Greek crisis casts fresh cloud over outlook

The deepening crisis in Greece has been met with a muted reaction in the financial markets inEmerging Europe and there are few signs that it has had any impact on economic activity in theregion. Nonetheless, the threat of “Grexit” has understandably cast a dark cloud over the outlook.Ties with Greece are sizeable in a few places, including Bulgaria and Romania, but for most theproblem is not so much Greece itself. Instead, the key risk lies in contagion to the broader eurozone,with which the region has large trade and financial linkages. Indeed, such contagion pushedlarge parts of Emerging Europe into recession when the risk of a Greek euro-zone exit first surfacedin 2011. There are reasons to think that the fallout now might not be as large. Financial linkagesbetween western and eastern Europe have declined, the economic recovery in the region looksmore entrenched, and there is scope for a fiscal policy response to counter a downturn. But even so,if a messy “Grexit” were to lead to financial stress and weaker growth in the wider euro-zone, thiswould still strike a damaging blow to Emerging Europe.