* Poland should cut budget gap below 3 pct/GDP by 2012
* Euro entry goal under pressure
* Hungary, Romania, Lithuania told to cut deficits by 2011
* Countries failed to reform public finances in good times
(Updates with Polish reaction)
By Marcin Grajewski
BRUSSELS, June 24 (Reuters) - The European Union's executive
arm on Wednesday gave Poland until 2012 to bring its public
sector deficit below the bloc's ceiling, extending the deadline
at the last moment by one year.
In recommendations to be sent for approval by EU finance
ministers, the European Commission also told Hungary, Lithuania
and Romania -- all struggling with extra spending demands and
reduced revenues because of the global economic crisis -- to cut
their deficits to below 3 percent of gross domestic product by
2011.
"It is crucial that governments devise an adjustment path
whereby they commit to correct public deficits from the moment
the economy starts to recover, which is expected to happen
gradually starting 2010," EU Monetary Affairs Commissioner
Joaquin Almunia said in a statement.
Extending the deadline for Poland will give it more leeway
to boost flagging economic growth, but creates a temptation to
delay the country's euro zone entry target, now set at 2012 or
slightly later.
Cutting its deficit to beneath the EU's cap -- a condition
for euro entry -- in 2012 would mean in practice that Poland
could adopt the euro in 2014 at the earliest, since the
Commission would have to confirm this was the case during 2013.
The latest Reuters poll on the issue in April showed
analysts expected Poland to adopt the euro in 2013 and Czech
Republic and Hungary in 2014. []
The Commission had initially planned a 2011 deficit deadline
for Poland, as indicated by a draft proposal obtained by Reuters
this week, but a Polish source said it changed its mind
following pressure from Warsaw.
Poland wanted the same deadline for cutting its deficit as
France, the source said.
The Commission's decision may have also been influenced by
Tuesday's declaration by Polish Finance Minister Jacek Rostowski
that he would raise this year's deficit target but also increase
taxes to keep public finances under control in the medium term.
"The Polish government is aware of the need to reduce the
excessive deficit ... The government will map out a medium-term
strategy of improving public finances," Ludwik Kotecki, Poland's
deputy finance minister, said in a statement.
The Commission said Poland should start cutting its deficit
by 1.25-1.5 percentage points annually from 2010. In the earlier
draft it spoke about a 2.0 point annual correction.
The Commission expects Poland to have a shortfall -- taking
in the central state deficit as well as borrowing by local
authorities and agencies -- of 6.6 percent of GDP this year and
7.3 percent in 2010, unless policies change.
The Commission recommendation was made under the EU's
excessive deficit procedure, which can lead to fines for euro
zone countries that persistently top the EU's cap or a freeze in
EU aid funds for EU members not using the single currency.
The Commission expects 21 of the EU's 27 countries to have
deficits above 3 percent of GDP this year due to recession.
GOOD TIMES WASTED
The EU executive said Poland had failed to take advantage of
its high economic growth before 2008 to slash the deficit.
"The recent good economic times were not fully used as an
opportunity to consolidate public finances and undertake deep
reforms on the expenditure side," it said.
It noted that the farmers' pension system, KRUS, was almost
fully subsidised by the national budget and a recent reform of
the costly early pension system excluded groups such as miners.
The Commission said Poland's government seemed to lack a
system for enforcing fiscal discipline on its entities.
The 2011 deadlines for Hungary and Romania reflected their
recent deals with the International Monetary Fund and the EU on
receiving financial aid.
Romania's deficit is seen at 5.1 percent of GDP this year
and 5.6 percent next, compared with 5.4 percent last year.
Lithuania hopes its austerity measures will allow it to keep
the deficit at 5-6 percent of GDP this year and next.
(Editing by Dale Hudson/Ruth Pitchford)
