Wednesday, June 24, 2009

EU Gives Hungary, Romania, Lithuania to 2011 to Control Budgets

By Adam Brown

June 24 (Bloomberg) -- The European Union gave Romania, Hungary and Lithuania until 2011 to rein in their budget deficits as recessions sparked by the global financial crisis slash tax revenue throughout eastern Europe.

Poland should also narrow its budget gap by 2012 and the deficits of Slovakia and Slovenia, the only countries in the region to have adopted the euro, will probably exceed their targets this year, the European Commission, the EU’s executive arm, said in a report today.

Most countries in the region are in recession as the crisis curbs exports and shuts off capital flows from their partners in the West, cutting tax revenue and pressuring governments to spend to jumpstart economic growth and lay out more on social benefits as unemployment rises.

“National budgetary positions in the EU and elsewhere have deteriorated considerably in the last year and will deteriorate even more this year,” Economic and Monetary Affairs Commissioner Joaquin Almunia said in the report. “It is crucial that governments devise an adjustment path.”

The economic crisis in eastern Europe has prompted several countries, including Romania, Hungary, and Latvia to agree to international financing packages led by the International Monetary Fund to finance budget and current account shortfalls.

Crisis Effects

Economies in all but one of the 27 EU members will contract this year as the global crisis curbs investment and unemployment cuts consumer spending, the commission forecasts. It said the average budget deficit of the 16 nations using the euro will swell to 6.5 percent of gross domestic product next year from 5.3 percent this year and 1.9 percent last year.

Romania will probably post a budget deficit of 5.1 percent of gross domestic product this year while Hungary will probably register a gap of 3.9 percent and Lithuania’s deficit may widen to 5.4 percent of GDP this year and 8 percent next year, the commission report predicted.

Those three countries will have six months, starting in July, to outline and enact the measures they plan to take to narrow their budget deficits, the commission said today.

The commission also urged Poland to narrow its budget deficit to a maximum of 3 percent of GDP by 2012, from a gap of 3.9 percent of GDP last year. Slovenia and Slovakia, the only countries in eastern Europe to have adopted the euro since a wave of EU expansion in 2004, were also warned to control spending and income to rein in their deficits.

Euro Adoption

The wider deficits may affect the countries’ plans to adopt the euro in coming years. To adopt the common currency, the country must lower its general government deficit below 3 percent of GDP and keep its public debt below 60 percent of GDP.

The commission said Slovenia’s 2009 budget-deficit target of 5.1 percent of gross domestic product is subject to downside risk because it is based on an optimistic economic-growth forecast. Slovakia’s goals of having shortfalls amounting to 3 percent of GDP in 2009 and 2.9 percent of GDP in 2010 have a “clearly negative” risk.

Bulgaria was the only eastern European nation to register a budget surplus last year, of 1.5 percent of GDP, although the commission forecasts it will post a deficit of 0.5 percent of GDP last year.

To contact the reporter on this story: Adam Brown in Bucharest at abrown23@bloomberg.net

No comments: