Nicholas Watson in Prague -

The big question for investors in Southeast Europe in 2012 is the same as that for anyone invested in the wider region: what will be the fallout from the mess in the Eurozone?

There is only one country in Southeast Europe that is actually a member of the Eurozone - Slovenia. But with strong trade, funding, investment and banking ties, every in the country in the region will feel the pinch as Western Europe's economies, particularly those of Greece, Germany and Italy, continue to struggle.

"There is a high but uneven degree of economic dependency between [Emerging] Europe and the Eurozone in general and Germany in particular. There are four main transmission mechanisms between East and West: (i) trade, (ii) investments, (iii) credits, and (iv) sentiment," says Marcus Svedberg, economist for the CEE-focused fund manager East Capital.

Indeed, the banking route that could carry the dreaded contagion from Western Europe is already looking wide open. Western European banks, which account for around 90% of all cross-border banking claims on CEE, are being squeezed on one side by demands for more capital, and on the other by downgrades of their sovereign debt holdings on the other. These factors are working particularly against banks from Austria and Greece, which are unfortunately also heavy investors in the banking sectors of Southeast Europe. Greek banks, for example, are particularly exposed to Bulgaria (where their share is over 25% of the market), Romania (over 15%) and Serbia (over 15%). "A sovereign default in case of Greece could have a severe impact on the Southeast Europe region," note analysts at Raiffeisen Research.

East Capital says: "The banking sectors in Croatia, Romania, Czech Republic and Slovakia are almost completely dominated by foreign banks whereas the ratio is above 80% in Hungary, Lithuania, Serbia, Estonia, Poland and Bulgaria. Comparatively, it is below 40%, 30% and 20% in Ukraine, Turkey and Russia respectively."

In 2009, during the first wave of financial crisis, a "Vienna Initiative" involving the European Commission and the parent banks' domestic regulators, worked to ensure that funds did not flow back to parents from regional subsidiaries. Today, people are fretting about an "anti-Vienna initiative" due to proposed restrictions by the Austrian regulator on the amount that Austrian banks' Emerging European subsidiaries can lend, a move that prompted angry reactions from regional politicians like Romanian President Traian Basescu, who threatened unspecified "counter-measures" against the Austrians. "You [Austrian bankers] have made huge profits and if you are now getting ready to leave Romania un-financed during the crisis, we will think it is an act lacking fair play towards Romania," he said, addressing a conference in Bucharest on November 24. "I don't want to believe we will be left to pay the bills of banks' greed."

Under the Austrian financial regulator's proposals unveiled on November 21, Austrian banks will have to reduce lending to below a fixed percentage of local deposits. The preliminary regulation stipulates that the ratio of new loans to local funding (which includes local deposits plus funding in local capital markets and funding from supranational institutions) is not to exceed 110%, though the numbers will be fleshed out at a later date. The regulator's move is part of an effort to shore up Austria's credit rating after Fitch Ratings said earlier in the month that its 'AAA' was "at risk". A downgrade would increase the cost of servicing Austria's debt, which stands at around 68% of GDP, a relatively modest sum by current European standards.

Moody's Investors Service notes that given the top Austrian banks - Raiffeisen Bank International, and Erste Bank - alongside the struggling Italian UniCredit Group are among the major players in many of the banking systems of Emerging Europe, the loan growth limitations will have a number of credit negative implications for the region's banks. "The instruction effectively limits the Austrian banks' subsidiaries' ability to enhance their position within the [Central and Southeast European] countries and will constrain their contribution to economic growth in the region, likely leading to weaker profitability," it says. "In addition to the probable negative effects on [Central and Southeast European] subsidiaries' franchises, this regulation may alter their business models. In particular, several subsidiaries of the larger Austrian banks currently have loan/deposit ratios that exceed 110%, and primarily rely on parental funding for their foreign-currency loan portfolios."

