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EBRD sees strong E. Europe growth, warns on EU strains
By David Chance
LONDON, Nov 24 (Reuters) - Eastern Europe will withstand the global economic downturn in 2003 and is set to grow strongly, outstripping the euro zone, the EBRD, the region's development bank, said on Sunday in its annual economic report
However, the European Bank for Reconstruction and Development warned that the economic discipline required by European Union membership would pose big problems for the eight east European states which hope to join the EU in 2004.
The EBRD "Transition Report" forecast the nine advanced states of Central Europe and the Baltics, of which all but Croatia are EU candidates for 2004, would grow by a weighted average of 3.7 percent in 2003 compared with a forecast of 2.2 percent in 2002.
Compared with OECD forecasts of growth of 0.8 percent this year and 1.8 percent in 2003 in the euro zone, these figures looks positively dynamic, but EBRD Chief Economist Willem Buiter cautioned accession countries they needed to do much better to catch up with living standards in western Europe.
"While most countries are enjoying moderate growth rates and inflation is on a downward trend, there is no room for complacency," Buiter, a former member of the Bank of England's Monetary Policy Committee, said.
"The majority of countries in this region have levels of gross domestic product per capita that are well below the EU average and, in most cases their unemployment rates stand at double-digit levels," Buiter said.
The average income of accession countries is just 40 percent of the EU average, well below the 60-70 percent average for Greece, Portugal and Spain when they joined the EU in the 1980s.
That means accession countries - Poland, Hungary, the Czech Republic, Slovakia, Latvia, Lithuania and Estonia - have to grow rapidly to catch up.
Slovenia, the eighth, is already at EU income levels.
The eight all face huge spending demands to meet EU rules -- the environment alone will cost up to 108.415 billion euros over 10 years -- and will also strive to meet the constraints of eventual euro membership, which limits budget deficits.
Buiter said these aims may be unreachable.
"...The degree of fiscal tightening that would be indicated by a strict interpretation of the Stability and Growth Pact budget criterion may be excessive from the point of view of successful real convergence."
At the same time, in the run-up to membership of the euro, central banks in countries which want to join would have to engineer a temporary monetary contraction to bring inflation below the eurozone threshold of not worse than 1.5 percent more than the three best performing economies.
Polish, Hungarian, Slovak and Czech central banks have battled against hot money flows from portfolio investors seeking to take advantage of juicy financial returns in the run-up to EU membership, forcing their currencies higher.
BALKAN BOOM, CIS CONCERNS
The Balkans, after years of slow reform and poor growth due to the breakup of Yugoslavia and wars in the region, is finally showing sustained levels of growth and attracting substantial levels of foreign direct investment.
The EBRD forecast Balkan countries are expected to grow 4.1 percent in 2003, up from 3.6 percent this year.
However, growth in the the Commonwealth of Independent States, the ex-USSR minus the Baltics, is expected to fall to 4.0 percent, down from 4.4 percent this year as the easy growth from oil and gas and the post default and devaluation Russian boom runs out of steam.
The EBRD said Russia and Central Asia needed to accelerate reforms to improve on pitifully low levels of foreign direct investment.
It said that for Russia, the problem was not a lack of savings but a poor investment climate.
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