New EU members fail to curb deficits - EBRD

Fiscal deficits in new EU members from central and eastern Europe are set to rise this year with the biggest newcomers particularly reluctant to pay the political price for spending cuts, the European Bank for Reconstruction and Development (EBRD) said yesterday.

The EBRD, the development bank for the former Soviet bloc, said in its annual transition report that of the eight countries that joined the EU last year, only Poland and Slovakia bucked the trend.

Poland is expected to report a budget shortfall of 3.7 per cent of gross domestic product this year, down from 3.9 per cent in 2004 while Slovakia's deficit is seen stabilising around 3.3 per cent.

The Czech Republic and Hungary are set to move further away from the limit of 3 per cent of GDP required to join the euro zone and general elections next year bode ill for 2006 budgets, the EBRD said.

"In both countries, talk of tax reductions has preceded the elections although expenditure reform should be a higher priority to bring fiscal deficits into line with EU requirements," it added The bank expects the Czech deficit to widen to 4.5-5 per cent this year from 3.3 per cent in 2004 and in Hungary the shortfall is seen jumping to 6 per cent, double the EU limit, from 5.4 per cent last year.

All new members are required to adopt the single currency when ready, but Poland, Hungary and the Czech Republic have all signalled that they are not keen to swap their currencies for the euro quickly.

Steven Fries, acting chief economist at the EBRD said euro zone membership promised long-term benefits such as reduced transaction costs, increased trade, greater financial stability and the elimination of the exchange rate risk. But those benefits came at a political cost, Mr Fries said ahead of the report's publication.

Among the region's countries, the Baltic states are set to remain comfortably below the 3 per cent cap, but their fiscal positions are also set to worsen, the EBRD said. Latvia's and Lithuania's deficits are due to widen while Estonia is due to move from a surplus to a balanced budget.

On average, fiscal deficits in the region, that also includes Slovenia, are set to widen to 3 per cent from 2.4 per cent in 2004, the bank said. - (Reuters)