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The European Bank for Reconstruction and Development (EBRD) said in its "Transition Report 2008" that while the resilience of the countries of emerging Europe to the early phases of the crisis was testament to their reforms and macroeconomic development, their integration into the international economy increased their exposure to the current crisis. A significant fall in growth is expected in 2009.

"After a period of mounting pressures in the financial markets, the crisis originating in the advanced economies of the US and Europe has finally hit the transition region with full force," the multilateral lender said. "The manifestations of the crisis are everywhere. Stock markets have plunged and several countries have experienced rapid capital outflows and pressures on their currencies. Inter-bank rates have also increased markedly."

The bank noted that growth in the region as a whole fell from 7.5% in 2007 - the highest that has been achieved since the transition from communism began - to a projected 6.3% in 2008 with a further significant fall expected in 2009. "However, only some of this slowdown can be attributed to the financial crisis. There are now increasing signs that the wider economy is being affected, with industrial production slowing down and even contracting in many countries."

These developments stem not only from more expensive credit and a rapid reduction of growth in key export markets, the bank said, but also increasingly from the shutdown of traditional lending channels. "Lending by local banks, many of which are owned by parent banks based in Western Europe - themselves adversely affected by the crisis - has widely contracted," the bank said. "In addition, governments themselves are being hit directly through lower ratings and speculation against individual currencies that in some cases have already forced governments to seek support from the International Monetary Fund and other agencies. The depth and duration of the global crisis are still unclear, but the region is now bracing itself for higher unemployment and lower consumption growth."

The bank acknowledged that the scale of the crisis made the job of policymakers more difficult, yet despite these limitations the policy response has mostly been appropriate. However, it warns that the global financial crisis could divert attention away from the key long-term growth challenges that face individual countries and the region.

The region's economy has expanded rapidly since 2000, but this growth came after a protracted period of recession. "To put this in perspective, by the end of 2007, the Commonwealth of Independent States and Mongolia on average had a GDP level roughly comparable (in real terms) to that reported in 1989. In Central, Eastern Europe and the Baltic states, GDP was on average only 50% higher than it had been in 1989, while in several countries in Southeast Europe it was significantly lower than in the pre-transition period. Therefore, while the acceleration in growth has been significant, the scope for the transition economies to grow further remains substantial," it says.

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