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Euro Zone Crisis to Hit Eastern Europe: Region's Bank

Friday, 18 May 2012 | 8:00 AM ET

The European Bank for Reconstruction and Development (EBRD) expects the economies of Eastern Europe and the former Soviet Union, as well as four countries in the Middle East and North Africa, to experience a "substantial" slowdown this year because of fallout from the euro zone crisis.

European Union (EU) flags fly outside the the European Commission headquarters in Brussels.
Bloomberg
European Union (EU) flags fly outside the the European Commission headquarters in Brussels.

In an interview with CNBC.com earlier this week, EBRD President Thomas Mirow said Eastern European countries are affected by the crisis in the euro zone through disruptions to trade, but also because of the Western European banks active in the area—many of which are now or are likely to begin cutting lending.

The latest EBRD outlook for the transition region, published on Friday, forecasts expansion of 3.1 percent in 2012 for the region, after 4.6 percent in 2011.

"The euro area crisis will continue to negatively impact those economies in the transition region that are the most intertwined with those of the euro zone,” the report said.

The EBRD's baseline scenario assumes that the euro zone will manage to contain the crisis it is going through but would not avoid a "mild recession."

"As European parent banks continue to deleverage, subsidiaries in the transition countries will see reduced cross-border funding and therefore extend less credit," according to the report.

The EBRD expects bank-related capital outflows to continue in the coming months, despite signs that stock and bond inflows may have returned to the region in the first quarter of the year.

'Anemic Growth'

Economies in Central Europe and the Baltic states will grow by only 1.6 percent this year and improve slightly to 2.3 percent next year, according to the report, which also said Slovenia, Croatia and Hungary are expected to see their economies contract.

Countries in the southeast of Europe are expected to grow at 1 percent in 2012, picking up to about 2.4 percent a year later.

The EBRD does not expect any country in the southeast of Europe to re-enter recession but said most of them will see "anemic growth reflecting a big drop in investment in recent years and weak levels of confidence, in part as a reflection of their links to crisis-hit Greece."

Ukraine will see a slowdown in growth by 2.5 percentage points to 2.5 percent this year, the report said, as its economy is somewhat integrated with the euro zone. In Russia, an already robust economy benefited from high oil prices in the first quarter, and growth is expected to reach 4.2 percent in 2012 and 4.3 percent in 2013.

Crisis Hits Middle East Too

The economies of Egypt, Tunisia and Jordan have been hit by falling tourism, foreign direct investment and trade, while in Morocco, although it recorded a healthy growth rate of 4.8 percent last year, a decline in agriculture in the early part of this year is turning into a slowdown in growth this year.

The EBRD will start an investment program in the four countries in the southern and eastern Mediterranean region this year.

The bank said Turkey's economy, which reached an overall growth rate of 8.5 percent in 2011, is now headed toward a significant slowdown brought about by "a drop in domestic demand and the worsening economic conditions of the euro zone."

The EBRD was created in 1991 to help the former communist economies of Central and Eastern Europe, as well as the former Soviet Union, make the transition from the centralized economic model to a market-based model.

Contact Europe: Economy

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