The crisis in the euro-zone continues to cast a long shadow over the outlook for Emerging Europe. Most countries are already feeling the effects of weaker export demand, and the very open economies in the region are now in recession. But our view that the deepening crisis in Europe will result ultimately in the break-up of the single currency suggests that much worse is to come. The worst performers are likely to be Hungary, Romania and Bulgaria (where banking risks are greatest) together with the Czech Republic (which is highly open). By contrast, Poland and, perhaps Russia, look less vulnerable. Nonetheless, we expect growth in pretty much every country to disappoint over the next year or so, with equities and currencies falling further before staging a recovery in 2013.
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