World Bank warns new EU members over imbalances

PRAGUE, Sep 27 (Reuters) East Europe has sidestepped most of the turbulence caused by the global credit crunch so far, but several countries with large external balances remain vulnerable to a halt in financing flows, the World Bank said on Thursday.

The World Bank, the financing arm of the International Monetary Fund, said in a regular economic report on the 10 recent EU entrants that the drive to qualify for euro adoption has left them in a strong position to weather the current storm.

But, it warned, tightening credit lines will weaken economic growth in developed markets and that could still hurt emerging market growth via trade links.

''The second risk is that there might be a deepening financial crisis and the possibility of a sustained reduction in external finance. This would be most important for those emerging markets with large current account deficits,'' it said.

The report singled out Latvia and Bulgaria for their large external imbalances.

While Slovenia has already adopted the euro, only Slovakia appears headed to join the single currency by the end of the decade.

Other countries covered in the report are Poland, the Czech Republic, Hungary, Lithuania, Estonia and Romania.

Most of the new EU members have seen their adoption timetables slide to 2012 and beyond as they battle to bring their economies level with richer western members.

The World Bank said inflation pressures have been rising in most of the new members this year, boosted even further by a summer drought which is pushing up food prices.

Furthermore, a weakening of many currencies in the region, is creating inflationary pressures via the rising cost of tradable goods.

''The balance of risks for inflation and for central bank interest rates remains on the upside for the remainder of the year, with real wages growing faster than productivity in most countries,'' the report said.

The World Bank also chided some countries for ''insufficient'' efforts at reducing fiscal deficits in a time when their economies are growing strongly.

It said that while public spending increases may not appear that large when measured as a percentage of GDP, economic growth has been rapid and the authorities need to examine closely whether such large increases are being made efficiently.

''There may be some erosion of fiscal positions going forward, as current information suggests fiscal loosening, or at best, no consolidation should be expected in about half of the countries. Any slowdown from global sources would cut into the recent pattern of revenue over performance,'' the report said.

In an addendum to the report, the World Bank warned of a labour shortage in the region, especially in skilled positions.

''The main challenge ... is to mobilise labour supply to meet the demand,'' it said.

''Addressing the emerging skills shortages is particularly important because failure to do so will constrain job creation and future economic growth.'' REUTERS SR KN1525