Larger government spending cuts in western Europe in the
wake of the Greek debt crisis threaten to derail eastern
Europes fragile economic recovery, experts have
Erik Berglof, chief economist at the EBRD, told
Emerging Markets that slow growth in western Europe
would be further exacerbated by public spending
[This] will cause credit constraints and rising
unemployment, which will undermine domestic consumption and
growth in eastern Europe, he said yesterday.
It is too early to tell if this causes another
recession but its clearly possible. In all, it
means growth will be more anaemic for emerging Europe and
Western Europe as a whole.
The Greek debt crisis has piled on pressure for tough
austerity measures in the European Union to placate markets,
said Jeffrey Anderson, director of the European department at
the Institute of International Finance.
We are now going to see a rigorous fiscal adjustment
not just in periphery but the core of the eurozone
due to market pressures. This is a significant threat to
central and eastern European exports, he said.
Spain seen as vulnerable to the fiscal
turbulence that shook Greece took markets by surprise on
Wednesday by announcing aggressive government spending cuts.
The country will hike taxes and cut public sector wages by 5%.
Portugal and the UK are also poised for big cuts in the coming
The EBRD will tomorrow publish its updated growth figures
for the 2010 fiscal year. In January, the EBRD predicted
eastern Europe and the former communist bloc would grow 3.3%
Berglof said the new regional growth forecast would be
slightly higher as stronger-than-expected growth in
Poland, Russia and Turkey driven by a rebound in exports
and capital inflows will offset the impact
weaker-than-expected growth in the Baltics and the impact of
Western European fiscal retrenchment. Its a slow
recovery and a heterogeneous recovery in the region, he
Anderson said the euros weakness would reduce foreign
direct investment (FDI) in Hungary, Poland, Czech Republic and
Slovakia. Eurozone producers are benefiting from the
weakness of the euro and this will reduce cost pressures but
work to the disadvantage of FDI flows into northern Central
On Wednesday official figures showed that the eurozone
economy grew 0.2% in the first quarter of the year, compared
with the USs 0.8%.
Anderson said the positive outturn was an inevitable upswing
from the sharp contraction of last year but warned that a
broader recovery had failed to gain momentum due to weak
Mark Allen, the IMFs senior representative for
central and eastern Europe, told Emerging Markets that
growth is fragile in eastern Europe and economic recovery
is contingent in core Europe. We are banking on eurozone growth
this year, hoping growth in Germany will be