Eastern Europe: The Big EU Hopefuls Are Pushing Their Luck

The European Union espouses fiscal discipline and practices cautious monetary policy. However, the four largest aspiring EU entrants--Poland, the Czech Republic, Hungary, and Slovakia--aren't exactly following the EU example, which may lead to problems later on.

On Dec. 16, the National Bank of Hungary lowered its benchmark interest rate to 8.5%, for a total cut of 1.25 percentage points in 2002. The Czech central bank cut rates from 4.5% to 2.75%, and Slovakia slid from 7.75% to 6.5%. But the National Bank of Poland has been the most aggressive. It has cut rates to 6.75%, from 11.5%, in an effort to boost Poland's economic growth, expected to be just over 1% in 2002.

The central banks are hoping to lift economic growth in two ways: by stimulating consumer demand and limiting the rise of their currencies. The strong currencies, a result of high real interest rates, have been a drag on exports.

The moves should pave the way for Eastern Europe to outpace the euro zone in 2003. For example, Polish real gross domestic product is forecast to grow by at least 2.4%. For the other three nations, economic growth of 2.8% to 3.5% is expected, twice the likely pace of the euro zone. Moreover, if growth begins to disappoint, there is plenty of ammo left. Real interest rates currently range from 2.25% to nearly 6%, much greater than the euro zone's 0.7%.

Stimulus is also coming from the government. All four countries are running budget deficits of greater than 5% of GDP in 2002 and are expected to carry budget deficits of 4.5% or more in 2003.

Such profligacy could cause problems in 2004, when entry into the EU will begin. The four countries will eventually lose the ability to control interest rates and run large fiscal deficits, especially since the EU wants its new members to carry deficits of only 3% of GDP by 2006. This could put the EU hopefuls in a bind: Either risk delaying integration or suffer major drags on economic growth from large fiscal spending cuts.

By James Mehring in New York

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