Economic Reform Lags in New EU Members

With foreign companies flooding into eastern Europe _ making available everything from attractive jobs to Hugo Boss suits and iPods _ those new European Union members are poised to boast 2006 growth rates that dwarf those in western Europe.

But some economists are warning that economic expansion in Poland, the Czech Republic and their neighbors masks structural problems and, most dangerously, takes pressure off governments to make the reforms needed to ensure sustained growth.

"Central Europe is benefiting from an inflow of business because of its accession to the European Union. But it's just a peak on an international boom," said Anders Aslund, an analyst at the Washington-based Peterson Institute for International Economics.

"Apart from this single year, central Europe is not catching up at all with Western Europe," he said. "And there's no reason it should catch up at all."

According to this line of thought, several of the former communist countries that joined the EU in 2004 are setting themselves up for future decline by failing to dismantle their systems of high taxes, expensive welfare systems and rigid labor markets _ legacies of state control of the economy during communism.

Symptoms include high government budget deficits, an unwelcoming environment for small and medium-sized businesses and delays in adopting the euro everywhere but tiny Slovenia, which will make the switch on Jan. 1.

A key exception is Slovakia, which made dramatic reforms in past years, with gross domestic product expected to grow at 7.7 percent this year alone. But even there a new populist government came to power this year vowing to undo some of those changes.

And experts say discipline is lacking elsewhere.

"In Poland, the government is just wasting time by not reforming," said Michal Chyczewski, an economist with the BPH Bank in Warsaw. "This should be a good time to reform _ it's easiest to cut spending when the unemployment rate falls and it's easier for people to find jobs.

"But this government is doing nothing."

Poland, the largest of the eight former communist countries to join the EU in 2004, has seen its jobless rate fall steadily in past months, hitting a five-year low of 14.8 percent in November _ still the highest in the EU, but down from the post-communist peak of 20.7 percent in February 2003. The country also boasts GDP growth this year above 5 percent.

But the new leaders in Poland and Slovakia maintain that many pro-market reforms like welfare cuts came too fast and have hurt the most vulnerable in society _ the poor, the elderly, those lacking skills to survive in the new economy. They came to power vowing to guarantee better social protection.

Meanwhile, economic growth is projected at 6.5 in the Czech Republic, despite a high budget deficit and ongoing political turmoil. Even the economic problem child of the region, Hungary, has projected growth of 4.1 percent _ beating economic giant Germany's forecast of 2.6 percent.

In the Baltics, economic growth is even stronger _ 11 percent in tiny Latvia, 10.9 in Estonia and 7.8 in Lithuania _ raising questions about whether Central Europe could be doing even better. But the Baltic boom has proved a mixed blessing, pushing interest rates high enough to delay euro adoption despite better overall fiscal discipline.

The European Central Bank said earlier this month that eight of the 10 new members that joined the EU in 2004 are unlikely to adopt the euro until after 2010. The reasons differ, with high inflation to blame in Latvia and Estonia but blown budgets and a lack of political will at the root in Warsaw and Prague.

Hungary offers the most dramatic case, with a budget deficit forecast to reach 10.1 percent of GDP this year _ more than three times the limit for countries using the euro. The country has endured protests _ some violent _ since September after Prime Minister Ferenc Gyurcsany was heard on a leaked recording admitting that the government had lied about the strength of the economy to win re-election in April.

"A window of opportunity for fiscal consolidation has opened in the Central European economies, as fiscal revenues have benefited from a robust economic recovery," said a report issued this week by the consulting Global Insight. "Much precious time has already been wasted, though, and euro adoption could be delayed much further still if the recovery loses steam and budgets deteriorate again."

Though euro readiness serves as a tangible test of economic soundness, some economists warn that it should not be a goal for these countries to pursue at all costs.

And in considering eastern Europe, some economists call for more optimism, stressing they should be judged by how far they have come since the collapse of communism in 1989 and not how far they have to go in catching up to London and Paris.

"I remember when they were facing these huge challenges _ all their industries were state-owned, there were no private property laws," said Katinka Barysch, chief economist with the Centre for European Reform, an independent London think tank.

"They didn't have consultants, bankers, modern telecommunication. They didn't have anything," she said. "Just look what they've accomplished within 15 years out of command economies."

Source:By VANESSA GERA Associated Press , chron.com