East European Prosperity Hinges on Revamp, Development Bank Says

Eastern European nations must renew efforts to overhaul their economies to avoid “forever trailing” western living standards, according to the European Bank for Reconstruction and Development.

“Economic growth remains well below pre-crisis levels and many countries have turned their backs on the reforms that could put economic expansion back on track,” Erik Berglof, chief economist at the London-based EBRD, said in the development bank’s annual Transition Report, which was published today.

Of the 34 countries from Morocco to Mongolia where it invests, only incomes in the central European and Baltic nations will in the next 20 years reach or exceed 60 percent of the average of the 15 nations that made up the European Union before eastward expansion began in 2004, the EBRD said.

Eastern Europe was the worst affected of all emerging markets by the global financial turmoil that began after Lehman Brothers Holdings Inc.’s demise because of banking and trade links with the continent’s crisis-stricken west. Most governments responded by stalling on or reversing steps to modernize their economies after communist rule.

While progress in transition has been closely correlated with democratization, economic overhauls have slowed, the EBRD said. Without changes to policies and institutions, the productivity growth that permits catch-up to western living standards will remain at an average 2 percent to 4 percent in the next 10 years before falling, it said.

It’s imperative to “invigorate reforms and improve economic institutions,” the EBRD said.

Russia’s deepening economic slowdown is impeding eastern Europe’s recovery as lower oil prices hurt the world’s largest energy exporter, the EBRD said Nov. 11. Russia, the largest economy where the EBRD invests, will grow 1.3 percent in 2013 and 2.5 percent in 2014, the bank said, cutting May estimates by 0.5 percentage point for each year.

The 30 eastern European and central Asian economies where the EBRD works will expand 2 percent this year and 2.8 percent in 2014, the bank projected, down from May forecasts of 2.1 percent and 3.1 percent.

To contact the reporter on this story: Agnes Lovasz in London at alovasz@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net

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