Analytics, Economics, EU – Baltic States, Financial Services

"The outlook for 2009 growth is gloomy and subject to high uncertainty, mostly on the downside," the bank said in a report on the EU"s 10 eastern members today. "The prospects for the region look particularly bleak." The former communist states that joined the EU between 2004 and 2007 were hit harder than initially expected by the global financial crisis after investors fled the region for safer assets. The currencies of those countries that trade without restriction have plunged against the euro, making household loans denominated in foreign currencies more expensive. While central banks have cut interest rates to kick-start growth, the room to continue has been curtailed by the currency depreciation, the report said. The Czech Republic"s central bank has reduced its key rate by 2%age points since last June, while Poland lowered borrowing costs 1.75 points since November. "Looking forward, the recent large depreciations in countries with flexible exchange-rate regimes limit the scope for monetary policy easing," the bank said.

"Within a few months, local currencies lost more or less all that they had gained against the euro during the last three to four years."

The economies of all three Baltic states – Lithuania, Latvia and Estonia – and Hungary are expected to contract this year, while Polish Prime Minister Donald Tusk has said that in the worst-case scenario, Poland"s economy may expand 1.7% in 2009, below the government"s official 3.7% forecast, reports BLOOMBERG/ELTA.

The EU"s eastern members, which also include Slovakia, Slovenia, Romania and Bulgaria, are still poorer than their western neighbors two decades after the fall of communism, and so are not able to introduce fiscal stimulus measures that countries such as the U.S. or Germany have done. "Given initial fiscal conditions and financing constraints, countries in the region have little or no room for discretionary fiscal impulses," the bank said. "To make matters worse, the financing of external positions has proved more difficult for emerging markets in recent months on the back of weakening investor sentiment, including for the EU10."