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EBRD: Eastern Europe growth is threatened by euro zone

The European Bank for Reconstruction and Development lowered its forecast for growth in the economies of east Europe and Central Asia, citing increased risks from budget cuts and volatile financial markets in the euro region.

The former communist countries in Europe and Central Asia are recovering from their deepest recessions since switching to free-market policies two decades ago. The outlook for recovery has been clouded by slowing growth in the euro area, the largest export market for most of eastern Europe, as it grapples with a sovereign-debt crisis and investors shun riskier assets, Bloomberg reports.

“The outlook for the remainder of 2010 and for 2011 is generally weaker than recent economic activity suggests,” the EBRD said. “Given the weakening outlook for the euro zone, as fiscal-austerity programs are implemented and financial markets are likely to remain volatile, the external environment is likely to be less benign than previously projected.”

The EBRD helped limit the impact of the financial crisis in eastern Europe by persuading banks such as Italy’s UniCredit SpA, France’s Societe Generale SA and Austria’s Erste Bank AG to remain in the region and providing them with funds to lend to businesses. It has warned that the worst isn’t over for the banking industry, which will slow the expansion of credit.

“Banks’ balance sheets remain under pressure and the cost of capital elevated” so “credit growth is likely to remain weak,” the EBRD said in the report.

The laggards of the EBRD region are Balkan countries such as Bulgaria and Romania, where economies remain in recession, financial systems are under pressure from Greece’s debt crisis and capital inflows are declining. Austerity programs throughout the European Union are also weighing on central Europe and the Baltic states, the EBRD said.

Bulgaria’s economy will contract 1.2 percent this year and expand 2.5 percent next year, the EBRD estimated. Romania’s economy will shrink 3 percent this year and stagnate next year, according to the bank.

The recent breakdown it talks between Hungary, the International Monetary Fund and EU “will damp growth in the country and beyond,” the EBRD said. The bank estimated Hungary’s growth at 1.2 percent this year and 2.1 percent next.

Russia and Turkey remain some of the fastest growing countries in the EBRD region, with growth forecasts of 4.4 percent and 5.9 percent for next year, according to the bank. Slovakia, whose car factories produce about 800,000 vehicles a year, will expand the most in Central Europe, growing 3.1 percent this year and 3.4 percent next, the EBRD said.

Poland, the largest of the EU’s eastern members, will grow 2.7 percent in 2010 and 3.3 percent in 2011, according to the bank. Given that government debt is approaching the 55 percent legal limit and the budget deficit remains at about 7 percent of GDP, Poland needs to take further steps to cut the shortfall, the EBRD said.

The bank, owned by 61 countries and two intergovernmental institutions, was created in 1991 to invest in former communist countries from the Balkans to Asia to help them transform their economies. (BBJ)