Raiffeisen Research says the upshot is that with the possible exception of Albania, double-digit loan and asset growth rates are unlikely in nearly all banking sectors in Southeast Europe for the foreseeable future (to 2015). "The Romanian banking market is set to be the most attractive Southeast Europe market, reflecting its position as the largest banking market in Southeast Europe and the decent expansion that looks sustainable," Raiffeisen says. "In contrast, the outlook for the Croatian banking market - the second largest in Southeast Europe - as well as the Bulgarian banking sector remains challenging."

On December 14, Fitch Ratings issued a report saying that the combined outlook for banks in CEE remains stable, but that downside risks are increasing against a backdrop of weakening GDP growth, worsening asset quality and potential funding constraints. "Adverse trends have continued for banks in Bulgaria, Romania and Croatia, although they retain some flexibility to absorb shocks, warranting stable outlooks. The balance of risks remains negative in Slovenia and Hungary," it said.

What worries people like Moody's is that the Austrian regulator's move could set off a round of similar moves by other countries whose banks have invested in the CEE region. In particular, Moody's notes that this risk exists in Italy, Germany, France, Belgium or Greece, all of which have significant operations in the region. "We believe that there is an increasing risk of regulators elsewhere introducing similar measures to preserve stability of their own banking systems. If such a scenario occurred, there would be a limitation on lending growth and profitability across the region, which will constrain economic growth and prove to be a significant credit negative for [Central and Southeast Europe] banks," Moody's says.

And growth is exactly what Southeast Europe needs right now. Recently released data from Eurostat show that for all the talk of how Emerging Europe is catching up with Western Europe and the crisis is turning the world on its head, GDP per capita data from 2010 show that Southeast Europe in particular has a long, long way to go.

At the bottom of the EU pile are the two latest additions to the bloc, Romania and Bulgaria, whose GDP per capita stands at just 46% and 44% of the EU average - pretty much unchanged from the year before. Slovenia is the highest ranked of the new member states at 85% of the EU average. Croatia, which has just been accepted into the EU and will formally join in the summer of 2013, is relatively well placed in terms of GDP per capita at 61% of the EU average. The other aspiring members still have much further to go. Turkey's figure is more than 50% below the EU average, while Serbia, Bosnia-Herzegovina and Macedonia have a gap of 60% - 70%. Albania is stuck right at the bottom with a GDP per capita level just 28% of the average. Moldova, whose GDP per capita level is possibly even lower than that of Albania, was not listed.

Yet growth in the region looks set to be anaemic in 2012. Citigroup Global Markets predicts emerging economies will likely grow by just over 5% next year, a mild softening after 6% growth in 2011. But Citi says much of this relatively strong performance will be down to China, while CEE (and the Middle East) are where "the biggest vulnerabilities lie," because of the risk of Western European banks deleveraging and accompanying constraints that countries may find in trying to meet their external financing needs. Gross repayments of bonds and loans for the CEE region as a whole are set to rise to an historic peak of $217bn next year, forecasts Citi.

According to the European Commission's autumn economic forecasts, EU growth will remain at a near standstill during 2012 and return to slow growth in 2013, which will hinder the more robust recovery that Southeast Europe had been expecting before the euro crisis began building. The 2012 forecasts range from Bulgaria's 2.3% GDP growth down to 0.8% for Croatia.

Economists too have been busy revising down their forecasts for growth as data from the real economy (such as exports and manufacturing) and sentiment indicators show the pace of economic recovery in the region has already started to lose steam as Western Europe stagnates.

East Capital's Svedberg notes that for the Czech Republic, Hungary, Slovakia and Slovenia, exports to the Eurozone make up around one-third of GDP. For others, like Poland and Romania, the export sector is of far less importance, while for Latvia and Croatia the Eurozone is of little importance.

