Euro-zone crisis adds to recovery headwinds (Q2 2010)

Problems in the euro-zone’s periphery will exacerbate the twin-speed recovery already underway in Emerging Europe. No country would escape unscathed from a full-blown crisis in Western Europe, but strong financial linkages mean that Bulgaria and Romania are highly exposed to the troubles in Greece, while large external financing requirements mean that the Baltics remain vulnerable to any deterioration in investor risk appetite. Coupled with the substantial headwinds already posed by overvalued exchange rates, fragile banking sectors and a looming fiscal squeeze, these economies face a long, hard slog back to health. Meanwhile, the outlook for the economies of Central Europe is closely tied to that of Germany. Accordingly, growth prospects there are better, though still not great. We expect an impressive industry-led rebound to fade over the next year, with Poland on track to outperform its neighbours and Hungary set to lag behind. Turkey should remain the region’s star performer, with growth likely to top 6.5% this year.