Chapter 2

Executive Summary

Over the last year the transition region has experienced a significant worsening in the external environment. The Transition Report 2011 presented a picture of ongoing recovery from the global financial crisis while pointing to risks from the region’s exposure to the eurozone. Since then, as the eurozone sovereign debt crisis deteriorated, recovery has stalled in many countries that are particularly integrated with the single currency area. Growth has slowed down as exports and capital inflows declined. Crucially, the region’s banks have lost significant external funding as eurozone banks reduced cross-border lending and withdrew financing from their subsidiaries in transition countries. This has depressed credit growth, which in turn contributed to slower output expansion.

An empirical analysis relating growth in transition countries to the fortunes of the eurozone, Russia and the world at large, along with oil prices and volatility in global financial markets, confirms that central and south-eastern Europe is more intertwined with the eurozone and eastern Europe and central Asia with Russia. The analysis also reveals that Ukraine is particularly exposed to developments both in Russia and in the eurozone, while Poland appears to be surprisingly resilient to changes in its external environment.

The outlook for the region continues crucially to be driven by developments in the eurozone crisis and its global repercussions, including its impact on commodity prices. In the baseline forecast, the region will see a substantial slow-down relative to 2011 both in this year and next as a result of the crisis. Central and south-eastern Europe will experience particularly slow growth and some of the countries have entered or will re-enter mild recessions. But countries further east have also already started feeling the impact of the crisis and are likely to grow more slowly as well. Possible further deterioration of the turmoil in the euro area poses the largest risks to already-slower projected growth in the region for 2012 and 2013.