The transition economies of eastern Europe were among those emerging markets that suffered the most from the 2008-09 global recession. Real GDP in the region contracted by 5.7% in 2009 and the recovery in 2010-11 was modest. Furthermore, the economies of central and southeast Europe are highly vulnerable to a new recession in the euro zone and, in a worst-case scenario, the consequences of a eurozone collapse.
The 2012 recession in the euro zone will act as a break on economic activity in eastern Europe, through weaker trade, investment and financing links. Several countries--including Hungary, Slovenia and Croatia--have tipped again into recession.
In the second half of 2012 export growth and industrial output have weakened notably and business and consumer sentiment in the region is fragile. The EIU forecasts that growth in the transition economies will weaken from 4% in 2011 to 2.8% in 2012. Moreover, downside risks predominate, given the on-going escalation of the euro zone crisis.
Exposure to the euro area crisis is magnified in Southeast Europe because many Balkan economies have significant economic links with Greece. The Greek banking subsidiaries in the region are a major channel of contagion; Greek banks' market share in south-east Europe is about 20%. There is also exposure to banks from Spain and Italy, which has been pushing up sovereign debt insurance levels. With only a few exceptions, cross-border funding of local banks is shrinking in eastern Europe. Reduced availability of cross-border finance for local banks has translated into continued credit contraction.
Comparative vulnerability
The EIU has constructed a composite index of vulnerability to the euro zone crisis for the eastern Europe region, based on the following indicators as percentages of GDP: Exports to the euro zone; the external financing requirement; inward FDI from euro zone countries; west European bank loans; remittances; budget balance and public debt; along with the EIU's own currency risk rating and banking sector risk rating. Among the east European transition countries, Hungary is rated as the most vulnerable; but the next three most vulnerable economies are all from Southeast Europe: Croatia, Albania and Serbia.
There are also now signs that the negative impact of the euro zone crisis on emerging Europe is spreading further east, including to Russia, as lower global demand affects commodity prices and risk appetite.
Another consequence of the euro zone crisis is that east European economies that have not yet adopted the euro are now in no rush to do so. Slovenia adopted the euro in January 2007, Slovakia in January 2009, and in January 2011 Estonia became the 17th member of the euro zone. However, the difficulties in the euro zone are prompting most of the seven east European EU members that are not yet in the euro zone to have second thoughts about the benefits of joining.
Fragile social peace
Despite the economic downturn in the region, the political consequences and the incidence of social unrest in eastern Europe has been remarkably limited so far. It's true that there have been some major disturbances and falls in governments. There have also been scattered protests by the general population and special interest groups in almost every other country in the region. However, overall social peace has been maintained and there has been a remarkable absence of any significant unrest. So how can this be explained? Three sets of factors seem to be at work. First of all, eastern Europe has some "advantages of backwardness" that cushion the region's populations from the impact of the economic downturn - including relatively large agricultural sectors and the important role played by extended families. Second, the demise of the traditional left and trade unions in most countries of the region means that there are few social and political forces that can provide a focus for and organise large-scale non-spontaneous demonstrations. Finally, opinion surveys reveal that a widespread apathy, not conducive to social activism, remains the dominant trend in the region. The big question, however, is whether the social and political peace is sustainable, and whether we are merely witnessing the quiet before a storm, to be unleashed by an intensification of the economic crisis.