IMF sees trouble ahead for emerging Europe

By Igor Ilic and Balazs Koranyi

DUBROVNIK, Croatia (Reuters) - Emerging Europe is facing increasing economic stresses that threaten to unwind some of the political progress made over the of past decades, a top International Monetary Fund official said on Tuesday.

Poul Thomsen, the head of the IMF European Department said central and eastern Europe's economic growth potential has halved in the past decade and the rapid outflow of skilled workers is an increasing drag.

He noted at a conference in Dubrovnik that some governments in the region are even questioning the benefits of European integration.

With Europe struggling through a decade of crisis and economic malaise, convergence between the core Western countries and the Eastern periphery has slowed or stopped. This has raised domestic questions about the validity of painful economic and political reform.

"This is a timely reminder to all of us not to fool ourselves into believing that governance and institutional progress are inevitable; not to believe that such progress is an unstoppable outcome, a steady evolution. It is not," Thomsen said.

"Going forward, headwinds will grow stronger," the Danish economist said.

Thomsen, who has led IMF programmes with countries such as Greece and Portugal, also noted that the exceptional support from a benign global growth environment that benefitted the region when it is initially emerged from Communism, was unlikely to be replicated.

Meanwhile, the outflow of skilled workers to Western Europe is a top issue for the region. The IMF estimates that 20 million people have left central and eastern Europe in the past decades -- roughly 5-6 percent of the population.

Half of Hungarian and a quarter of Polish manufacturing firms now claim that a shortage of workers is limiting production and inhibiting investment, surveys showed.

EU TENSIONS

On a political note, Thomsen pointed to increased tensions between some of the EU's eastern members and the European Commission as a key concern.

The EU is at loggerheads with Poland about rule-of-law issues and has clashed with Hungary over refugees, among other issues.

The turmoil of the past decade has also put into doubt the value of EU membership for countries still outside the bloc.

He added that another concern is that given the disappointments of the past decade, some countries may reverse the political and institutional reforms that were meant to solidify democracy and support long term growth.

"Some of the threats of (governance) reversal... are evident in some of the most advanced countries of the region," Thomsen said.

"There is clearly one area where we at the Fund are concerned: central bank independence," Thomsen said. "In a number of countries central bank independence is under threat."

(Reporting by Balazs Koranyi and Igor Ilic Editing by Jeremy Gaunt)