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It said the worsening mood reflected a slowdown particularly in Russia, even as the threat from turmoil in the eurozone appeared to be abating. Weaker activity in other large economies such as Poland and Turkey was also weighing on the outlook.
However, the report said the biggest downside risk to the outlook remained a possible further deterioration of the eurozone crisis. The recovery might falter in the absence of more growth-friendly economic policies in advanced Europe, it added.
Chief Economist Erik Berglof said the latest slowdown was a “wakeup call across the region to reenergise structural reforms that have been on hold since the start of the crisis”. Referring to a current debate about the relative merits of stimulating growth versus the need for fiscal austerity, Mr Berglof said: “This trade-off is not the main issue in our region. Fiscal responsibility is of course important. But most of our countries have already made significant progress in this area during the crisis. What is urgently important now is to advance structural reforms."
He pointed to areas such as promoting the entry of new firms, strengthening competition and removing obstacles to business. Structural reforms were also important for the southern and eastern Mediterranean, where fiscal issues did still need to be addressed. A shift towards market-based pricing would reduce subsidies and help cut fiscal deficits.
The report said several countries were turning to unconventional tools to stimulate their economies. “Their effectiveness will depend, among others, on good institutional setups as well as removing any other major policy obstacles in the way of recovery”, the EBRD cautioned.