Regional Focus: Greek debt crisis may deepen multi-speed Europe

The 2010 Greek sovereign debt crisis has put pressure on both the eurozone and EU members in Central and Eastern Europe. Central European countries such as Poland or Czech Republic could face challenges as their economic situation remains closely linked to the performance of the euro while delays in euro adoption will put further pressure on their economies.

The Greek crisis will have a significant impact on South East Europe which is more dependent on Greek trade, investments and banks.

Key points

  • Following the 2008 global financial crisis, general government budget deficits and public debt levels in eurozone countries, particularly Greece, deteriorated. This led to a crisis of confidence in financial markets as concerns over the ability of Greece to finance its debt rose at the beginning of 2010 when deficits turned out to be larger than expected. This resulted in the Greek sovereign debt crisis and risks of contagion to other eurozone countries;
  • Central European countries such as Poland or Czech Republic could benefit from a redirection of foreign direct investment (FDI) from other countries, pejoratively called PIIGS (Portugal, Ireland, Italy, Greece and Spain) or South East Europe;
  • However, the Greek crisis is likely to deepen the emergence of a multi-speed Europe, as an economic and financial gap could grow between well-managed Central European countries and South Eastern European countries, which have stronger trade, investment and banking ties with Greece. Greek FDI in Bulgaria and Romania is expected to decline and real GDP growth in these countries will remain below 1.0% in 2010;
  • The Greek crisis will reinforce scrutiny on new eurozone members and euro adoption is likely to be delayed for several candidates such as Poland, Czech Republic or the Baltic states;
  • The Greek crisis also runs the risk of putting pressure on Eastern European currencies as they remain closely correlated to the performance of the euro. Currency depreciation raises the cost of imported goods and contributes to higher consumer prices.

Greek crisis brings uncertainty in Central Europe

  • In order to match EU monetary guidelines, the Greek government has consistently misreported its economic statistics. Greece’s general government budget deficit and public debt were revised in April 2010 with the general government budget deficit at -13.6% of GDP and its government gross debt at 115.1% of GDP in 2009 according to Eurostat;
  • The Greek situation brings uncertainty to the eurozone since the PIIGS also display worrying levels of government deficits and debts, increasing the risk of contagion. The Maastricht criteria, agreed by EU countries and established in 1992, sets a -3.0% of GDP limit on government budget deficits and a 60.0% of GDP limit on public debt;
  • The global financial crisis of 2008-2009 and euro skepticism has also played a role in delaying euro adoption. Poland was due to adopt the euro in 2012 but failed to match the convergence criteria (notably on inflation). In addition to managed levels of government deficits and debts, countries who wish to join the euro must limit inflation (not higher than 1.5 percentage points above the average of the three best performing member states of the EU), join the ERM II (Exchange Rate Mechanism under the European Monetary System) for two consecutive years without devaluating during this period, and limit nominal long term interest rates by no more than 2 percentage points above the three lowest inflation member states. Euro adoption has been postponed to the second part of the decade (2015 at the earliest in Poland and 2016-2017 in Czech Republic);
  • The prospect of joining the euro contributed to Central European efforts to maintain acceptable levels of government budget deficits and debts but these were too high in 2009. Poland’s general government budget deficit reached -7.1% of GDP in 2009, Czech Republic’s -5.9% of GDP, Slovenia’s -5.5% and Slovakia’s -6.8% of GDP;
General government budget deficits as a percentage of GDP in Central Europe: 2009
% of GDP

Source: Eurostat.

  • The Greek crisis can bring good consequences for Central European countries. As the PIIGS are still at risk, and due to Greece’s strong economic ties with South Eastern countries such as Romania or Bulgaria, investors could focus their attention on Central European economies, which could benefit from a redirection of foreign investments;
  • However, the Greek crisis will increase EU enlargement fatigue and the European Central Bank will put new eurozone members under much closer scrutiny, especially regarding Lithuania and Latvia, whose levels of government budget deficits remain high (-8.9% of GDP and -9.0% of GDP in 2009 respectively).

South East Europe likely to suffer more

  • The Greek crisis is likely to have a bigger impact on South East Europe because of strong investment, trade and banking ties with Greece. According to the Bank of Greece, Greek net investments in Bulgaria represented €104.9 million and €102.0 million in Romania in 2009 compared to €18.9 million in Poland and €6.0 million in the Czech Republic. As Greek firms are likely to face higher domestic tax burdens, they will be less likely to invest in these areas;
  • Greek banks have invested heavily in the region, making up four of Bulgaria’s top 10 banks, three of Serbia’s and two of Romania’s in 2010. Because of domestic pressure on Greek banks, there is a risk that their subsidiaries in South East Europe will limit loan and credit growth. This will limit business investment and consumer spending power;
  • The volume of trade between South East Europe and Greece also increases the risk of economic contagion from the Greek crisis. For example, exports to Greece accounted for 9.0% of Bulgarian exports but only 0.6% of Polish exports in 2009.
Net direct investment from Greece by country of destination: 2009
€ millions

Source: Bank of Greece.

Impact on business and consumers

  • As a result of financial, trade and investment ties between Greece and South East Europe, it is expected that real GDP growth rates in Bulgaria and Romania will only respectively reach 0.2% and 0.8% in 2010. Bulgaria and Romania also suffer from corruption and organised crime, which can widen the gap between these countries and better managed economies in Central Europe;
  • Adopting the euro would boost trade with the EU and reduce currency risks. Indeed, the euro has helped Slovakia, who joined the euro in 2009, to service its national debt several times cheaper than Poland. Estonia is likely to be the only country which will match the convergence criteria and adopt the euro in 2011, while Lithuania and Latvia’s membership in the eurozone remains uncertain as they have the highest general government budget deficits in Central and Eastern Europe. Hungary is still under an IMF rescue package and will be under stronger scrutiny. Poland and Czech Republic are said to join between 2015 and 2017;
  • The Greek crisis runs the risk of putting pressure on Eastern European currencies as they remain closely correlated to the performance of the euro. The euro lost value in early 2010 as investors were concerned about a solution for Greece’s fiscal problems, which harmed Central Europe’s trade with the eurozone;
  • Pressure on currencies impacts the costs of imported goods and contributes to higher consumer prices. Moreover, depreciation of the zloty could raise the costs of servicing and repaying Poland’s debt and dig its government deficit further. It would also raise the costs of loans denominated in foreign currencies, making them a heavier burden for business and consumers.


  • In May 2010, the IMF and EU agreed a joint €110 billion financing package to help Greece out of its debt crisis. The package will last for three years but the government faces tough challenges to impose unpopular austerity measures, which will limit Greek business and consumer confidence in the short term;
  • Central European countries such as Poland or Czech Republic with sound financial situations and high economic growth rates could benefit from a shift in investors’ focus from South East Europe or PIIGS, but the woes of the eurozone may damage their economic situation in the long term by putting pressure on their currencies and delaying euro adoption. Estonia is likely to be the only country which will adopt the euro in 2011;
  • The IMF forecasts Poland’s government deficit to decline below -7% of GDP from 2011. If the Greek crisis continues to put pressure on the zloty, Poland might face difficulties in bringing its deficit below -3% in order to join the euro in 2015;
  • Another long-term impact could be the resurgence of EU enlargement fatigue, which would delay negotiations on EU accession for Croatia, Serbia or Turkey.