EU newcomers to grow fast, euro path uncertain

Brussels, Nov 17 | Updated: Nov 18 2005, 05:43am hrs
EU newcomers will enjoy faster economic growth than the rest of the bloc in 2005-2007 but high budget deficits may undermine efforts by the three biggest countries to adopt the euro currency, the European Commission said. The European Unions executive said in a half-yearly forecast on Thursday that inflation in the 10, mostly ex-communist new entrants would stabilise and their high unemployment would ease, helping boost private consumption and investment.

Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia and Slovenia joined the EU last year, which boosted their economies by attracting investment, EU aid and increasing their exports. But the Czech Republic, Hungary and Poland are failing to tighten fiscal policies and are expected to have budget deficits above the EUs ceiling of 3% of gross domestic product in 2007, putting a question mark over their timetable for euro zone entry, the report said.

Poland, the biggest newcomer, is expected to cut its deficit to 3.4% of GDP in 2007 from 3.6% in 2005 and 2006, while the Czech Republic may see its shortfall increase to 3.3% of GDP in 2007 from 3.2% this year. Hungary, the worst budget deficit offender among the newcomers, is forecast to see its deficit balloon to 6.9% of GDP in 2007 from 6.1% this year, unless it introduces austerity measures.

Hungarys high deficit is set to put the country on a collision course with the EU.

The EU is expected tell Budapest early next year by how much it should lower the shortfall as part of the blocs excessive deficit procedure, which may involve freezing of aid funds.

A deficit of less than 3% of GDP is also a key criterion for joining the euro zone and should be met two years before a candidate adopts the single currency. Slovakia, which is seen as a star reformer among EU new joiners, is set to cut its deficit to 2.5% of GDP in 2007 from 4.1 percent in 2005, helping the country to meet its goal of entering the euro zone in 2009. The public finances of new EU members will also be burdened by spending to co-finance multi-billion-euro projects funded mainly by the EU, such as motorway construction and environmental clean-ups and other EU membership dues.

Poland is forecast to see its growth rate increase to 4.5% in 2007 from 3.4% this year and 4.3% in 2006 as massive EU aid funds will start to flow in after initial difficulties, boosting domestic consumption and imports.

The Czech Republic is expected to have similar growth rates, while Hungarys expansion will be slightly lower but still much above the average for the euro zone of 1.9% next year and 2.1% in 2007. The Commission said the fastest growth rates, well above 5 percent, would be seen in the three Baltic republics - Estonia, Latvia and Lithuania whose budget deficits are already below 3% of GDP and are expected to join the euro around 2007.

Economic expansion in the record-growing Latvia is expected to fall to 7.1% in 2007 from 9.1% this year. But the Commission warned Lavia that it might jeopardise its goal of joining the euro zone in 2008 because of high inflation, projected to ease only to 4.8% in 2007 from 6.8% in 2005 - not enough to meet the entry criteria.

The Commission forecast that economic growth in candidate country Turkey would inch up to 5.1% in 2007 from 5.0 percent in 2005.