The investment pattern looks pretty similar to the trade structure, and there is ample evidence that flows of foreign direct investment to the region are weakening significantly (though Svedberg stresses the worsening outlook for FDI is not only due to the outlook in Western Europe, but is also related to the fact that the prospects for green-field investment in the region are smaller as most of the large-scale privatisation projects are already implemented). The Balkans saw a fivefold increase in direct foreign investments between 2003 and 2008, rising from $30bn to $155bn, according to PwC. FDI plunged 50% in 2009 as the crisis took hold, with only a modest recovery from 2010 onward. This year Bulgaria, for example, saw its FDI drop by 40% in January-October versus the year before.

All this will, of course, have an adverse impact on the region's financial markets as risk appetite worsens and portfolio flows reverse. According to fund-tracker EPFR, year to date, all emerging market equity funds tracked have seen net outflows of about $36bn. "Emerging equities and currencies have both suffered in recent months as investor risk appetite soured," says Capital Economics. "The pattern of underperformance in the bad times and outperformance in the good is longstanding, so... the troubled global backdrop inclines us to believe that emerging currencies and equities will underperform in 2012."

However, it adds: "Further ahead though, as investors focus on the emerging world's stronger fundamentals and its resilience to turmoil in the Eurozone, we expect a significant rebound in 2013.

They go on to add a warning however that this prediction, as the economic growth forecasts doing the rounds, is based on a muddling-through scenario in the Eurozone. If the Eurozone goes into a deep recession, triggered by financial breakdown and a disintegration of the euro, no part of Southeast Europe will be spared the shock. "The biggest risk to our view is that Eurozone break-up is much messier than we now expect, triggering a financial crisis which spreads to Eastern Europe - Hungary, Ukraine, and the Balkan countries look most exposed," says Capital Economics.

If Europe's politicians don't take decisive action to solve the problems plaguing the euro, the ground beneath the Southeast European economies looks very shaky.

Romania

Romania, like Poland in Central Europe, boasts the largest economy in Southeast Europe (ex-Turkey) and as such is somewhat insulated from the problems in the Eurozone, given it has a large domestic market to fall back and is not so dependent on exports to the Eurozone. "Romania's smaller export share (35.8% of GDP) compared with Czech Republic (79.3%) and Hungary (86.5%) helps, while a public debt/GDP ratio of sub 40% also limits spill-over from European debt worries," notes Caroline Grady of DB Research.

Indeed, the economy has been showing some strength in the face of the ever-deepening gloom further west. According to preliminary data, real GDP grew by 4.4% year on year and 1.9% on the quarter in the third quarter; both growth rates were substantially above market expectations and by far the strongest in the whole of CEE. Industrial production in October, meanwhile, rose 4% from the year before. "With a substantially better-than-expected figure for the third quarter, the economic growth for 2011 as a whole should be much above our expectations of 1.5% even in case of a bad figure for the fourth quarter. Real GDP already grew by 2.7% on year in the first three quarters. Accordingly, we think the GDP would grow by 2.5% in 2011," says Ionut Dumitru of Raiffeisen Bank International.

The European Commission's latest forecast put Romania's growth in 2012 at 2.1%, rising to 3.4% in 2013. "After export-led growth in 2011, activity is expected to become more broad-based in 2012 as the increase in exports spills over into domestic demand," the commission wrote.

DB Research puts Romania's 2012 forecast at 1.9% growth, adding that, if anything, the figure should be higher given an expected pick-up in consumer spending due to wage growth and an acceleration in investment growth from efforts to improve absorption of allocated EU funding. The €6bn, or 4.7% of GDP, included in the 2012 budget for EU transfers is a record high, though because of fraud and incompetence the absorption of EU funds has traditonally been appallingly low. "The still very low EU funds absorption rate of 3.7% (as of end-September) indicates that there is great potential for higher public investment," notes the commission.

The fiscal position is also relatively strong (unusual for Romania traditionally and now for Europe as a whole) on the back of austerity measures taken as a consequence of IMF bailout packages. Romania completed its €20bn loan programme earlier this year and now has a new €5bn "standby" programme from which it will only draw funds if needed. As conditions of these loans, the government agreed austerity measures such as a freeze on public-sector wages and pensions, a levy on healthcare, and privatisation of some state assets.

