Why the Greek crisis matters to its neighbours in southeast Europe

DISCLAIMER: All opinions in this column reflect the views of the author(s), not of EURACTIV.COM Ltd.

The countries of southeastern Europe cannot remain indifferent to the ongoing fiscal and debt crises in Greece due to the latter's track record of foreign investment, foreign policy focus in the region and growing trade volumes, writes Jens Bastian, senior economic research fellow at the Athens-based Hellenic Foundation for Foreign and European Policy (ELIAMEP), in a March op-ed.

The following op-ed was sent to EURACTIV by ELIAMEP.

''As the twin fiscal and public debt crises unfold in Greece, neighbouring countries in southeastern Europe are anxiously trying to determine how they will be affected by the developments in Athens. In light of Greece's track record of foreign direct investment, its foreign policy focus on the region and growing trade volumes between the countries, neighbouring Serbia, Albania, FYR Macedonia, Romania, Bulgaria and Turkey cannot remain indifferent to the magnitude of the crisis next door. Nor can they cast a blind eye to the possible solutions being addressed in Athens or advocated in Brussels, Berlin and Washington.

Both Serbia and the EU member Romania currently have IMF-led stand-by agreements. These facilities have been in place since early 2009. In the case of Romania the IMF [International Monetary Fund] programme is being supplemented by financial assistance from the European Union, the EBRD [European Bank for Reconstruction and Development] in London and the World Bank. Turkey itself is presently in negotiations with the IMF about possible financial assistance.

Put otherwise, as the discussion and controversy over possible IMF support for Greece continues, some of its neighbours have extensive experience with the Washington-based institution. The same holds for Hungary and Latvia, equally two EU members with multi-year, IMF-led macroeconomic stabilisation programmes in operation.

What could be the short to medium-term repercussions of the Greek fiscal and public debt crises for its neighbours? Is the contagion risk-limited or imminent? Some spillover effects have already started to manifest themselves. As Greek 10-year bonds fall and yields continue to remain above 6%, sovereign debt issuance and the risk premium investors demand to hold securities emitted by Romania, Serbia, Bulgaria and Turkey have been adversely affected.

Moreover, the ripple effects of the Greek crisis are being felt in three other key areas, namely the impact on foreign trade volumes, the level of remittances being send back home from Greece and the cost of lending by the local subsidiaries of Greek parent banks operating in the region.

As the 2009 reporting season for commercial banks illustrates, they are being confronted with mounting problems concerning non-performing loans in Greece and in their main external markets, i.e. next door. They are increasing their provisioning levels, which will impact not only on their asset quality and profitability for 2010 but also influence their lending activities in Serbia, Romania, Albania, Bulgaria and FYR Macedonia. A return to annual lending growth reaching 50 percent, as witnessed in the mid-2000s will not be repeated by Greek banks.

We also have to bear in mind that the recession-hit markets in southeast Europe still have a long way to go until they can legitimately claim to be on safer economic grounds. The secondary effects of the global economic and financial sector crises in the region are feeding through the real economies of these countries, e.g. in terms of declining consumer demand, indebtedness of private households and corporate entities as well as growing unemployment.

Under these difficult conditions, the economic crisis in Greece risks affecting the recovery potential of its neighbours. Over the past decade foreign direct investment from Greece, rising trade volumes with each other and labour migration to Greece all contributed to assist the economic transition of its neighbours. This positive impact may be put on hold for some time to come.

However, possibly the most important issue on the minds of policymakers and central bank governors in neighbouring countries are the potential consequences for the most crucial political project in the region. There is a growing concern across capital cities from Tirana over Skopje to Belgrade and Ankara that the EU accession perspectives for countries in southeast Europe could be affected as a result of the EU becoming rather cautious about enlargement and more rigorous regarding economic conditionalities of membership.

It is in this area of foreign policy making that Greek leadership can be most influential in the coming months. Sending out clear signals of engagement with the region, sustaining these with practical efforts of support for its neighbours can underscore this agenda. The credibility which Greek governments and the private sector have established over time in the region as an investor, diplomatic force and gateway for goods, services and people is an impressive achievement.

It is therefore in their own self-interest to build on this political capital and continue identifying economic opportunities in the neighbouring countries. Despite the crisis and the challenges it poses, Greece should not become inward-looking, nor forget its next door neighbours in the region of southeast Europe!''

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