24th Jul 2021

Euro crisis to smother growth in eastern Europe

The current troubles in the eurozone are slowing down growth in eastern European countries, particularly Romania, Albania and Serbia, where Greek banks are an important part of the financial sector, according to a study by the European Bank of Reconstruction and Development (EBRD) published on Tuesday (18 October).

Barely out of the recession following the 2009 financial and economic crisis, many countries in eastern Europe will have to cope with slowdown in growth next year compared to what was projected just six months ago.

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  • Romanian shipyard: The prospect of a second recession is hanging over eastern Europe (Photo: European Commission)

Referring to the 2009 crisis, the report said: "increased stress in the eurozone could have an even more severe impact on emerging Europe this time around" with recovery in this area "thrown off track."

Growth forecasts in central Europe and the Baltic states for next year are now projected at 1.7 percent, down from the 3.4 percent in July, with Hungary and Slovakia slowing down the most. Both are EU members, the latter being also a eurozone country.

Further to the south-east, Romania, Serbia and Albania are expected to grow only a little over one percent, primarily due to exposure to Greek banks, which face a shaky future as the EU prepares for a partial default of Athens' sovereign debt.

Turkey's growth is also slowing down, but is still set to cruise at a comfortable rate of 2.5 percent, according to the EBRD predictions. Russia, meanwhile, seems little affected by the euro-turmoil: output there is expected to grow by 4 percent in 2011 and by 4.2 percent in 2012.

Shortly after Germany warned markets on Monday not to expect a comprehensive solution to the eurozone debt crisis at a summit on Sunday, the EBRD notes that "lack of a resolution of the eurozone turmoil and a US recession would pose additional risks to growth across the region and increased risks to cross border banking relationships in emerging European countries."

"Until the resolution of the eurozone crisis, a period of continued market instability, constrained credit as well as the resulting near standstill in western Europe is expected to seriously affect the outlook for the [eastern European] region."

The London-based bank also predicts that if the crisis is not stopped before spreading to core euro-countries, recession will hit the global economy again. For the eastern European countries, it would also mean that any help to eurozone banks would not go to the subsidiaries in the non-euro region.

EU member Romania, for instance, whose growth rate has been slashed from 3.4 to 1.1 percent next year, has most of its banking sector in foreign hands. Austrian banks are the strongest presence and form almost 40 percent of the financial sector, while Greek subsidiaries account for 15.5 percent. The local central bank has urged international banks to inject more capital into their Romanian subsidiaries to weather the fallout of a potential Greek default.

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Rules by Austrian regulators limiting lending to eastern European countries are a lack "fair play" after they made huge profits in the region, Romanian President Basescu has said.

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