* All eastern EU members seen in recession this year
* Polish, Czech, Bulgarian recessions mild
* Big contractions in Baltics, Hungary
* Higher deficits to complicate euro entry efforts
* Poles, Romania, Lithuania Latvia face budget penalties
(Adds Romanian reaction)
By Marcin Grajewski
BRUSSELS, May 4 (Reuters) - All of the European Union's
eastern members will fall into recession this year, the bloc's
executive forecast on Monday, signalling the slowdown will swell
national deficits and could dash euro adoption plans.
The European Commission forecast economic contractions of
more than 10 percent in the worst-hit Baltic states and said the
region's biggest economy, Poland, would shrink 1.4 percent, a
sharp contrast to Warsaw's own forecasts of modest growth.
Among 10 ex-communist countries that joined the EU in 2004
and 2007, the Czech Republic and Bulgaria are also forecast to
experience a relatively small contraction, compared with the
euro zone's expected 4.0 percent this year.
"Compared with other countries in the region this is a
relatively mild recession thanks, among other factors, to the
lower share of trade in GDP," the Commission said of Poland,
which accounts for about half of the region's output.
The estimates came as forward-looking data from April showed
a dramatic manufacturing decline in the Czech Republic and
Hungary slowed, suggesting their shrinking economies could be
approaching a bottom. But the figures showed Poland worsening.
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The Commission's twice-yearly forecast saw Czech 2009 growth
at -2.7 percent and Bulgaria at -1.6 percent this year and 0.3
percent and -0.1 percent respectively in 2010.
Hungary, the recipient of a $25.1 billion International
Monetary Fund-led bailout after years of fiscal profligacy, will
shrink by 6.3 percent in 2009 and by 0.3 percent in 2010.
If borne out, the forecast for a contraction in Poland would
be the first there since 1992, compared to growth of 4.9 percent
last year. The country is expected to be one of the few in the
region to return to growth in 2010, at 0.8 percent.
For the Baltics, Estonia was seen contracting 10.3 percent
this year, Latvia by 13.1 percent and Lithuania by 11 percent.
The economies will also shrink in 2010, although much less.
Polish Finance Minister Jacek Rostowski remained adamant the
economy would grow this year, but said his expectations for
growth were now that it would top 1 percent, compared to the
government's early worst case scenario of 1.7 percent.
The IMF and many bank analysts have forecast a contraction.
The Commission said a sharp depreciation of the Polish zloty
-- it has lost more than 25 percent against the euro since last
July -- would ease pressure on exporters, but it may dampen
demand from households that have taken foreign currency loans.
SWELLING BUDGET GAPS
Manufacturing data showed Poland's Purchasing Managers'
Index (PMI) inched down to 42.1 points in April from a
five-month high of 42.2 in March. The Czech index rose to 38.6
in April, from 34.0. A score above 50 indicates manufacturing is
expanding, while a score below means it is contracting.
The industry-led decline in eastern Europe -- a result of
euro zone consumers reducing purchases of cars and electronics
made there -- has badly undercut the region's budget revenues.
The Commission said public sector deficits would also swell
across the region, with the Czech Republic's growing to 4.9
percent of gross domestic product in 2010, from 1.5 percent last
year, and Hungary's to 3.9 percent, from 3.0. []
It said Poland's deficit would balloon even more to 6.6
percent this year and 7.3 percent in 2010, from 3.9 percent last
year. All would be much higher than the 3 percent ceiling
required of euro zone aspirants.
If those figures materialised, Warsaw would find it hard to
meet its goal of joining the euro in 2012, exacerbating problems
already seen in meeting an exchange rate stability criterion.
Rostowski rejected the forecast, saying: "We are determined
to keep the deficit in a worst case scenario at the level of 4.6
percent (of GDP) but we also hope to trim it more."
EU Monetary Affairs Commissioner Joaquin Almunia said he
would pursue budget disciplinary measures against countries with
deficits above the EU's 3-percent ceiling last year -- Malta,
Poland, Romania, Lithuania and also Latvia.
Romanian Finance Minister Gheorghe Pogea said his country
was taking austerity measures to avoid EU disciplinary action.
"We totally agree with the estimates presented by the
Commission. We already took measures to reduce spending, moves
that we hope will help us not to be sanctioned by the European
Commission," he told Reuters, adding the Romanian shortfall
would return to beneath 3 percent of GDP in 2011.
ECB Vice-President Lucas Papademos made clear there could be
no reneging on euro adoption criteria and he also reminded
aspiring countries that putting their currency into the pre-euro
Exchange Rate Mechanism (ERM-2) would not solve their problems.
"The conclusion is that ERM-2 participation is not a panacea
for economic problems," he said in Brussels.
(Writing by Michael Winfrey and Gareth Jones; additional
reporting by Radu Marinas; Editing by Patrick Graham)
