The eurozone crisis is not only slowing down growth in Western Europe, it also affects growth in Eastern Europe, East Capital said. According to Threadneedle, the only answer to the crisis is for the European Central Bank (ECB) to introduce quantative easing (QE).

Bengt Dennis, East Capital Advisory Committee member, and Marcus Svedberg, chief economist at East Capital, said that Eastern Europe is expected to grow by four per cent next year, but is also negatively influenced by certain economic linkages and dependencies with the West: trade, investments, credits and general sentiment.

About a third of Eastern European countries’ GDP is dependent on trade, export and imports with Western Europe, while Eastern Europe is only a small part of Western Europe’s trade.

In a statement, Dennis and Svedberg wrote: “Depending on the weight of the linkages Eastern economies have with the West, [we] assess the Central European countries more vulnerable in responding to a eurozone slowdown, in particular Hungary, Slowakia and Bulgaria, whilst Croatia, Slovenia and Romania for example have a comparably high degree of integration with the eurozone.”

European politicians still have not found a solution for the crisis and Azad Zangana, European economist at Schroders, said they have missed their opportunity to prevent a European credit crunch.

He said: “Many eurozone banks are already on life support – unable to raise funds in capital markets and heavily reliant on liquidity from the European Central Bank. However, this will not be enough to stop banks from deleveraging, and reducing lending to the real economy. As a result, we are now forecasting a serious recession in the eurozone in 2012, which is also likely to result in recessions in the wider European region, including the UK.”

However, CIO at Threadneedle Investments Mark Burgess believes that QE might be the only option for the eurozone, as Europe “cannot shrink its way back to health, because it’s not clear which number moves faster, the numerator or the denominator in the debt to GDP equation”.

He explained: “Over the next two years, buyers have got to be found for approximately 400bn Euros of Italian debt, and at the moment it is not clear who those buyers might be. Banks are deleveraging and shrinking their balance sheets selling bonds, and international investors are fleeing back to their home markets.

“It increasingly seems that QE introduced by the ECB is the only answer. Indeed it could be seen as their ‘with one leap they are free’ policy option, but with the Bundesbank culture and fear of hyperinflation, its introduction is going to require an enormous cultural shift in the minds of the central bankers. However, without it, Italy (and indeed Spain and Greece) runs the risk of running out of money, with all the accompanying economic and social consequences.”

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