Economic Challenges Bedevil Eastern Europe

Economic turmoil throughout Europe is having an impact on the east. Reports Bloomberg:  “Growth will probably slow this year in Eastern Europe and central Asia, and the region is at risk from tighter credit conditions at a time when lending by the International Monetary Fund may be postponed to countries such as Ukraine, a World Bank official said.”

The Bank projects lower growth rates in 2012 in Belarus, Russia, and Ukraine.  Other countries in the region may suffer a similar fate.

Ukraine faces a particular problem with the IMF, which refuses to release more funds from its 2010 rescue program until Kiev raises household utility tariffs to balance the government’s budget, a sensitive domestic political issue. Ukraine’s government may choose to devalue the Hryvnia to improve international competitiveness—an option not available to Greece and other members of the Euro.

A broader challenge for the regional economy comes from the regulatory pressure on European banks to improve their balance sheets.  The resulting economic reverberations are being felt as far away as Asia.  However, reported Reuters:  “Eastern Europe, by dint of geographic proximity and financial integration, is potentially even more vulnerable than Asia if the Euro zone crisis intensifies.  Foreign banks, with Austria, Italy and France to the fore, typically own 60 percent to 90 percent of bank assets in the region.”

The IMF figures that banks in Western Europe are likely to cut their total assets by $2.4 trillion in the coming 18 months.  That means a cut in private credit in Eastern Europe by four to six percent.  Observed economist Gabriel Sterne with the London investment bank Eoxtix, “Eastern Europe is right in the firing line.  If European banks are having to deleverage, their subsidiaries and the odd branch in eastern Europe are the first place they look.”

Another regional economic threat comes from increasing discrimination against Eastern Europeans looking for work in the west.  Switzerland has reimposed quotas on migrants from a number of countries, including the Baltic States, and Members of the European Parliament have complained against discrimination within the European Union against citizens from Central and Eastern Europe.

Although neither the reduction in bank credit nor the restriction on economic emigration is likely to have a decisive economic impact, both will harm growth prospects in the region at the margin.  And that will increase pressure on countries already suffering from varying degrees of political stress.  This could make 2012 an even more challenging year for all of Europe as it continues to struggle to contain the economic and political ramifications of the Euro crisis.

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