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Central Europe caught in the EU crossfire

Central Europe: net external financing requirements 1999 requirements
Source: Independent Strategy

It's not just the tragic events in Kosovo that are hitting the economies and financial assets of central Europe. The current state of the European Union isn't helping either. It's ironic that, just as central Europe's reorientation towards the EU once underpinned its post-communist revival, it's now proving to be its nemesis. Slow growth in the EU this year means big external financing gaps for Poland and Hungary. Germany, which accounts for around 30% of the region's exports, is crucial. But the collapse of demand from Russia, which accounts for another 5% to 8% of exports, doesn't help.

Poland and Hungary both face the prospect of a current-account deficit above 6% of GDP this year. And Hungary is expected to run a 4.5% of GDP budget deficit to boot.

The last time Hungary developed such a twin deficit crisis - in 1994 and 1995 - the government had to impose a suffocating austerity programme. Then, industrial production growth collapsed, real wages contracted 10% and the equity market lost 40% of its value in dollar terms.

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