These measures helped bring down the budget deficit to 4.4% of GDP in 2011, which prompted Fitch Ratings in the summer to raise its assessment of Romania's credit worthiness to 'BBB-', the lowest investment grade rating, from 'BB+', the junk rating that the rating agency, together with Standard & Poor's, dropped the country into at the height of a political crisis which put its IMF bailout deal temporarily on hold in late 2009. "We see potential for S&P to join Fitch in bringing Romania's long-term foreign currency sovereign rating back to investment grade during the coming year provided the government sticks with its fiscal commitments," says Grady of DB Research.

On December 15 the parliament approved the 2012 budget, which aims to narrow the deficit by more than half, to 1.9% of GDP, through a mix of public-spending measures such as wage and pension freezes, trimming state jobs and revamping money-losing state companies - and all ahead of a general election in late 2012. The budget is based on economic growth of 2.1%, less than the previous forecast of 3.5%, and inflation at 3.5% at the end of 2012.

"Today's vote pushes through parliament a budget that consolidates Romania's financial position and that doesn't have any electoral hints ahead of the general election next year," Prime Minister Emil Boc was quoted as saying by newswires after the vote.

"Progress is good and all the performance criteria have been fulfilled," echoed IMF mission chief for Romania Jeffrey Franks. However, whilst the IMF and the rating agencies appear happy at the way Romania is handling its economy, not everyone is convinced.

Public debt is unlikely to exceed 40% of GDP in the medium term, according to Dan Bucsa, chief economist at UniCredit Group, "if no major spending slippages occur." However, only time will tell whether the country's notoriously venal politicians can resist indulging in a spending spree to secure votes from a population weary of austerity. A recent survey found that only 7% approve of the government's handling of the crisis, meaning the temptation to open the spending taps could prove irresistible.

The official unemployment rate of just over 7% hides the fact that 2m Romanians, or around 10% of the population, work abroad. At 8.5%, inflation is the highest in the EU and still rising, with poorer households feeling the pinch most from a spike in food prices.

Economists also highlight the large contribution from agriculture to GDP growth in 2011 (possibly up to 1 percentage point), which implies risks for a negative contribution in 2012 due to the base effect. Moreover, the slowdown in Europe should result not only in a lower contribution to GDP from net exports in 2012, but also in a sluggish recovery of consumption and investments. "Accordingly, the GDP growth in 2012 might come below our expectations of 1.8%, which we put under revision for a downward adjustment," says Dumitru of Raiffeisen Bank International.

Bulgaria

Bulgaria is another whose fiscal prudence looks set to pay off as the debt crisis in Europe deepens, with the European Commission predicting growth to increase from the 2.2% posted in 2011 to 2.3% in 2012 and 3.0% in 2013.

However, that hasn't stopped some from revising down their forecasts in the face of the slowdown in the Eurozone and the squeeze in lending as western banks retrench. In its December forecast, Fitch Ratings dropped its predicton for 2012 to 2.3% (compared with the 3.8% it predicted in June). At the same time, the agency revised its outlook on the long-term foreign and local currency ratings of Bulgaria to stable from positive due to the deterioration in the European economic and financial outlook.

What will help Bulgaria through the crisis in 2012 is a return to the fiscal prudence that appeared to have been abandoned in 2009. "Despite a large slippage in the 2009 budget position during the global and domestic recession, the Bulgarian government has since reverted to a tight fiscal policy stance, implying a measurable improvement in creditworthiness that in July 2011 led to the only sovereign rating upgrade in the European Union since the global crisis began in 2007," Moody's Investors Service said in a report in December, referring to its July upgrade in Bulgaria's rating to 'Baa2', the second-lowest investment grade.

