* Euro zone turmoil, weak growth undermine east EU recovery
* Fiscal deficits in focus, could undermine growth
* Officials to discuss issues at May 14-15 EBRD meeting
By Michael Winfrey
PRAGUE, May 11 (Reuters) - Turmoil in the euro zone's
periphery and weak growth in developed Europe may hobble a
recovery in many emerging eastern states and undermine their
efforts to rein in swollen budget deficits.
Policymakers from across the region are expected to touch on
this and other policy issues on Friday at the annual meeting in
London of regional investment institution the European Bank for
Reconstruction and Development (EBRD).
After suffering more than anywhere else on the globe at the
height of the financial crisis, countries from the Baltic to the
Black Sea are growing slightly, or at least slowing contractions
that in the worst case saw Latvia's economy shrink 18 percent.
Most governments in the 10 states that joined the European
Union since 2004 are now trying to slash budget deficits to
reduce debt and avoid the long-term insolvency problems that
have pushed Greece to the brink of bankruptcy.
The region faces headwinds, however, including fatigue among
voters who have already swallowed tax hikes and spending cuts, a
sluggish growth outlook and, even in countries with healthy
domestic demand such as Poland, banks are more reluctant to give
new loans than before the crisis.
And although leaders cast a safety net under Greece and
other weaker euro zone states with a $1 trillion crisis package
at the weekend, economists said it was unlikely to address the
main doubt surrounding the EU recovery: low consumer demand.
Instead, governments may have to raise taxes or cut spending
to pay for the package, which would squeeze demand for goods
manufactured in the bloc's export-heavy east, undermining growth
and prolonging efforts to shrink deficits.
"That brings challenges because slow growth there means
central and eastern European deficits might take longer than
previously anticipated," said Nigel Rendell, a strategist at the
Royal bank of Canada in London.
"It's going to do nothing to generate growth. In fact, it's
going to do the opposite."
The EBRD, set up after the Cold War to help ex-communist
states transition to market economies, invests in 29 countries.
Last year it forecast growth in the region of 3.3 percent in
2010, against a 6.1 percent contraction in 2009.
DEBT, DEFICITS
The euro zone package boosted emerging assets this week and
could potentially unblock a route to euro bond issuance from the
Czechs, Croats, and other countries that put plans on hold when
euro zone periphery bond yields spiked in April.
But the crisis has prompted some policymakers from new EU
member states to question the once widely held wisdom that new
EU members should adopt the euro as quickly as possible.
The situation is not all bad. Non-EU states flush with raw
materials like Russia and Kazakhstan have raised their forecasts
for gross domestic product growth this year to 4 percent and 7
percent on the back of rising prices in metals and fuels.
Other countries such as Poland and the Czech Republic have
raised 2010 growth forecasts too, although many economists say
it is too early to say whether consumer demand will pick up in
the West, a crucial requirement to those forecasts panning out.
"The pace of recovery in the global economy is going to
disappoint," said David Oxley, from Capital Economics.
Hungary, Romania, the Czech Republic and other countries say
they will either miss previously stated budget deficit targets
or need further austerity measures to hit them.
The last step would hurt growth and could also give rise to
public unrest. In Romania's case, a pledge to cut 250,000 state
jobs in the next few years has prompted unions to stage strikes,
while three people died in a fire during a protest last week.
Bad debt has risen sharply in parts of emerging Europe,
notably in Ukraine, Kazakhstan and the Baltics, where every
third loan is overdue or otherwise impaired. Romania, Bulgaria
and Serbia are also seen at risk, as Greek banks make up a large
part of their lending markets.
The International Monetary Fund said last month the banks
should be able to absorb the peak in nonperforming loans.
But it added: "Another acceleration in (bad debt) formation,
were a weaker economic scenario to unfold, would leave banks
significantly weakened and ill-prepared to absorb losses."
(Additional Reporting by Boris Groendahl, Zoran Radosavlijevic
and Gordana Filipovic; editing by Tony Austin)
