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Growth of CEE Region Under Threat from Eurozone Crisis

Published: October 18, 2011; 18:35 · (Vindobona)

The EBRD research is predicting a slow-down in emerging Europe’s economic growth next year with the continuing eurozone sovereign debt crisis posing challenges to recovery from the 2008-09 global financial crisis.

Growth of CEE Region Under Threat from Eurozone Crisis / Picture: © Vindobona.org

The EBRD’s latest Regional Economic Prospects report underlines that economic fundamentals in the region are stronger in several respects than before the onset of the crisis. But it notes that increased stress in the eurozone could have an even more severe impact on emerging Europe this time around. The latest forecasts assume a protracted but ultimately contained eurozone debt crisis.

The report revises down predictions for 2011 economic expansion in the EBRD region to 4.5 per cent compared with 4.8 per cent seen in July. Growth in 2012 is now seen at 3.2 per cent, compared with the 4.4 per cent expected three months ago.

The 2012 growth forecast has been downgraded in the Central Europe most substantially for Hungary and the Slovak Republic, the two transition countries that are the most exposed to the eurozone.

According to the research, Hungary is highly exposed to risks emanating from the eurozone, given close direct investment linkages, and the substantial participation of foreign investors in the local bond market. The government is committed to meeting fiscal deficit targets next year, in support of which it has implemented additional tax measures. As structural reforms in support of consolidation are progressing only slowly risk premia may rise over time. Following the adoption of so-called crisis taxes on a number of sectors and the return of the second pillar private pension funds to the state, Parliament in September adopted a law that gives household borrowers an option to pre-pay foreign currency loans at discounted fix rates. This is likely to further undercut bank capital positions and lending capacity, potentially setting back credit recovery and growth.

The growth outlook for Poland has moderated, in particular for 2012, reported EBRD. Fiscal and financial sector vulnerabilities are contained and as the economy depends to a greater extent on domestic demand, making it more resilient to a eurozone slowdown. Following elections in October additional measures will need to be taken to meet the ambitious, though much-needed, target for deficit reduction.

The Slovak Republic has benefited from an export-led recovery with growth likely to be about 3 per cent this year. As economic developments in 2009 underlined, the economy is highly exposed to the stagnation in the rest of the eurozone, and further fiscal consolidation will take an additional toll, leading us to a substantial revision in growth forecast for 2012 to just over 1 per cent. The substantial fiscal consolidation package should arrest public debt accumulation, though the political resolve to implement reforms remains uncertain.