Bulgaria plans to stick to tight fiscal policies in 2012, targeting a cut in its budget deficit and planning a touch higher economic growth that will be backed by increased investment and absorption of EU funds.

The 2012 budget, adopted by parliament on December 9, keeps unchanged one of the lowest corporate and personal income taxes in Europe and the government's fiscal reserve at the level projected for the end of this year. The draft provides an option for the issuing of fresh domestic and foreign debt next year to secure the payment of BGN1.8bn worth of global bonds maturing in 2013. Finance Minister Simeon Dyankov said the government may not use the option to issue new debt in 2012, like it did in the previous two years.

Operating under the restraints of a currency board regime that bans the central bank from lending to the government, Bulgaria has to rely on fiscal prudence to sustain growth and the stability of its currency peg to the euro. Using money from its fiscal reserve, the right-of-centre government of the GERB party that took office in August 2009 has so far avoided bailout borrowing from multilateral lenders amidst the sovereign debt crisis - unlike the governments of its indebted neighbours Romania, Serbia and Greece.

The fiscal reserve fell to around BGN5bn at the end of August from over BGN8bn two years earlier when GERB came to power. Dyankov said he hoped the fiscal reserve will be boosted by privatisation revenue as Bulgaria is expected to wrap up the sale of its minority stakes in two of its three power distribution companies, which are majority owned respectively by CEZ, EVN and E.On.

The budget envisages a consolidated budget deficit equivalent to 1.35% of the projected GDP, lower than the 2011 fiscal shortfall of just above 2% forecast by Dyankov in October and in line with the government's aim to achieve a balanced budget in 2014. The budget deficit is projected to decline in 2012 mainly thanks to a faster rise in budget revenue, by 9.6%, compared with a spending increase of 5.9%.

The government optimistically expects GDP to grow by 2.9% in 2012, compared with a projected rise of 2.8% in 2011. A rise in domestic consumption is likely to spur economic growth, but sluggish economic recovery in Europe is expected to slow down external demand for Bulgarian exports. The EU is Bulgaria's main trading partner, absorbing about 60% of the country's exports.

The president of the Bulgarian Industrial Association, Bojidar Danev, sees the 2.9% GDP growth target as too ambitious however, suggesting a more realistic projection would be 1.5%. At the same time, Danev reckons end-year inflation in Bulgaria in 2012 could be lower than the 2.8% projected in the budget due to falls in the global prices of oil, gold and raw materials. The finance ministry expects end-year inflation of 3.9% in 2011.

Government debt meanwhile, is projected to increase to BGN15.3bn, or nearly 19% of GDP in 2011, yet remains one of the lowest levels in the EU.

A faster economic recovery on a global scale, including in Europe, will help Bulgaria beat its budget deficit target next year as the prices of oil and raw materials will boost inflation in the country above the government's expectations, increasing budget revenue from VAT, said Lachezar Bogdanov, managing partner at Sofia-based Industry Watch consultancy.

At the same time, there remains the spectre of a banking crisis caused by the problems in next-door Greece. "Prolonged stress in financial markets worldwide over fiscal and debt sustainability concerns, as well as continued adverse spill-overs from Greece, have the potential to delay the recovery in consumption and investment," notes the European Commission. "Although the capitalisation of banks has remained at reassuring levels, the further deterioration in asset quality and the subsequent erosion of banks' capital buffers is likely to put additional pressure on banks' solvency and lending capacity."

Western Balkans on borrowed time?

Alhough growth in the Western Balkans will outstrip that of the EU in 2012, the fears of contagion from the Eurozone crisis has left many harbouring public finance and growth concerns of their own.

With almost 60% of the region's total exports going to the EU, plummeting demand will have profound ramifications. Remittances and foreign direct investment will also be affected. The predominance of European banks, particularly Greek and Italian, is also fuelling fears about the possible redeployment of capital.

