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East, central Europe economies to recover

Presenting its twice yearly economic forecast, the European Commission said most of the former communist states are expected to fail to cut their budget deficits significantly, making clear none of them will qualify to join the euro zone any time soon.

The countries, which join the EU in 2004 or 2007, are forecast to keep inflation under control, but in many cases unemployment rates will remain high.

Poland, the biggest ex-communist state in the EU, would see its growth increase from 3.5 percent this year to 3.9 percent in 2011 and 4.2 percent in 2012 thanks to improving domestic demand and the continued flow of EU aid funds.

In the 27-nation EU, only Sweden and Germany are expected to expand faster than Poland.

Across the 16-nation euro zone, growth is expected to be 1.7 percent, 1.5 percent and 1.8 percent in 2010, 2011 and 2012 respectively. Poland’s government forecast is for growth of 3.0 percent, 3.5 percent and 4.8 percent respectively.

“The main drivers of this recovery are: a gradually improving labour market, rebounding consumer and business confidence, and increased foreign capital inflows,” the Commission said.

Among the eastern European EU members, Bulgaria, Latvia and Romania are forecast to suffer recessions this year, following the global financial crisis that hit them hard, but will rebound strongly in 2011 and 2012.

In Hungary, which is winding down a $25 billion International Monetary Fund-led bailout programme, the economy is expected grow by 1.1 percent this year, 2.8 percent in 2011 and 3.2 percent in 2012. For next year and 2012, it is slightly less than forecast by the government.

A special levy imposed on financial institutions and other industries to battle the budget deficit could dampen growth.

“The financial sector levy is likely to dampen credit to corporations and to households,” the Commission said.

“The further extra levies on energy, telecoms and retail may have a negative impact on the business environment through increased institutional uncertainty,” it added.

The Czech Republic is forecast to see its growth rate increase to 3.1 percent in 2012 from 2.4 percent this year.

HIGH DEFICITS, EURO FAR

Except for fiscally sound Bulgaria, the coutries will fail in their efforts to cut their budget deficits to below the EU’s cap of 3 percent of gross domestic product, which is also a ceiling for qualifying to join the euro zone.

In some cases, the shortfalls may even grow.

The countries do not have official target dates to join the euro zone, with most saying they would like to achieve it as soon as possible. Debt problems in the currency area have undermined popular support for euro entry in some candidate countries.

The Commission said that in Poland the deficit is expected to decline from 7.9 percent of GDP this year to 6.6 percent in 2011 and 6.0 percent in 2012.

The country’s public debt is forecast to grow from 55.5 percent of GDP in 2010 to 57.2 percent in 2011 and 59.6 percent in 2012, although Poland uses a slightly different methodology for counting debt.

Poland has three debt containment levels that trigger various levels of fiscal tightening. Debt-to-GDP levels of 55 percent and 60 percent are the most severe because, once breached, the government is obliged to significantly cut spending and even present a balanced budget.

“Projected debt figures are, however, subject to uncertainty because of the high volatility of exchange rate and the ensuing valuation effects of the large foreign-denominated part of the debt,” the Commission noted.