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World Bank says eastern Europe reforms falling behind

The eight eastern European states that joined the European Union in 2004 must push ahead with overhauling their finances and restructuring key industries to foster long-term economic growth and prepare for euro adoption, the World Bank said. „Recent reform initiatives in the region do not suggest much forward momentum,” the bank said in its quarterly report, presented in Warsaw yesterday. The nations „have not taken adequate advantage of the benign growth conditions to tighten the fiscal stance and advance major structural reforms.” The bank pointed to „sporadic steps in the right directions,” though criticized governments for failing to undertake „critical outstanding reforms of strategic enterprise sectors and public finance and administration. The largest three countries in the region, beset by unstable governments, are struggling to push through measures demanded by the EU and international institutions like the World Bank and International Monetary Fund including trimming budget deficits and containing inflation. Poland may have to hold a general election in November, little more than a year after the last one. The Czech Republic is striving to pass legislation after June elections ended in a stalemate and Hungary witnessed several nights of riots last week after a leaked speech by Prime Minister Ferenc Gyurcsány in which he admitting lying to win elections.
Elections in these countries have „forced parties to make fragile alliances and allowed populist forces to gain influence,” the report said. „This is hampering progress on the outstanding reform agenda.” Hungary's economy is bound to suffer after state spending increased over the last few years and taxes were cut, leading to an excessive deficit that is expected to reach 10% next year, said Thomas Laursen, the chief World Bank economist for central Europe and the Baltics. „It's almost inevitable that growth will slow in Hungary,” said Laursen at a presentation of the report in Warsaw. „In Poland though, it could speed up even more if the government were to employ growth-supportive policies.” The Polish economy expanded an annual 5.5% in the Q2 and the Finance Ministry has forecast growth of 5.2% for 2006 as a whole.

All the countries in the region are struggling to meet euro-adoption criteria, a condition of their accession to the EU. To adopt the euro, countries must narrow the budget deficit to within 3% of gross domestic product, rein in debt, cut long-term interest rates and curb inflation to within 1.5% of the 12-month average of the three EU nations with the slowest inflation. „I'd be very surprised if either Poland, Hungary or the Czech Republic were to join the euro-zone within the next five years,” said Laursen. „And it could take much longer than that.” Higher-than-expected inflation has delayed euro-adoption plans in the Baltics. Lithuania, Latvia and Estonia have delayed the currency switch after consumer prices accelerated too fast. Inflation has to interest rate increases in all the countries in the region apart from Poland recently, the bank said. The Czech central bank yesterday raised its benchmark two-week repurchase rate 25 basis points to 2.25%, the second increase this year, while Poland left rates unchanged. Poland yet to set a euro-adoption date. Five of the new EU members have been forced to push back their planned dates for the currency switch because of excessive budget deficits or accelerating inflation. (Bloomberg)