World Bank warns new EU members on fiscal laxity

By Alan Crosby and Karolina Slowikowska

PRAGUE, Sept 27 (Reuters) - European Union members in east Europe are failing to take advantage of booming economies to enact key reforms and put their fiscal houses in order, the World Bank warned on Wednesday.

In its quarterly report on eight ex-communist countries that joined the European Union in May 2004, the bank also said that inflation pressures were mounting across the region, adding to the challenge of switching national currencies to the euro.

"The EU-8 countries have not taken adequate advantage of the benign growth conditions to tighten the fiscal stance and advance major structural reforms," the report said.

"Fiscal balances are worsening in several of the countries in 2006 and budget plans for 2007 point to further laxity," it said, adding Hungary was the exception since it had "no alternative" to taking strong fiscal steps.

The World Bank said the region's economies had gained pace this year, showing a broadening recovery in domestic demand and a resilience to tough international conditions.

Growth in the region should continue to be robust, the lender said, albeit with some cooling in the Baltic countries and an adjustment related slowdown in Hungary.

But it also warned that political uncertainty has revealed a high degree of fragmentation, forcing political parties to make fragile alliances that have allowed populists to gain influence.

"This is hampering progress on the outstanding reform agenda, complicating the required fiscal and macroeconomic stabilisation and delaying euro adoption in all EU 8 countries except Slovenia and possibly Slovakia," the report said.

Slovak voters dumped their reform-minded government for a leftist dominated cabinet that has pledged to increase social spending. The Czechs held an election in June, but nearly four months later left and right parties are in a stalemate.

Poland's coalition government fell apart last week, triggering talk of early polls if the ruling conservatives fail to find a new majority by Oct. 10.

Hungarians have held sometimes violent anti-government demonstrations in recent days after Prime Minister Ferenc Gyurcsany admitted to lying about public finances to win re-election in April.

The millionaire Socialist won the vote, and has since pushed for tough spending reforms that have sparked outrage.

But the World Bank said the government needs to follow through fully on its ambitious fiscal adjustment program and move quickly to prepare critical spending reforms.

It added that Poland needs, at a minimum, to stick firmly to its informal deficit ceiling while Slovakia needs to put in place a well-specified and credible medium-term fiscal framework consistent with its deficit targets.

"Progress on advancing the outstanding reform agenda has been mixed following EU accession," the report said.

"While some further progress has been made ... on broad indicators of transition, economic freedom and corruption, other indicators relating to competitiveness, ease of doing business, and governance reveal a more nuanced and less positive picture." ((Editing by Ruth Pitchford; prague.newsroom@reuters.com; Reuters Messaging: alan.crosby.reuters.com@reuters.net; +420 224 190 477))

Keywords: ECONOMY EAST