Central Europe braced for tougher economic times

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Central Europe is gearing for a critical 2008 as its run of breathless annual growth rates loses momentum amid pressure for reforms and competition from low-cost nations elsewhere.

28 December 2007

Berlin (dpa) - Central Europe is gearing for a critical 2008 as its run of breathless annual growth rates loses momentum amid pressure for reforms and competition from low-cost nations elsewhere.

For both governments and central banks, economic management is shaping up to be a balancing act between slowing economic growth, resurgent inflation and pressures to bring their economies into line with those of Western Europe.

"We are definitely facing tougher times in the region", said Lars Rasmussen, senior analyst with Danske Bank, but added that this was the normal part of economies adjusting to lower growth rates.

Growth in Poland, which is Central Europe's biggest economy, is expected to slide to 5.5 percent in 2008 from 6.5 percent in 2007, while Slovakia's expansion rate is expected slip to about 7 percent in 2008 from 9 percent this year.

The Czech Republic's expansion rate is forecast to fall from about 6 percent this year to closer to 5 percent next year.

So far Central Europe has managed to emerge relatively unscathed from the financial firestorm that swept global markets. This is because growing investor confidence in the region's economic transformation since the implosion of communism more than 18 years ago has helped shore a sense of stability.

But further economic integration with Western Europe is likely to face a test soon when the European Commission and the European Central Bank consider whether Slovakia has met the tough fiscal targets for joining the euro.

If Slovakia does receive the green light to join in January 2009, it will be the second former communist state, after Slovenia that joined the European Union in May 2004, to adopt the common currency.

Its acceptance as what will then be the eurozone's 16th member could eventually help pave the way for other former Soviet bloc nations to sign up to the euro.

For the time being, many analysts believe that it is unlikely that Poland and the Czech Republic will adopt the common currency before 2012 with Hungary possibly joining two years later.

But in much the same way, a decision to delay Slovakia's euro membership could result in the same sort of bitterness among the EU newcomers that followed Lithuania's rejection last year after it failed to meet inflation targets.

At the same time, reform fatigue has set in in Central and Eastern Europe after the sometimes chaotic economic change that emerged after the region began dismantling its Stalinist-style command economies to embark on a new era shaped by free-market forces.

But the pressures to maintain high growth rates in the face of slowing expansion rates in their key markets in Western Europe could force governments in Central Europe to press on with economic reforms.

That said, however, one of the more immediate problems facing Central European governments is renewed inflationary pressures.

A sharp pickup in inflation has helped fuel overheating in parts of Central Europe notably in Bulgaria and the Baltic states of Lithuania, Estonia and Latvia.

Stoking the inflationary pressures has been an increasingly tight labour market and a growing shortage of skilled workers in several nations.

Warning signals are starting to flash in Central Europe as bottlenecks start to appear on the back of high economic growth rates and skilled workers head to higher paid jobs in the West.

What is more, labour shortages also risk hitting the robust growth that has played a key role in economic transformation.

Wages in even the most advanced CEE nation are still a fraction of the levels in Western Europe, with a low-cost highly skilled workforce considered one of the prime factors drawing in foreign investment, which last year totalled more than 30 billion euros.

But wage costs in several key CEE economic sectors surged by 50 percent over the last year. Gross wages in Poland shot up by 9.5 percent in September compared to a year ago, while Czech officials report technical job vacancies running at 50,000.

This has resulted in nations such as Poland, the Czech Republic and Slovakia turning to countries further east such as Belarus and even India and China for skilled workers to help meet their skill shortages and allow them to press on with major projects.

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