Thursday, May 31, 2007

Reforms waning in EU's newest members: World Bank

By Alan Crosby

PRAGUE (Reuters) - The pace of reforms in the EU's east European members has slowed and most countries in the region are not taking advantage of strong growth to improve public finances, the World Bank said in a report on Thursday.

It predicted the pace of growth in the EU-8 plus two -- the 8 east European countries that joined the bloc in 2004 plus Bulgaria and Romania, which joined this year -- would generally "slow somewhat" in 2007, except in Poland, Slovakia and Bulgaria.

But given their recent strong economic performance, driven mainly by domestic demand, the World Bank chided governments for not using the opportunity to finish reforms needed to converge with richer European Union members and to cut public deficits.

"Reform momentum in the region has generally waned owing to post-accession reform fatigue, unstable political situations, and weak administrative capacity," the report said.

"Although small steps are taken now and then to improve the business environment, more complex public administration, legal, and labor market reforms are proving elusive and renewed momentum is needed to sustain the process of rapid real convergence."

In May 2004, the Czech Republic, Slovakia, Poland, Hungary, Slovenia, Latvia, Lithuania, and Estonia joined the EU as part of a massive expansion plan that also included Cyprus and Malta. Romania and Bulgaria followed this January. The 10 east European members are covered in the report.

DEFICITS NEED CUTTING

Public finance reforms have been a hot topic in east Europe, where governments have been trying to balance political considerations with fiscal reality.

Bloated deficits have forced some to change euro adoption plans. New EU members are required as part of the accession agreement to adopt the single currency. Though no strict timetable is set out, most want to join the euro zone as quickly as possible to increase efficiency in trade and business.

The report said only Bulgaria and Estonia tightened their fiscal stance "significantly" in 2006.

It added the picture is unlikely to change markedly in 2007, "although Hungary will make an important dent in the very large deficit recorded in 2006 and Poland will continue its very gradual adjustment process".

Slovakia is aiming to bring its deficit just below the 3 percent of GDP threshold which would be needed to adopt the euro from 2009 as planned, but the World Bank said "there is very little margin for slippage".

"The need for a more ambitious fiscal policy is particularly acute in Latvia, but Bulgaria and Romania also can hardly afford the fiscal easing envisaged this year," the report said.

The report said monetary policy in the Czech Republic and Poland is likely to follow the tightening cycle of the ECB, while better inflation prospects -- and higher interest rates -- may allow for some easing in Hungary and Slovakia.

In Romania, where inflation is below expectations, the central bank appears to be focused on reducing interest rate differentials between Romania and the euro zone after three cuts in the base interest rate by a total of 150 basis points this year, the report said.

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