Accession states 'exposed to risks'

Accession countries trying to join the euro zone face increasing risks to their economy, but those risks will not spill over into the euro zone once they join, a survey of emerging countries of eastern Europe by Moody's rating agency claims.

In particular, the survey warns that balance of payments deficits - the extent to which imports exceed exports - are becoming "extremely high" for some east European countries. The trend also implies that these economies may be borrowing heavily to compensate for low productivity.

"Most emerging economies are net providers of savings to the rest of the world. Only emerging Europe differs, prompting questions about the specific nature of the forces at play in this part of the world," the study states.

While maintaining that such deficits can be sustained if exchange rates are flexible - the study cites large current account deficit in Ireland in the 1980s as an example - it warns that this does not apply to accession states.

"All these countries have fixed or stable exchange rates - a recipe for disaster in the recent past."

High current account deficits increase a country's dependence on foreign borrowing and, unless it is able to reduce its exchange rate to increase exports, raise the chances that investors will suddenly withdraw capital, the study warns. It also says that as accession states maintain fixed currencies in preparation for euro membership, the risk of economic stagnation increases.

"The major threat facing these new EU countries with huge current account deficits is less a repeat of the Asian crisis than the 'Portuguese syndrome', a long process of restoring competitiveness through painful structural reforms aiming at boosting productivity," it added.