The EU’s newest member states in Eastern and Central Europe have begun the recovery one year after the breakout of the global financial crisis as the credit crunch has eased, but most countries undergo large contractions this year, and the recovery is likely to be feeble and uncertain, the World Bank said as it launched its new EU10 Regular Economic Report.


Although the rebound of the global economy has started, the report cautions that the recovery in EU10 countries could be weak and growth is likely to be lower than in pre-crisis years. EU10 countries are projected to contract by around 4.2 percent in 2009, and to grow by around 1 percent in 2010 and 3.6 percent in 2011, down from 3.9 percent in 2008 and around 6 percent in 2007. Medium-term growth prospects look weak as the recovery is not yet private-demand driven and potential growth is lower than before the crisis.

According to the report, the EU10 countries fall into three groups with regards to their recent growth performance:

•Poland is in the first group as the only EU country whose economy has expanded throughout the last three quarters.

•Bulgaria, Romania and other Central Europe countries make the second group with year-on-year contraction of 5 to 10 percent of GDP.

•Third group comprises The Baltic countries, where the output contraction started in 2008, with declines of 15 to 20 percent of GDP.

“The scale of the contraction is linked to a number of factors, including the degree of trade openness, the export composition, the exchange rate regime and the magnitude of macroeconomic imbalances.” said Kaspar Richter, Senior Economist in the World Bank’s Europe and Central Asia Region and lead author of the report at the launch in Warsaw and Thomas Laursen, World Bank Country Manager for Poland and the Baltic Countries added “Poland’s performance during the crisis has been remarkable due to different factors. Poland entered the crisis with stronger macroeconomic balances than other countries in the region, it has a floating exchange rate regime and its economy is more diverse and not as open as others’ in the region. Also, the response of Polish authorities to the crisis was fast and adequate.”

Given these prospects, financially weaker governments in the region will need to protect poor people while strengthening institutions and infrastructure to attract investors. At the same time, they need to adjust their policy agenda to support exit strategies and prevent future crisis.

Unemployment rose in the EU10 countries from 6.1 percent in August 2008 to 8.1 percent in July 2009, or from about 2.9 million to 3.8 million people. At the same time, one million workers who had emigrated from the region to crisis-hit countries such as the UK, Ireland, and Spain after 2004 have returned home, adding to the pressure on job markets in Eastern and Central Europe. The economic crisis is affecting foremost workers with basic education level and limited work experience, most of whom are young. Unemployment rates for workers aged 15 to 24 increased more than twice as compared to the overall increase. As a result, almost one third of the economically active population below 24 years of age is unemployed in the Baltic countries, and around one quarter in Hungary and Slovakia.

"Employment has remained remarkably high in many EU10 countries, similar to key countries of the euro area, and opposite to the trends seen in the US. However, while employment tends to hold up better during downturns, it could take much longer to increase up during upturns." said Richter "Governments’ active efforts to alleviate the impact of economic slowdown on the labor markets have to be combined with measures supporting employability and guiding people towards new jobs, empowering workers to take advantage of new opportunities when the economy recovers."

According to the EU10 Regular Economic Report the main challenge for the EU10 countries now is to adjust the policy agenda; the economic policy should balance the support of recovery with exit strategies to contain risks of negative public debt dynamics and inflation. Structural policies, along the lines of the Lisbon agenda, are crucial to mitigate the loss in potential output growth due to weaker capital flows. Social policies are crucial to mitigate the loss in living standards for the poor.

"The recovery from the economic crisis depends foremost on restoring financial market confidence. To help close some external financing gaps created by the crisis and ease the burden of adjustment, the IMF, EC and World Bank have provided substantial support. As international investors take a closer look at the vulnerabilities of emerging economies, there is a large premium on strong domestic policies." – said Richter, "Governments face the difficult challenge of reconciling three objectives: to protect priority programs for economic and social development so that growth prospects are enhanced and social cost of the economic crisis mitigated; to exit from anti-crisis policies and ensure fiscal consolidation once the recovery is under way to make room for a private sector led recovery; and to improve policies, regulations and coordination to prevent such crises in future."