* World Bank sees East Europe contracting 4.2 pct in 2009
* Sees growth of around 1 pct in 2010, 3.6 pct in 2011
* Bank urges labour, school and business climate, reforms
By Michael Winfrey
PRAGUE, Oct 28 (Reuters) - The European Union's 10
ex-communist economies will contract by 4.2 percent as a whole
this year and eke out growth of around just 1 percent next year,
the World Bank said in a report on Wednesday.
The Washington-based lender said recovery in the region that
went from investment-fuelled boom to manufacturing-collapse bust
would be feeble and uneven, and it urged governments to jump on
structural reforms to strengthen a rebound.
In a quarterly economic report the bank said the EU's
eastern wing had bottomed out, but medium term growth prospects
were grim, with a long slog to return to potential levels.
It said the region could grow by 3.6 percent as a whole in
2011, down from 3.9 percent in 2008 and around 6 percent a year
earlier, with demand from the bloc's richer western members
playing a key role.
"Robust growth is likely to return only once investment and
exports rebound and consumer confidence is restored," it said.
"While growth in 2010 and 2011 in the (ex-communist) EU 10
region is likely to be higher than in the EU 15 region (the
bloc's older economies), the growth differential compared to the
pre-crisis period is reduced by about 1.5 percentage points."
It said countries with the largest economic imbalances would
suffer worst. Most countries' gross domestic product will
decline by 5 to 10 percent, while the Baltic states Latvia,
Lithuania and Estonia are seen shrinking 15-20 percent.
Poland, the largest of the bloc's newcomers with a strong
internal market of 38 million, has been the sole country to
avoid contraction.
INVESTMENT, BANKS
The Washington-based lender said private capital inflows to
the region were shrinking. Syndicated bank lending had plunged
in the first three quarters of this year by 93 percent for
public borrowing and 80 percent for private, the report said.
It also said that, out of the $7.2 billion gross capital
flows to emerging EU 10 countries in the third quarter of 2009,
some $6 billion was bond issuance.
Bank lending was only $800 million, compared to $10 billion
in the fourth quarter of 2007 before the full force of the
crisis hit eastern Europe.
Loan growth would be hampered by rising bankruptcy and
unemployment -- more than one million workers returned home from
countries such as the United Kingdom, Ireland and Spain in the
crisis -- while a return of the huge investment flows seen
earlier this decade were far off.
"Investment is likely to gain strength only slowly, held
back by excess capacity and financing constraints, as banks in
Western Europe and North America continue to write down loans
and credits," the bank said.
But the World Bank said that lenders in the region seemed
able to accommodate rising losses, with capital adequacy ratios
across the region at above 8 percent, and it said loan losses
had been largely provisioned.
It said the financial sector still needed support from
parent banks as well as governments to minimise a risk of the
return of turbulence and to support a recovery.
And it also called on governments to make plans for fiscal
consolidation after budget deficits spiked across the region and
for strategies to fuel a rebound to near earlier growth levels
even in the face of rising unemployment.
"Maintaining potential output growth depends on successful
structural reforms in areas such as labour markets, education,
and business climate," the report said.
