EU's ex-communist newcomers face slower growth in 2007

(WARSAW) - The European Union's new ex-communist member states continued to enjoy an economic boom in 2006, but are likely to face a slowdown this year, the World Bank said in a study released on Thursday.

In its "EU 8+2" report, which provides an economic snapshot of 10 newcomers to the 27-member EU, the World Bank said that growth strengthened across the region last year, particularly in Poland, Slovakia and Romania.

The three Baltic States, Slovenia and Bulgaria also grew at an even stronger rate than in 2005.

The situation remained rosy despite currency appreciation against the euro, and especially the dollar, in several countries, as well as moderate growth in the eurozone, which is the major market for the new EU members.

However, said the World Bank, the region faces a slowdown this year as growth weakens in the eurozone and output moves closer to potential.

The bank also sounded a warning about higher inflation, even though it said that the recent sharp decline in oil prices could help dampen risks.

"While inflation remains well under control in Poland and the Czech Republic, other countries are struggling," it said.

"In the Baltic countries and to some degree Bulgaria and Romania, strong wage and credit growth are leading to overheating and significant inflationary pressures."

The World Bank called for "close monitoring" of the rapid expansion of credit across the region.

"In some countries, an outright credit boom has contributed to large macroeconomic imbalances, potential asset market bubbles, and significant vulnerabilities that call for a more determined policy response," it said.

Despite strong growth and buoyant tax revenues, fiscal deficits increased last year in most countries in the region.

The situation was particularly dramatic in Hungary, where the deficit reached about 10.0 percent of GDP.

The Hungarian government is planning a major tightening this year, and Slovakia and Poland are also aiming for lower deficits, but other countries are holding off overhauls until 2008-2009.

The region's enthusiasm for joining the eurozone has appeared to wane because of problems meeting the membership rules, the World Bank noted.

While Slovenia became the zone's 13th member on January 1 this year, most other new EU members states are struggling to meet entry conditions related to inflation, budget deficits, exchange rate stability, and legislation.

Most countries have set aside their previous euro targets, although Slovakia is still aiming for January 2009.

Lithuania's bid for January 2007 was rejected last year due to concerns about inflation. Estonia and Latvia have delayed their plans for the same reason.

The Baltic states still aim to join as soon as possible but have acknowledged that this is unlikely before 2010.

Other EU newcomers in the region have indicated that joining the eurozone will not be feasible until 2010-2012.

Eight former communist bloc countries joined the EU in May 2004: the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia and Slovenia.

Bulgaria and Romania joined on January 1 this year.

EU8+2 Regular Economic Report January 2007