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EU10 Output Returned to Pre-Crisis Levels

April 19, 2011

Bucharest, April 19, 2011 - Two and a half years after the global financial crisis broke, the economic activity in the EU10(1) rebounded in parallel with the EU15(2), according to the World Bank’s new EU10 Regular Economic Report launched today in Bucharest. Growth strengthened in the second half of 2010, supported by restocking, a double-digit expansion of industry, and a rebound in consumption, states the report.

The pace of the recovery in the EU10 is set to accelerate in 2011 and 2012, but it also differs across the EU10 countries. The return to pre-crisis levels was helped by aligned business cycles and close trade and production linkages with the EU15. The economic sentiment in the EU10 exceeded its long-term average in December 2010 for the first time in 26 months. In 2011 and 2012 firms are expected to raise investment with higher capacity utilization and strong global demand for capital goods and durables, and households to step up consumption with improving confidence about future prospects.

The performance of Slovakia and Poland is set to remain solid thanks to low pre-crisis imbalances, deep integration into European production networks, EU funds, and, in the case of Poland, solid consumption. Estonia, Lithuania, and Latvia are likely to build on the export-led upswing as domestic demand continues to recover. Romania and Bulgaria, where the crisis hit later than elsewhere, are set to see the biggest improvements in growth in 2011, aside from Latvia and Lithuania. Growth in Slovenia, the Czech Republic, and Hungary is set to increase at a more measured pace, in part because these countries have already converged more to EU income levels.

The strong rebound in global trade benefited exports in the EU10, which recovered to pre-crisis levels by the end of 2010,” said Kaspar Richter, Senior Economist in the World Bank’s Europe and Central Asia Region and lead author of the report. “However, growth prospects are subject to risks related to the feeble private investments, winding down of construction projects, and tight international financial constraints,” added Richter.

Romania is expected to lead the recovery in 2012 compared to the other EU10 countries, with a projected GDP growth of 4.4,” said Catalin Pauna, Senior Economist and co-author of the report.

The report also looks at EU10 employment, stability of the financial sector, and fiscal consolidation, as well as the needed policies and reforms. The report outlines that the pace of recovery remains too subdued to generate jobs, and employment is still below pre-crisis levels. Policy action to ensure the stability of the financial sector is essential for growth. Shoring up fiscal consolidation remains high on the policy agenda. Most EU10 countries reduced fiscal imbalances already in 2010, and it appears that fiscal deficits decreased in eight EU10 countries. However, public debt burdens in the EU10 countries are likely to stay higher than prior to the crisis. Structural policies in support of growth can help to overcome the financial, labor, and fiscal challenges. The reform agenda is vast, ranging from absorbing EU funds and FDI flows, increasing labor force participation, strengthening skills, and improving technology.

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.

[1]The EU10 countries include Bulgaria, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia, and Slovenia.

[2]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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