Faced with a possible second wave of recession and with very few assets remaining to be privatized, the squeeze on public finances will be extremely painful in economic and political terms for all countries of the region. With the European perspective ever more distant, the Western Balkans will lose one of the key drivers of reform momentum.

The extent to which populism replaces progress will, therefore, determine whether the region remains stalled by internal fixations or continues to adapt to the demands of the global marketplace. Whichever prevails, the likelihood of social unrest will continue to grow.

Having signed an Accession Treaty during the recent European Council meeting, Croatia is due to join the EU in 2013, but only after a referendum has been held, probably in the spring. Only 53% of citizens backed membership in a recent poll, meaning a pro-EU campaign will be one of the first priorities for Croatia's newly-elected social democratic prime minister, Zoran Milanovic.

With the economic promises on which membership has been sold unlikely to materialise, support for accession is likely to be negatively affected. Croatia's large budget deficit and high public debt - currently at 60% of GDP - means that, after Hungary and the Ukraine, its debt is the third-most expensive to insure against default in CEE. With growth of 0.3% forecast for 2012 and unemployment at just over 17%, tough choices lie ahead.

The trial of former prime minister Ivo Sanader on corruption and abuse of office will continue in earnest, with some potentially damaging disclosures; whilst the change in government may reinvigorate investigations into other scandals.

Deteriorating market expectations - including a recent ratings downgrade - may play a key part in ending Bosnia-Herzegovina's year-long search for a state-level government, allowing the respective political players to point to crises elsewhere beyond their control as impelling difficult compromises. Blinking first, however, will certainly be interpreted as a sign of weakness.

Indeed, with local elections ahead in autumn 2012, there will be little respite on the political front, as the window for reform - particularly constitutional - narrows further. In the absence of an agreement on the state budget, Bosnia continues to function on limited temporary financing measures. There is a great deal of legal uncertainty as to whether such measures can be extended into 2012, raising questions about how the state will continue to meet its obligations. Accordingly, the IMF recently slashed Bosnia's growth forecast from 3.0% to 0.7% in 2012, whilst simultaneously reiterating the risks associated with these projections. Concerns about the euro's future have even prompted discussions about alternative currencies that the convertible mark could be pegged to in a worst case scenario.

With general elections in the spring of 2012, Serbia will face its own period of political turmoil. Electioneering is already well underway, and inevitable coalition talks will involve months of speculation and behind-closed-doors bargaining. According to Goran Nikolic, an economist at the New Policy Centre in Belgrade, the IMF and Serbian government's growth projections are "somewhat unrealistic...[and] growth will more likely be close to zero - and perhaps even negative, both in 2011 and 2012."

For Nikolic, the Eurozone crisis "will have a direct impact on Serbia through the decrease in import demand and reductions in capital flows." Serbia's stance towards Kosovo continues to impede its European prospects, with a decision on its bid for candidacy status postponed until at least February, largely as a result of German opposition. Ahead of elections, however, Serbia's president, Boris Tadic, will find his scope for compromise further diminished.

Kosovo, meanwhile, has finally received the green light to begin dialogue with the European Commission on visa liberalisation - despite five EU member states withholding recognition of its independence.

Kosovo's relative lack of integration into global markets has proved something of a blessing. Though it is expected to grow by 4.6% in 2011 - albeit from a low-base - it continues to have one of the largest current account deficits (at over 20% of GDP in 2010) and high unemployment.

Aside from corruption and organised crime, Kosovo has attracted much criticism for an expensive - and, for some, unnecessary - Albania-Kosovo highway linking the port city of Durres to the border town of Kukes. As Andrea Capussela, the former head of the economics unit of the International Civilian Office in Kosovo, tells bne: "This highway is an economically unsound, financially unsustainable and fiscally irresponsible project - it is a largely unnecessary and unaffordable piece of infrastructure. It will cost more - possibly much more - than 25% of the 2010 GDP, and will be paid for by public money: sensibly, private capital stayed away from it. Its economic effects, therefore, are negative and will weigh heavily on Europe's poorest economy."

