Contacts: In Warsaw: Malgorzata Dworzynska (48 22) 520 8000 e-mail: mdworzynska@worldbank.org In Washington: Merrell Tuck-Primdahl (1-202) 473-9516
e-mail mtuckprimdahl@worldbank.org Warsaw, September 27, 2006―The external environment for the eight Central European and Baltic countries that are new members of the EU—the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, the Slovak Republic, and Slovenia—remained broadly favorable in 2006, but EU8 countries need to take advantage of benign growth conditions to tighten the fiscal stance and advance major structural reforms, says a new World Bank report. The EU8 countries performed well in the first half of 2006, despite higher oil prices and global interest rates, according to the latest EU8 Quarterly Economic Report. The turbulence that was visible in the international financial markets in May and June was short lived, and most of the emerging markets had fully recovered by the end of August. The authors expect global growth to remain strong in 2007. Despite robust growth, recent elections in the Visegrad countries have revealed a high degree of fragmentation, forcing parties to make fragile alliances and allowing populist forces to gain influence. This is hampering reforms, complicating the required fiscal and macroeconomic stabilization, and delaying euro adoption in all EU8 countries except Slovenia. The fragile political situation in the region is especially visible in the latest civil unrest in Budapest. The report predicts continued robust growth in the region, albeit with some cooling in the Baltic countries and adjustment-related slowdown in Hungary. In Hungary, growth is likely to slow to 2-3% as fiscal tightening measures take effect. “Unemployment continues to decline in most countries in the region, but labor market bottlenecks—exacerbated by sizeable outflows of workers since EU accession—are emerging,” cautions Thomas Laursen, World Bank Lead Economist and main author of the Report. In another cautionary note, the report warns that inflationary pressures appear to be mounting. Wage growth is accelerating rapidly in the Baltic countries, credit is growing rapidly in most countries, and several EU8 countries have not yet seen the full impact of rising commodity and producer prices—in part reflecting freezing of tariffs and excise taxes on energy in some countries. Inflation problems have already delayed euro-adoption plans in the Baltic countries and may add to the fiscal challenges of securing euro adoption in 2009 in the Slovak Republic. Fiscal balances are worsening in several of the countries in 2006, and budget plans for 2007 point to further laxity (except notably in Hungary where strong consolidation efforts are a must). Specifically, Hungary needs to follow through fully on its ambitious fiscal adjustment program and move quickly to prepare critical spending reforms. Poland needs at a minimum to stick firmly to its informal deficit ceiling, and the Slovak Republic needs to put in place a well-defined and credible medium-term fiscal framework consistent with its deficit targets. Finally, the Czech Republic should avoid drifting away from its hard-won fiscal consolidation. “Progress on post-accession reforms are mixed—we have seen advances in economic freedom and reduced corruption, but areas like competitiveness, ease of doing business, and governance reveal a more nuanced picture,” says Thomas Laursen, “Also, privatization and liberalization in ‘strategic sectors’ has seen little momentum in most of the EU8 countries. Furthermore, critical public finance and administration reforms have largely stalled. Attention is needed to these areas, including to make room for and plan needed infrastructure investments and make the most of the large amounts of EU structural funds becoming available.” Special Topic: Labor Migration from the New EU Member States The report focuses on the intensified labor mobility in the new EU member countries spurred by EU accession and the opening of selected EU15 labor markets for EU8 nationals. The evidence from receiving countries indicates that fears of massive inflows of workers and devastating impacts on receiving labor markets were unfounded, since inflows of foreign workers have generally supplemented rather than replaced domestic labor and helped sustain solid economic growth, while at the same time keeping local wages stable. Although this phenomenon has led to skills shortages and bottlenecks in several sectors in the main sending countries and increased wage pressures, sending countries are benefiting from increased remittances from workers abroad who may also return with additional human capital. The authors of the Report call on the governments to manage labor migration more proactively. Further efforts are needed to stimulate labor force participation and employment, including reducing high labor taxes and in some cases social benefits. EU8 countries should also phase in—in tandem with capacity development for screening needed labor—a more liberal regime for importing labor from countries further east. In the fiscal sphere, governments need to make room for additional spending on wages in sectors where public workers are in short supply (notably the health sector) and investment where private labor is becoming more expensive (notably construction). Governments may also need to rely more on user fees in the health sector. In the education sector, greater reliance should be placed on private financing where returns are mostly private, including tertiary education, but potentially also vocational education to the extent workers tend to seek employment abroad. The Report can be accessed electronically on: http://www.worldbank.org/eu8-report ### |
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