Eastern Europe

It’s grim out east. Emerging Europe’s unravelling economic situation this week prompted the European Bank for Reconstruction and Development to downgrade its 2009 growth forecast for its 30 countries of operation from 2.5 per cent to 0.1 per cent. Five countries, it believes, will experience recessions; Ukraine and Latvia could contract by 5 per cent. Social unrest is surfacing in several capitals.

The risk is that better-off western Europeans abandon their eastern neighbours to their fate. Already Greece has cautioned its banks against transferring funds from a €28bn support package to Balkan subsidiaries because of fears of financial turmoil. Such disengagement would be a historic mistake. Certainly, many east European countries made errors, going on credit binges fuelled by foreign currency borrowing and running up yawning current account deficits. They are suffering now, however, in large part because of their integration with the international economy. Nowhere is integration greater than in financial services: large chunks of east Europe’s banks are owned by foreign groups.

That creates opportunities and risks. In spite of political rhetoric, funds from west European banking bail-outs are generally trickling through to eastern subsidiaries. But further moves such as Greece’s could threaten such flows. Providing support only via western banks’ subsidiaries is also insufficient and could lead to disparities, depending on what proportion of countries’ banking systems are foreign-owned, and whether the owners are, say, French, Italian or Austrian. Eastern Europe’s public authorities need access to more funding for systemic measures.

Several commercial banks operating in the region are calling for European institutions to extend the kind of financial initiatives undertaken in the west into eastern Europe, including countries outside the European Union. The European Commission and EBRD back that call. Unless rapid co-ordinated action follows, however, eastern Europe’s economic achievements of the past decade could be undermined. And that will only exacerbate the challenges faced farther west.

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