Capussela goes on to criticize the "unplanned, irrational and populist approach to fiscal policy of Kosovo's institutions," including the government's breaking of an IMF programme in order to provide an "unfair and unproductive pay rise to the public sector" and its mishandling of the privatization of the telecom utility, Post and Telecommunications of Kosovo (PTK), which was supposed to finance part of the highway.

Montenegro, meanwhile, will begin EU membership talks in June 2012, provided it makes additional progress on tackling organized crime and corruption. Like Kosovo, Montenegro uses the euro as its currency, leaving it extremely vulnerable to any potential break-up of the euro. Nonetheless, Montenegro's prime minister, Igor Luksic, has vowed that the country - whose foreign debt is roughly 44% of GDP - will not abandon the currency.

The European Commission plots Montenegro's growth at 2.2% in 2012, down from 2.7% in 2011, but rebounding to 3.2% in 2013. "Overall, growth is likely to decelerate in 2012 before rebounding in 2013 due to stronger external demand, but also owing to a recovery of bank lending supporting private consumption and investment."

Macedonia is still basking in the glow of its recent win over Greece in the tedious dipute over its name. The International Court of Justice (ICJ) said on December 5 that Greece had violated a bilateral agreement by barring neighbouring Macedonia from joining Nato in 2008, offering a slim chance of compromise between the two nations.

In September 1995, Greece agreed not to block its neighbour's applications to join international, multilateral and regional organisations if it did so under the name Former Yugoslav Republic of Macedonia (FYROM). In April 2008, however, Greece unilaterally opposed Macedonia's Nato entry at a summit in Bucharest. The Hague court ruled 15 votes to one in favour of Macedonia's contention, with the only opposing vote coming from Greek judge Emmanuel Roucounasu.

The neighbourly dispute has simmered since the Yugoslav province declared independence in 1991. Greece objected from the start because it opted to take the same name as a Greek province, rejecting alternatives like the "Republic of Skopje". In 1993, the UN said it would provisionally refer to it as Former Yugoslav Republic of Macedonia while talks went on. A Greek trade embargo lasted until 1995. "This is going to present a small window of opportunity for both sides to find some kind of functional compromise," said Saso Ordanoski, an analyst at Skopje-based consultancy VeVe. "It would be very clear if the Greeks do not take this opportunity that it isn't only related to the name, but the deeper geopolitical interests they may think they have."

The European Commission says Macedoonia's growth accelerated markedly during 2010, from around 1% year on year in the first half to about 3% in the second, bringing annual growth to 1.8%, compared with a contraction of 0.9% the year before.

In 2012, export growth is expected to decelerate, but thanks to the completion of some export-oriented FDI projects, the country's exports are still likely to expand in 2012 and 2013. This, together with stable private consumption and increased investment, will allow the economy to grow at 2.5% in 2012 and around 3.5% in 2013. Inflation is expected to decelerate in 2012, following the expected slowdown in prices for energy and metals, but - on the back of stronger growth - to accelerate again in 2013.

Albania, one of only two European countries to avoid recession in 2009 (the other was Poland), in November passed a budget whose assumptions were, to put it mildly, a bit on the optimistic side.

The government's projected growth forecast of 4.3% for 2012 is far above that of the IMF estimate of 1.5% or the World Bank forecast of 2.0%, both of which warn that Albania's economy will be affected negatively by the Eurozone debt crisis, as well as the fact that the country's two main trading partners are Italy and Greece.

The ruling coalition of Prime Minister Sali Berisha also doesn't appear to be copying the fiscal rectitude of Romania and Bulgaria; Berisha said his government plans to raise wages and pensions, brushing off opposition worries about the levels of debt that Albania is accumulating. Albania's debt currently stands 59.4% of GDP, which is relatively low by the standards of debt-laden countries in Western Europe but high by the standards of the region.

IMF predictions