EU newcomers will enjoy faster economic growth than the rest of the bloc in 2005-2007 but high budget deficits may undermine efforts by the three biggest countries to adopt the euro currency, the European Commission said.
The commission said in its half-yearly forecast today that inflation in the ten new entrants would stabilise and their high unemployment would ease, helping boost private consumption and investment.
Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia and Slovenia joined the EU last year, which boosted their economies by attracting investment, EU aid and increasing their exports.
But the Czech Republic, Hungary and Poland are failing to tighten fiscal policies and are expected to have budget deficits above the EU's ceiling of 3 per cent of gross domestic product in 2007, putting a question mark over their timetable for euro zone entry, the report said.
Poland, the biggest newcomer, is expected to cut its deficit to 3.4 per cent of GDP in 2007 from 3.6 per cent in 2005 and 2006, while the Czech Republic may see its shortfall increase to 3.3 per cent of GDP in 2007 from 3.2 per cent this year.
Hungary, the worst budget deficit offender among the newcomers, is forecast to see its deficit balloon to 6.9 per cent of GDP in 2007 from 6.1 per cent this year, unless it introduces austerity measures.
The EU is expected tell Budapest early next year by how much it should lower the shortfall as part of the bloc's excessive deficit procedure, which may involve freezing of aid funds.
A deficit of less than 3 per cent of GDP is also a key criterion for joining the euro zone and should be met two years before a candidate adopts the single currency.
The Commission said the fastest growth rates, well above 5 per cent, would be seen in the three Baltic republics - Estonia, Latvia and Lithuania - whose budget deficits are already below 3 per cent of GDP and are expected to join the euro around 2007.
Economic expansion in the record-growing Latvia is expected to fall to 7.1 per cent in 2007 from 9.1 per cent this year. But the Commission warned Latvia that it might jeopardise its goal of joining the euro zone in 2008 because of high inflation.
The commission forecast that economic growth in candidate country Turkey would inch up to 5.1 per cent in 2007 from 5.0 per cent in 2005. Other candidates, Bulgaria, Romania and Croatia, should also enjoy fast growth rates.