The economies of Central and Eastern Europe (CEE) are expected to slow next year “substantially” as a “protracted” euro-area debt crisis infects the region, the European Bank for Reconstruction and Development said.

“Lack of a resolution of the eurozone turmoil and a US recession would pose additional risks to growth across the region and increased risks to cross border banking relationships in emerging European countries,” an EBRD report, released on Monday, said.

The EBRD predicts growth in the CEE's economy will slow to 3.2 per cent next year from 4.5 per cent in 2011. This compared with the 4.8-per-cent and 4.4-per-cent growth rates the bank predicted for 2011 and 2012 respectively in its last projections published in July.

The region's economy grew by 4.6 per cent in 2010 after it rebounded from the 2009 recession, when the economy shrank by a dramatic 5.9 per cent.

In particular, the EBRD revised down its 2012 growth forecast for Hungary and the Slovak Republic, because of their exposure to the eurozone.

The outlook also worsened significantly for Albania, Romania and Serbia, which are heavily exposed to the troubled Greek economy, the bank said.

Still, the EBRD believes that the about 30 CEE economies included in its report are in much better shape than in 2008, when a meltdown in the United States housing market triggered the world financial crisis.

'The EBRD countries are, in some important respects, better prepared to withstand external shocks of the sort and magnitude they experienced in 2008,' the report said.

“There is a risk that the ability of bank groups to pass on support to their subsidiaries in the transition region may be constrained by their national governments,” according to today’s report. “This could result in a substantial reversal of bank debt flows and a large contraction of credit in the region, with potentially severe consequences for output. Policy coordination that includes emerging Europe is needed perhaps even more than” in 2008-2009.

Lack of a resolution of the euro-region turmoil and a U.S. recession would pose additional risks to growth across the EBRD’s region, the bank said.

“The potential for worsening of the current situation in the euro zone beyond the baseline scenario poses significant risks even to the lowered outlook,” according to the report.

While all EBRD countries are forecast to avoid a contraction in gross domestic product, central and southeast European countries, which are “particularly vulnerable” to euro-region contagion, will see the deepest slowdown.

The EBRD revised its 2012 forecast in the central Europe and Baltic region to 1.7 percent, from the 3.4 percent seen in July. Growth in southeastern Europe will be 1.6 percent next year, more than 2 percentage points lower than the July prediction.

Expansion in Russia will remain “reasonably strong,” supported by government spending in the run-up to presidential elections in 2012, the EBRD said. Growth will quicken to 4.2 percent next year from 4 percent in 2011, it said.

The EBRD, owned by 61 countries and two intergovernmental institutions, was created in 1991 to invest in former communist countries to help them transform their economies.

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