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EU New Member States and Croatia Continued Recovering in 2010, but Unevenly

July 22, 2010

World Bank ‘EU10 Regular Economic Report and Croatia Supplement’ says stability of financial sector and fiscal consolidation essential for safeguarding recovery

ZAGREB, July 22, 2010—The EU’s newest member countries (EU10 ) and Croatia have continued recovering since the start of the global financial crisis, but the rebound is fragile and uneven. According to the World Bank’s new EU10 Regular Economic Report, 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, Estonia, and Croatia. To date, the outlook for Croatia is weaker than expected, although the high-frequency data point to continued bottoming out. Earlier expected positive zero growth was thus revised to the expected one percent real decline.

Slower growth in Croatia than in the best performing EU10 countries points to a lack of confidence in the recovery. This reinforces the need for the early and determined implementation of the Croatian Economic Recovery Program which presents a solid basis for safeguarding recovery.” said Sanja Madzarevic Sujster, Senior Economist in the World Bank’s Europe and Central Asia Region at the presentation of the Croatia Supplement. “This would require structural changes in public finances, social sectors, education, innovation, and business climate”.

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, and over 11 percent in Croatia, raising the number of unemployed workers from 3.2 million to 4.9 million. In Croatia, despite slight positive changes in some industries the unfavorable economic situation continues to affect the labor market, with particularly evident shift towards the grey economy.

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 Croatia. 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. 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. This seeks even faster efforts in safeguarding the recovery through shoring up fiscal sustainability and creating fiscal space to support private sector growth.

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, including Croatia, it is likely to take slightly longer. In addition, post-crisis growth is likely to stay below pre-crisis growth 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 and the Croatia Supplement are published three times a year. It monitors macroeconomic and reform developments in the EU10 countries and Croatia, and provides in-depth analyses of key policy issues.

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

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