Rapid growth seen for EU newcomers
ft.com
By Reuters Mon 6 Nov 11:55
EU newcomers will enjoy faster economic growth than the rest of the bloc in 2006-2008, but high budget deficits and inflation rates will complicate their path to join the euro zone, the European Commission said.
In its half-yearly forecast, the European Union executive said on Monday that robust foreign investment, massive flows of EU aid funds and improving consumer morale will fuel fast expansion in the mostly ex-communist new entrants.
But it cut its growth forecast for Hungary and raised the inflation outlook after Budapest allowed its budget deficit to balloon to 10.1 percent of gross domestic product in 2006.
Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia and Slovenia joined the EU in 2004, boosting their exports and helping ease unemployment rates, which fuelled consumption and investment.
However, the Czech Republic, Poland and, especially, Hungary are expected to fail to cut their budget deficits to below 3 percent of gross domestic product by 2008, the report said, calling into question their euro zone entry timetables.
High inflation rates in the fast growing and fiscally prudent Baltic republics of Estonia, Latvia and Lithuania lookset to jeopardise any attempt to join the euro zone before 2010.
Cyprus, Malta and Slovakia have a much better chance of adopting the euro this decade, with relatively low budget deficits, although inflation might pose a problem.
A candidate must have a deficit of less than 3 percent of GDP two years before it adopts the euro. Its average annual inflation rate must be no more than 1.5 points above the three best performers in the EU.
HIGH DEFICITS
The report showed that Hungary will remain the EU’s worst budget deficit offender, although its shortfall is forecast to shrink to 5.6 percent of GDP in 2008 and 7.4 percent in 2007 from 10.1 percent in 2006.
The Commission lowered its growth forecast for Hungary to 4.0 percent this year and 2.4 in 2007 from a May reading of 4.6 and 4.2 percent respectively. The country is expected to grow at 2.7 percent in 2008.
Poland, the biggest EU newcomer, is expected to see its economy expand faster than previously thought, with its GDP growing by 5.2 percent this year and 4.7 in 2007.
The country is expected to grow 4.8 percent in 2008, for which the forecast was made for the first time.
The euro zone’s economy is expected to grow at 2.6, 2.1 and 2.2 percent respectively in 2006, 2007 and 2008.
Poland’s budget deficit is forecast to fall to 1.8 percent of GDP in 2008 from 2.2 percent this year. But under EU rules, Warsaw and Budapest will no longer be allowed to exclude the cost of pension reforms from its budget deficits from next year, adding about 2.0 points to the gap.
The Czech Republic will see its shortfall shrink only slightly to 3.2 percent of GDP in 2008 from 3.5 percent in 2006.
Slovakia, where fiscal performance is deteriorating, is still set to cut its deficit to 2.9 percent of GDP in 2008 and 3.0 percent in 2007 from 3.4 percent in 2006, helping the country to meet its goal of entering the euro zone in 2009.
The Czech Republic and Hungary have dropped official target dates to join the euro zone, while Poland has never had one.
Analysts say this reflects diminishing enthusiasm towards the euro among many of the central European EU newcomers and their reluctance to cut spending amid political instability.
The fast-growing Baltic countries, where budget deficits are already below 3 percent of GDP, will have problems with taming inflation, the Commission said.
Year-on-year inflation in Estonia is forecast to remain above 4 percent in 2006-2008, much above 5 percent in Latvia and much above 3 percent in Lithuania. |
