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EU: E.European economies to shrink, euro path bumpy

  All of the European Union’s eastern members will fall into recession this year, the bloc’s executive forecast on Monday, signaling the slowdown will swell national deficits and could dash euro adoption plans.

The European Commission forecast economic contractions of more than 10% in the worst-hit Baltic states and said the region’s biggest economy, Poland, would shrink 1.4%, a sharp contrast to Warsaw’s own forecasts of modest growth.

Among 10 ex-communist countries that joined the EU in 2004 and 2007, the Czech Republic and Bulgaria are also forecast to experience a relatively small contraction, compared with the euro zone’s expected 4.0% this year.

“Compared with other countries in the region this is a relatively mild recession thanks, among other factors, to the lower share of trade in GDP,” the Commission said of Poland, which accounts for about half of the region’s output.

The estimates came as forward-looking data from April showed a dramatic manufacturing decline in the Czech Republic and Hungary slowed, suggesting their shrinking economies could be approaching a bottom. But the figures showed Poland worsening.

The Commission’s twice-yearly forecast saw Czech 2009 growth at -2.7% and Bulgaria at -1.6% this year and 0.3% and -0.1% respectively in 2010.

Hungary, the recipient of a $25.1 billion International Monetary Fund-led bailout after years of fiscal profligacy, will shrink by 6.3% in 2009 and by 0.3% in 2010.

If borne out, the forecast for a contraction in Poland would be the first there since 1992, compared to growth of 4.9% last year. The country is expected to be one of the few in the region to return to growth in 2010, at 0.8%.

For the Baltics, Estonia was seen contracting 10.3% this year, Latvia by 13.1% and Lithuania by 11%. The economies will also shrink in 2010, although much less.

Polish Finance Minister Jacek Rostowski remained adamant the economy would grow this year, but said his expectations for growth were now that it would top 1%, compared to the government’s early worst case scenario of 1.7%.

The IMF and many bank analysts have forecast a contraction.

The Commission said a sharp depreciation of the Polish zloty -- it has lost more than 25% against the euro since last July -- would ease pressure on exporters, but it may dampen demand from households that have taken foreign currency loans.

SWELLING BUDGET GAPS

Manufacturing data showed Poland’s Purchasing Managers’ Index (PMI) inched down to 42.1 points in April from a five-month high of 42.2 in March. The Czech index rose to 38.6 in April, from 34.0. A score above 50 indicates manufacturing is expanding, while a score below means it is contracting.

The industry-led decline in eastern Europe -- a result of euro zone consumers reducing purchases of cars and electronics made there -- has badly undercut the region’s budget revenues.

The Commission said public sector deficits would also swell across the region, with the Czech Republic’s growing to 4.9% of gross domestic product in 2010, from 1.5% last year, and Hungary’s to 3.9%, from 3.0.

It said Poland’s deficit would balloon even more to 6.6% this year and 7.3% in 2010, from 3.9% last year. All would be much higher than the 3% ceiling required of euro zone aspirants.

If those figures materialized, Warsaw would find it hard to meet its goal of joining the euro in 2012, exacerbating problems already seen in meeting an exchange rate stability criterion. Rostowski rejected the forecast, saying: “We are determined to keep the deficit in a worst case scenario at the level of 4.6% (of GDP) but we also hope to trim it more.”

EU Monetary Affairs Commissioner Joaquin Almunia said he would pursue budget disciplinary measures against countries with deficits above the EU’s 3% ceiling last year -- Malta, Poland, Romania, Lithuania and also Latvia.

Romanian Finance Minister Gheorghe Pogea said his country was taking austerity measures to avoid EU disciplinary action.

“We totally agree with the estimates presented by the Commission. We already took measures to reduce spending, moves that we hope will help us not to be sanctioned by the European Commission,” he told Reuters, adding the Romanian shortfall would return to beneath 3% of GDP in 2011.

ECB Vice-President Lucas Papademos made clear there could be no reneging on euro adoption criteria and he also reminded aspiring countries that putting their currency into the pre-euro Exchange Rate Mechanism (ERM-2) would not solve their problems. “The conclusion is that ERM-2 participation is not a panacea for economic problems,” he said in Brussels. (Reuters)