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EU new member states return to growth in 2010, but financial and labor markets cast shadow on future prospects

July 16, 2010

BRUSSELS, July 16, 2010 — The EU’s newest member countries – the EU10*  – have returned to positive growth for the first time since the start of the global financial crisis, but the rebound is fragile. According to the World Bank’s new EU10 Regular Economic Report launched today in Brussels, the year-to-year growth in the EU10 region improved from -2.1 percent in the fourth quarter of 2009 to 0.8 percent in the first quarter of 2010, in line with the improvement from -1.9 percent to 0.6 percent over the same period in the EU15**  region.

But the upswing in the EU10 region is uneven, reflecting varying degrees of reliance on external demand, initial imbalances, and country specific factors. In the first quarter of 2010, the year-on-year rebound was largest in the Slovak Republic – helped by the recovery in the automobile sector – and in Poland, the only EU country with positive growth in 2009.  Economic activity in Hungary and the Czech Republic returned to growth, while it continued to contract, although at more moderate rates, in Latvia, Bulgaria, Lithuania, Romania, and Estonia. 

The labor market still has to benefit from the recovery. Unemployment rates in the EU10 rose from 6.5 percent in June 2008 to around 10 percent in May 2010, raising the number of unemployed workers from 3 million to 4.7 million.

“The crisis made it much harder for workers who lose their job to return to employment.” said Kaspar Richter, Senior Economist in the World Bank’s Europe and Central Asia Region and lead author of the report. “With the number of unemployed rising and the number of job vacancies falling, the competition for jobs has significantly increased across the EU10 region.  And it is the young and those with less education who have been the hardest hit by the growth in unemployment.” 

Concerns about sovereign debt in selected countries in the euro area have lowered risk appetite in European financial markets.  In the EU10 region, this has triggered a slowdown in capital inflows, a decline in stock prices, and an increase in credit default swaps spreads for governments and parent banks, and a depreciation of national currencies against major currencies. 

With the growth impact from the upturn in global trade and the reduced risk appetite in financial markets roughly balanced, the EU10 region is on the road to a gradual recovery during 2010 and 2011. The EU10 countries are projected to expand by between 1.5 and 1.7 percent in 2010, and 3.1 to 3.6 percent in 2011.  The growth advantage of the EU10 over the EU15 could increase from around 0.5 percent in 2010 to 1.5 percent in 2011. 

Nevertheless, the recovery is weak.  It will take until next year before real output in the EU10 region regains its pre-crisis level, and for a few it is likely to take slightly longer.  In addition, post-crisis growth is likely to stay below pre-crisis growth in the future in view of reduced capital flows, restrained credit growth, and the need to undertake fiscal consolidation.  What remains essential for the region’s recovery is to safeguard financial market stability, and increase fiscal efficiency.

The EU10 Regular Economic Report is published three times a year. It monitors macroeconomic and reform developments in the EU10 countries, and provides in-depth analyses of key policy issues.  To obtain an online copy of the new report, please visit: https://www.worldbank.org/eca/eu10rer

* The EU10 countries include: Bulgaria, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia, and Slovenia.

**  The EU15 countries include:  Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden, and the United Kingdom