CEE economies growing fast as EU membership nears

  • Growth to pick up in EU candidate countries in 2003, 2004.
  • Euro poses challenges for candidates’ fiscal policies.

The economies of Central and East European (CEE) candidate countries will still be expanding rapidly when they join the EU in May 2004. The economies of the eight new EU members are forecast to grow by an average of 3 per cent this year and 3.6 per cent in 2004 - about twice the rate recorded by existing EU members states. Nevertheless, inflation will remain under control this year and next. “Growth will continue to motor along in EU candidate countries this year, and with international support it could even rev up in 2004,“ said Bank Austria Creditanstalt Chief Economist Marianne Kager, on the sidelines of the EBRD Annual Meeting in Tashkent, Uzbekistan. “But the candidates will still have to overcome major challenges to their fiscal policies along the road to euro membership,” she added.

Except in Poland, the first half of 2003 has seen a continuation of last year’s rapid expansion, mainly driven by personal consumption. In Poland, Slovakia and Slovenia, consumption growth has moderated in the early months of this year. In the Czech Republic and Hungary it is still being fuelled by high wage increases and low inflation, but a slowdown is likely in the second half, especially in Hungary. The course of Central and East European economies will thus be determined by whether, and to what extent, investment takes up the running later in the year.

No external impetus until late in the year
There will only be a gradual improvement in the external environment, forecast the economists of Bank Austria Creditanstalt. The prevailing cautious optimism about growth in the Eurozone, put at 1.3 per cent this year and 2.0 per cent in 2004, points to a positive impact on investment in Central and Eastern Europe which should accelerate slightly in the second half of 2003. “With a life from growth outside the region, the private sector will drive expansion,” said Marianne Kager. “On the other hand, the public sector, which has bolstered demand in some countries in recent months through investments in infrastructure, will be reining in its spending for fiscal reasons,” she predicted.

Fiscal policy the central challenge
Behind the cutbacks is the need to reduce budget deficits. The fiscal deficits of the eight CEE candidate countries averaged well over 6 per cent of GDP in 2002, due to the large fiscal gaps in Poland (6.5 per cent of GDP), Slovakia (7.2 per cent) and Hungary (9.6 per cent). Impending EU accession poses new challenges for budget consolidation efforts. Room has to be made for the co-financing resources needed to obtain support from the EU structural funds. This will be difficult, as the changeover to EU standards will result in losses of revenue from customs duties and taxes. Moreover, the creation of new institutions, such as those required by the Schengen Accord, will result in additional costs.

However the central task for candidate countries’ fiscal policies in the medium term will be adhering to the Stability and Growth Pact, and complying with the Maastricht rule for euro membership that limits budget deficits to 3 per cent of GDP. The economists at BA-CA are of the opinion that the deficit reduction measures taken to date have been relatively unsuccessful across the entire region. “For social and political reasons, governments are likely to continue to take a cautious approach to budget consolidation, meaning that fulfilment of the key Maastricht criterion and hence entry to the euro could be delayed until 2007–2008,” BA-CA Chief Economist Kager concluded.

 Economic growth

Contact: Bank Austria Creditanstalt Group Public Relations
Ildiko Füredi, tel. +43 (0)5 0505 56102
E-mail: ildiko.fueredi@ba-ca.com