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I first reported on the grim news from Central and Eastern Europe in January, then again last week on the troubling similarities between what's happening now and the conditions that led to the Asian crisis in 1997-8. Since then, the bad news has been piling up fast and thick.

S&P, a credit ratings agency, has just downgraded the Ukraine by two levels to CCC+ (a category it shares with Pakistan). The country owes some $64 billion in debt this year, and as you might have guessed, the credit markets aren't going to be particularly forgiving. This is not just a problem for those working in a Ukrainian (or Polish, or Latvian, or Hungarian, or Bulgarian...) economy that's about to get hit by a twin banking and currency crisis: as Ken Rogoff points out in this NYT article, there is the problem of contagion:

Furthermore, the expected economic turmoil has been accompanied by political unrest that was already building due to a spate of political corruption scandals. The resignation of the Latvian government last Friday is just the most obvious example of these colliding factors, making Latvia the second government to collapse as a result of the crisis, after Iceland (or is it the third?).

It's important not to overgeneralize - there are plenty of countries in the CEE and not all of them are facing the same challenges. Moreover, those countries within the EU have access to a different support system than those on the outside. As one Austrian banker pointed out in this FT article:

“What’s been lost in this crisis very often has been the ability of people to differentiate.”

But that's exactly the problem with financial contagion - people generalize, leap to conclusions, and make rash decisions. For example, one consequence of this phenomenon is that, rightly or wrongly, the citizens of Central and Eastern Europe appear to be growing increasingly skeptical of the value of the EU free market integration project. It would be too rash to predict a complete halt to the process, or even a splitting of the EU, but the crisis certainly isn't helping.

Nor, for that matter, is the political leadership of Western Europe. The Czechs have rightly taken Sarkozy to task for his suggestion that French car manufacturers pack up their things and return home. Meanwhile, in the UK - home to the ridiculous obsession about Polish plumbers stealing babies or whatever - we've seen renewed political pressure on Gordon Brown to follow through on his promise of British jobs for British workers.

So it doesn't look like Euromageddon just yet, but Europhiles are going to have work a lot harder over the next short while if they're going to keep the project going. If only there were some encouraging news to hang on to....