EU10 nations set stage from strong economic recovery: World Bank

The nations of the EU-10 – which comprise various countries in Eastern Europe -- have commenced a meaningful economic recovery and look to strengthen even further in 2011, according to a report from the World Bank.

The EU10 countries comprise Bulgaria, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia, and Slovenia.

The study says that year-on-year output growth in the EU10 increased from 0.6 percent in the first quarter of 2010 to 2.2 percent in the second quarter of 2010.

“Growth improved not only due to the base effect — the second quarter of 2009 was the trough of the crisis — but also due to a strong dynamism of the economies, with quarter-on-quarter growth rising from 0.4 percent to 0.8 percent,” the report stated.

“The rebound in global trade and industrial production has lifted economic activity. European economies benefit from the upswing in trade, the return of confidence in financial markets in response to decisive policy action, low interest rates, and positive feedback effects between the real and financial sectors.”

In 2010, Slovakia and Poland are leading in the region with growth of 3.5 percent or more, helped by modest adjustment needs during the crisis, a normalization of global trade and capital flows, and -- in the case of Poland -- solid consumption, the Bank stated.

Estonia and Lithuania, which undertook large adjustments during the crisis, are set for a turnaround from a contraction of around 15 percent in 2009 to an expansion of around 2 percent in 2010.

However, growth in the Czech Republic, Bulgaria, Hungary, and Slovenia is likely to be more modest, ranging from 0 to 2.0 percent, as domestic demand remains weak.

Moreover, Latvia and Romania are projected to contract in 2010, reflecting the large adjustment needs from unsustainable domestic booms in those countries in the run-up to the crisis.

Still, growth is set to be positive in all EU10 countries in 2011.

“Not surprisingly Poland is leading the recovery in the region with GDP growth projected at 3.5 percent for 2010 and 4.1 percent for 2011,” said Kaspar Richter, senior economist in the World Bank’s Europe and Central Asia Region.

“However, there are still tough challenges that Poland will have to face in the near future to shore up growth prospects. They include reviving credit growth for companies, bringing about fiscal consolidation, and generating jobs, especially for the young and low-skilled.”

The Bank cautioned that the economic rebound in the EU10 is still reliant on external demand and faces a number of risks, of which the main one is weak recovery in Europe, as prospects for exports, credit and jobs in the EU10 depend foremost on a strong recovery in the EU15.

[The EU15 countries comprise Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden, and the U.K.]

“The EU15’s recovery from the global financial crisis could be sluggish and may still be followed by a relapse,” the Bank noted.

“Fiscal consolidation in a number of EU15 countries, the end of the inventory cycle and the recent appreciation of the Euro will dampen economic activity. And in most countries, private demand is not strong enough to take the lead and sustain the expansion. Another risk is the return of heightened financial strains in the euro area, in spite of the recent improvements in European financial markets. Renewed financial sector stress could spread quickly to the EU10 countries through cross-border linkages, as parent banks could shrink their subsidiaries’ balance sheets.”

“There are three main issues crucial for policy makers in the EU10 region to sustain stable growth,” said Thomas Laursen, World Bank Country Manager for Poland and the Baltic Countries.

“The first one, on monetary policy, is for central banks and financial authorities to pursue efforts to reinforce the resilience of the financial sector at the national and European levels. The second one is to implement credible medium-term fiscal strategies, which include rationalizing benefit entitlements and stabilizing age-related spending, strengthening broad-based taxes and tax compliance, and enhancing fiscal institutions. The third issue is to remove structural barriers which could strengthen growth without bringing back unsustainable domestic demand booms fuelled by excessive credit expansion.”