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East Europe’s Catch-Up at Risk Without Reforms, EBRD 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.

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 taken after communist rule.

“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 published today.

Over the next two decades, incomes will reach or exceed 60 percent of the average of the European Union’s 15 member states before its 2004 eastward expansion only in central Europe and the Baltics, leaving behind most of the 34 countries from Morocco to Mongolia where the EBRD invests, it said.

“I’m rather hopeful because the situation is so bad that it’s liable to improve,” billionaire investor George Soros said at a discussion in London today. “The region is in fact stuck, and what has started off as a process of integration and transformation -- whether it’s from a closed society to an open society, from a repressive regime to democracy or from socialism, communism to capitalism -- has now reversed.”

Deep Trouble

While the region “desperately” needs the EU as “a magnet,” the bloc is now “in deep trouble,” Soros said.

While progress in transition has been closely correlated with democratization, economic improvements have slowed, the EBRD said. Without changes to policies and institutions, the productivity growth that permits poorer states to catch-up with 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.

The EBRD recorded more downgrades than improvements in its measures of economic and democratic progress in the region for the first time in the past two decades.

Downgrades Dominate

Hungary’s scores decreased in three areas, and Slovakia’s scores dropped in two due to government involvement in the energy and insurance industries, which may decrease investor confidence, according to the report.

Hungary’s cabinet has relied on extraordinary taxes in industries including banking to energy to finance budget spending and it approved a 10 percent cut in household energy prices this year, earning it reduced scores in trade and price liberalization and competition policy, the report said.

“Developments in Hungary are certainly disconcerting both in the political and economic space,” Berglof said.

Slovakia’s scores were cut in trade liberalization and competition policy, reflecting state interference in various areas, the EBRD said.

Slowdown Hurts

Tajikistan earned higher scores in trade liberalization after the country joined the World Trade Organization this year, and Croatia improved in state asset sales after it sold shipyards before entering the EU in July.

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.

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