EU debt problems threaten recovery

VILNIUS - The economies of Lithuania and Estonia will expand faster than the rest of the European Union’s Eastern members next year as they weather waning demand in trade partners from the sovereign-debt crisis, the World Bank said, reports Bloomberg. Both Baltic States will see gross domestic product grow 3.5 percent in 2012, above the 2.1 percent average growth-rate forecast for the region, the Washington-based World Bank said in a report released on Nov. 16.

“Where we earlier expected growth to pick up next year, now we’re seeing a weakening dynamic that will carry on into 2012,” Kaspar Richter, a senior economist at the World Bank, said in an interview on Nov. 15 in Warsaw.
 Eastern Europe’s export-led recovery from its worst slump since the end of communism is being jeopardized by the threat of a new recession in the U.S. and Europe’s sovereign-debt crisis. The region depends on export demand from euro-area nations to drive its growth and about three-quarters of its banks are owned by foreign, mainly Western European lenders.

Economic growth in the 12 former communist countries that are now part of the 27-member EU will reach 3 percent this year, according to the World Bank. “Trade played a more important role than we expected in many economies of the region this year,” he said. “But going forward, export demand is dropping, and that in the region’s biggest trading partners.”

Richter said that while most of the countries in the region were “successful” this year with their fiscal consolidation plans, it’s “vital that fiscal imbalances don’t become a source of financial market volatility” in Poland, where the deficit soared to 7.9 percent of GDP last year and public debt reached 52.8 percent of GDP, close to the legal cap of 55 percent.
“We know the Polish government is looking very carefully at the external environment and what will be needed to bring the deficit down to 3 percent of GDP,” Richter said. “In fact, the EU-10 is set to reduce fiscal deficits faster than expected, also in part because of pressure from the financial markets.”

Poland’s government will cut the gap to within the EU’s 3 percent of GDP limit next year, Finance Minister Jacek Rostowski has said, though he said on Nov. 9 that economic growth in 2012 may be 3.2 percent, down from a previous forecast of 4 percent. The World Bank expects growth of 2.9 percent.

Poland’s A- rating may be at risk without additional measures to cut the shortfall as growth slows, Fitch Ratings said in October, while Hungary’s sovereign credit grade could be cut to junk after Standard & Poor’s Ratings Services put the country’s BBB- rating, the lowest investment grade, on “creditwatch with negative implications.”
 Economic growth in Hungary, the first EU member forced to tap international aid in 2008 after the collapse of Lehman Brothers, will at 0.5 percent be the slowest in the region next year, the World Bank report said.

In Poland, where the currency weakened almost 10 percent against the euro in the third quarter, the zloty’s depreciation has helped offset lower demand for its products in Western Europe, Richter said.
“The currency depreciation in Poland will compensate for waning external demand,” Richter said. “In fact, we expect net exports to make a positive contribution to growth next year, although consumption remains the most important motor of growth.”