by Lidia Moise

    BUCHAREST, Sept. 25 (Xinhua) -- Faster-than-expected second-quarter growth in Germany and France, the European Union (EU)'s largest economies, is raising hopes that the recession in Central and Eastern Europe (CEE) is lifting.

    But analysts forecast that the clouds of recession would lift slowly, and at different speeds.

    Almost all the countries in the region share the burden of huge fiscal deficits, relatively high public sector debt and fragile currencies which make them vulnerable in the face of global instability.

    All over the region, households and companies increased their reliance on foreign currency loans which turn out to be a risk factor in recession times. High unemployment rates and the devaluation of currencies limited borrowers' ability to repay their debts.

    Therefore, the fragile recovery in two of Europe's biggest economies may not be enough to pull the CEE economies out of recession, but it will definitely help them in the long run. Which countries will benefit the most and how are million dollar questions.

    PSYCHOLOGICAL EFFECT

    A KBC report based on the conventional export links suggested that "the turnaround of the industrial production in Germany should have a positive impact on emerging Europe, not only on those countries with traditionally strong export links to Germany, such as the Czech Republic or Hungary, but also on Russia and Turkey."

    "The recovery in France and Germany is good news for all CEE economies as exports will recoup and foreign investments will rise, helping the region to emerge from a deep and large recession," Lars Christensen, chief analyst at Danske Bank, said in a phone interview.

    The return to growth in the two key export markets of CEE countries will have "a positive psychological effect on investors, making them less nervous about the risks of the region and more open to financial and direct investments," Christensen remarked.

    The good news of the recovery in France and Germany injected optimism into the CEE economies, prompting the industrial output to rise through prospects of higher export demand, despite the evidence that Germany's growth relied not on larger imports, but on its own exports growth.

    DIFFERENT COUNTRIES, DIFFERENT PROSPECTS

    Slovakia's industry performance was linked to the eurozone, especially to Germany. Therefore, it would enjoy stability, Jan Toth, chief economist at the Slovakian branch of Unicredit Group, reasoned in the last report on CEE markets.

    Besides, the economies of Poland and the Czech Republic appeared to be in a good position, and they would be able to pull out of recession sooner, Christensen said.

    According to Marin Mrowiec, chief economist at Bank Pekao, Poland, the largest of the EU's eastern members, outperformed the rest of the region. Its economy managed to stay above water "due to relatively loose 2008 fiscal policy and a relatively smaller export sector."

    Although Poland's economy grew 1.1 percent in the second quarter, the outlook was not too sunny, analysts warned.

    Polish economic growth "will temporarily move into negative territory in the last quarter of 2009 and in the first quarter of 2010 mainly due to the base effect before rapidly picking up," Christensen predicted.

    While the Czech Republic and Poland have better recovery prospects, the Baltic states and Hungary are facing more challenging ones, as they run "higher external debt levels and have limited fiscal and exchange rate response to the slowdown," UniCredit Group's analysts said.

    In Hungary, a combination of rescue packages from both the International Monetary Fund (IMF) and the EU eased the financial difficulties and eventually made foreign investors return.

    Significant IMF support exercised a positive influence on fiscal policy in Hungary, but the country's public sector debt rose above 80 percent in 2009, and the private sector is heavily indebted in foreign currencies.

    Analysts of UniCredit Group predicted two consecutive years of contraction for Hungary's economy, with positive prospects only in2011 when the GDP may grow by 2.5 percent.

    In Romania, EU balance of payment support, low public sector debt levels and long term growth potential supported by EU funds would help the country to compensate the risks of high budget deficit and get out of the recession next year, analysts said.

    A recovery of the main European economies "may help Romania, but not to a large extent because of issues stemming from poor fiscal policy," said Nicolaie Alexandru-Chidesciuc, senior economist at ING Bank Romania.

    The economy was expected to perform better in the last quarter of this year and return to a modest growth in 2010, Alexandru-Chidesciuc announced.