Fiscal stimulus programs in industrialized countries should be used to encourage production in ways that are broadly efficient, not narrowly nationalistic, World Bank Europe and Central Asia Chief Economist Indermit Gill said at the launch of the bank’s latest EU10 Regular Economic Report in Warsaw on Friday.
The prospects for global recovery, for private capital flows, and for growth in the EU10 continue to deteriorate, the report said, projecting contracting GDPs for the ten new EU members for 2009, including an around 3% GDP fall in Hungary.
The report noted that its forecasts are subject to very high degrees of uncertainty, mostly on the downside. The EU10 economies face the challenges of a dearth of international liquidity, exposure to vulnerable banks, and collapsing export markets.
As the international economic crisis continues to unfold, spreading from financial markets into the real economy, the EU10 economies find themselves especially vulnerable, the report noted. External demand has collapsed, driven by recession in the region’s main trading partners.
Foreign capital inflows to the EU10 states have dropped off, especially intrabank lending and foreign borrowing by companies. A credit crunch within the EU10 has further undermined production, as banks weather a crisis of confidence of lending to each other and to the private sector.
“Compared with emerging markets in East Asia and Latin America, EU new member states entered the crisis weak—with high public debt ratios, low foreign exchange reserves, rigid exchange rate regimes, and banks that depended more on foreign savings than domestic deposits,” said Gill.
Gill said that the ongoing crisis should spur deeper European integration, rather than a return to the nationalism of the past. “Fiscal stimulus programs in industrialized countries should be used to encourage production in ways that are broadly efficient, not narrowly nationalistic. During times of economic crisis, growing protectionism may be the greatest danger to economic recovery.”
The World Bank publishes its EU10 Regular Economic Report three times a year. (MTI-Econews)