Political turmoil may harm EU newcomers' growth-IMF

By Marcin Grajewski and Jan Strupczewski

BRUSSELS, Nov 9 (Reuters) - European Union newcomers from the central Europe will see their economies expand fast in the coming years, but political turmoil is a risk to growth, a senior IMF official said on Thursday.

The emigration of workers to the EU's "old" member states may also weigh on growth in the eight ex-communist countries that joined the bloc in 2004, said Susan Schadler, the deputy head of the International Monetary Fund's European department.

"We expect EU membership will pay out more handsomely than so far... EU funds should be a boost to the supply side of those economies," Schadler told an economic seminar in Brussels, predicting the new members would receive 3-4 percent of their GDP in EU funds that will boost both demand and investment.

"Downside for growth is political ruptures that make it difficult to go ahead with structural reforms... Emigration to the West is going to be an important issue for those countries," she added.

She said that in pursuit of fast growth and to hedge against growing exchange rate risks, the countries should strive to adopt the euro currency as soon as possible.

But many newcomers have recently delayed or dropped their euro adoption target, unable keep lids on their budget deficits and inflation rates.

Schadler noted that markets were asking for lower risk premiums on bonds of the central European countries than on those of other emerging markets, possibly because they were already EU members and bound to join the euro.

Entering the single currency would strongly boost their growth rates and shield them from foreign exchange rate risks that can be seen in large current account deficits of the new EU members as a group.

Schadler echoed many other forecasts that the small Baltic countries of Estonia, Latvia and Lithuania would grow much faster than Poland, the Czech Republic and Hungary.

The European Commission forecast this week that Poland, the biggest EU newcomer, is expected to grow at 5.2 percent this year, 4.7 percent in 2007 and 4.8 percent in 2008.

Growth in the Baltics is expected several points higher, but expansion in Hungary likely to be slower slower than in Poland as the country is burdened with a high budget deficit of more than 10 percent of GDP this year.

The IMF's pessimism about reforms in Poland, the Czech Republic, Hungary and, to a lesser extent Slovakia results from their complicated political scenes.

In Poland, the ruling conservatives rely on the support of two fringe radical parties for survival in the government, making it next to impossible for the country to cut government spending and make growth more sustainable.

Hungary's government has recently faced street protests after the prime minister admitted to having lied to win this year's general elections after allowing the budget deficit to soar the highest in the EU.

"In Hungary and Poland substantial fiscal adjustments are necessary," said Schadler.

This year's election in the the Czech Republic has resulted in a hung parliament, which so far has made it impossible for subsequent prime ministers to find a majority.

((Editing by Ian Jones; Brussels newsroom, tel +322 287 6830, fax +322 230 5573, e-mail: marcin.grajewski@reuters.com))

Keywords: ECONOMY EAST IMF