Eurozone Crisis Clouds Recovery In Emerging Europe And Central Asia

Washington, Economic recovery is underway in the Emerging Europe and Central Asia (ECA) region, but at a slow pace and is at risk from the troubled Eurozone, according to the World Bank at a press briefing during the World Bank/IMF Annual Meetings 2011. According to the briefing, most countries in the region have recovered the output losses suffered during the 2008-9 global economic crisis. In fact, GDP remains below its 2007 level in only eight out of 30 ECA countries. Helped by high commodity prices, the countries farther to the east in the region have done much better since the crisis than those to the west. But ECA’s recovery signals a lower growth gradient than the pre-crisis rates. There has been a noticeable reduction in growth prospects: countries in the region may need to prepare for growth rates that are 2 percentage points of GDP less than what they were before the global crisis.
Unemployment increased significantly during the crisis ― in 2008 it was about 10 percent, while as of about early 2011, the overall unemployment rate for the region is at 13 percent. Meanwhile, youth unemployment remains a particular concern at 27 percent. To address this, governments have been trying to limit the effects of the crisis on labor markets through a wide range of employment programs. Some jobs are returning and unemployment has dropped since the early 2010 peak, with only a few exceptions (Bulgaria, Croatia, Slovenia, Moldova, and Hungary). But the job turnaround will remain gradual even if the economic recovery is sustained. Increases in output per worker are driven by increases in hours worked, but these are still below their pre-crisis levels. Therefore, the room for further increases in productivity and hours worked could delay the recovery in employment.
The global crisis has had a severe negative impact on public finances. During pre-crisis times, structural fiscal imbalances were masked by revenue over-performance, as buoyant economies yielded more taxes than governments often expected. During the crisis, there was sharp fiscal deterioration in most countries in the region. Public debt has gone up in many countries, leaving governments less room to counter any economic slowdown than they had in 2007.
The decline in credit to firms and households from pre-crisis levels was sharp, but necessary in some countries. While credit has been slow to recover, there are encouraging signs in most countries in the region. Only five countries in the region are still experiencing contractions in credit.
Given the importance of Greek banks in the Balkans and Italian banks in Central Europe, any problems they have would have direct effects in those countries. Some of the banks most active in emerging Europe ― especially those based in Austria and Sweden ― have limited exposure in Greece, Italy, Ireland, Portugal, and Spain, but interconnectedness on funding markets could result in adverse consequences.
Western European countries are the most important trade partners for most countries in the region, and weaker economic prospects in Europe will dampen their recovery. There are already signs of declines in export demand. Export levels in 2011 were expected to be above those reached in 2008, but recovery of exports has so far been sluggish. Now a slowdown in global activity has increased the downside risks, most sharply for countries with close economic linkages with the Eurozone.
World Bank support reached $6.1 billion this fiscal year, including $5.5 billion from the International Bank for Reconstruction and Development (IBRD) and $650 million from the International Development Association (IDA). Turkey ($1.4 billion), Romania ($1.1 billion), and Poland ($1.1 billion) were the largest borrowers. The sectors receiving the most funding were energy and mining ($1.9 billion), public administration ($1.7 billion), and health and social services ($1.2 billion). Along with funding, the Bank provides over 180 economic and technical reports every year in the Emerging Europe and Central Asia region to inform government reform efforts and prioritize its own financial support. It offers analytical support and encouragement to governments to improve labor market and social security systems and expand selected social safety net programs. The Bank is advising governments on how to fix less efficient public programs and improve social services so that their benefits reach those who need them most.