Will The Economic Crisis Split East And West In Europe?

Will The Economic Crisis Split East And West In Europe?
Nouriel Roubini, 02.26.09, 12:01 AM EST
The meltdown puts huge pressure on the E.U.'s free-market rules.

(Nouriel Roubini co-wrote this essay with Mary Stokes, Jelena Vukotic and Elisa Parisi-Capone, analysts at Roubini Global Economics.)

The Central and Eastern Europe region is the sick man of emerging markets. While the global crisis means few--if any--bright spots worldwide, the situation in the CEE area is particularly bleak. After almost a decade of outpacing worldwide growth, the region looks set to contract in 2009, with almost every country either in or on the verge of recession.
The once high-flying Baltics--Estonia, Latvia, Lithuania--look headed for double-digit contractions, while countries relatively less affected by the crisis--the Czech Republic, Slovakia and Slovenia--will have a hard time posting even positive growth. Meanwhile, Hungary and Latvia's economies have already deteriorated to the point where International Monetary Fund (IMF) help was needed late last year.
Central and Eastern Europe's ill health is primarily driven by two factors: collapsing exports and the drying up of capital inflows. Exports were key to the region's economic success, accounting for 80% to 90% of gross domestic product in the Czech Republic, Hungary and Slovakia. By far the biggest market for CEE goods is the Eurozone, now in recession.
Meanwhile, the global credit crunch has sapped capital inflows to the region. An easy flow of credit fueled Eastern Europe's boom in recent years, but the good times are gone. According to the Institute of International Finance, net private capital flows to emerging Europe are projected to fall from an estimated $254 billion in 2008 to $30 billion in 2009. Whether this is formally considered a "sudden stop" of capital or not, it will necessitate a very painful adjustment process. Read more...
http://www.forbes.com/2009/02/25/eastern-europe-eu-banks-euro-opinions-columnists_nouriel_roubini.html