By Marcin Grajewski and Jan Strupczewski - Reuters

BRUSSELS – The European Commission will urge Latvia, Bulgaria and Romania to use the current economic upswing to shore up public finances more quickly, draft documents showed on Friday.

The European Union’s executive arm will assess the three countries’ plans of how they want to reach their medium-term budget targets, which in most cases means balance or surplus, on Wednesday.

In a draft assessment obtained by Reuters, the Commission says fast-growing Latvia should aim for a smaller budget deficit this year than the planned 1.3 percent of gross domestic product, wider than the 0.4 percent gap in 2006.

EU budget rules – the Stability and Growth Pact – say that during economic good times, countries that have not yet achieved their medium-term budget position should cut deficits by at least 0.5 percentage points a year until they reach the target.

“The planned worsening of the budgetary position in 2007 during the ‘good times’ currently enjoyed by Latvia is not in line with the Pact,” the Commission draft said.

Latvia logged economic growth of 10.2 percent in 2005 and 11.5 percent last year. The Commission said the economy was overheating, which raised the risk that Latvia may miss its own goal of reaching a balanced budget in 2010.

Latvia expects growth to slow to 9.0 percent this year and 7.5 percent in 2008 and 2009 – a soft landing the Commission said was plausible. But it warned, “There is a significant probability of much less favorable macroeconomic developments in view of the large external imbalances and the overheated state of the Latvian economy.”

Latvia’s current account gap reached 24 percent of GDP in the third quarter of 2006.

Because of high inflation, the small Baltic state had to abandon plans to join the eurozone in 2008 and now aims for 2010 at the earliest. The Commission said the country’s inflation forecasts of 6.4 percent this year, 5.2 percent in 2008 and 4.2 percent in 2009 were “on the low side.”

The high inflation triggered a rumor last month that the country could devalue its euro-pegged lat currency to stay competitive.

The Commission said Romania should use fast economic growth to cut its budget deficit more aggressively than envisaged in its midterm fiscal program, because there was a risk that the EU newcomer’s gap may exceed the bloc’s cap of 3 percent of GDP.

“Romania is invited to exploit the good times to significantly strengthen the pace of adjustment... by aiming for more demanding budgetary targets in 2007 and subsequent years,” the Commission’s draft said.

Romania set its budget deficit targets at 2.7 percent of GDP in 2007, 2.6 percent in 2008 and 2.0 percent in 2009, compared with 2.3 percent last year.

It assumed the economy would grow by 6.5 percent this year, 6.3 percent in 2008 and 5.9 percent in 2009.

“The budgetary stance does not provide a sufficient safety margin against breaching the 3.0 percent of GDP deficit threshold,” the draft said.

“From 2008 onward, the budgetary strategy is insufficiently specified with a volatile path for several expenditure items and unsubstantiated tightening in 2009,” it added.

It said Romania’s projections for inflation were on the low side. They are 4.5 percent year-on-year in 2007, 4.3 percent in 2008 and 3.2 percent in 2009.

Bulgaria, which joined the EU in January with Romania, should try to achieve a higher budget surplus to contain macroeconomic risks from the country’s ballooning current account deficit.

Bulgaria’s current account gap hit a record 16 percent of GDP in 2006. Its trade deficit was 21.8 percent of GDP.

“Bulgaria is invited to achieve a higher budgetary surplus in 2007 than currently planned and to maintain a strong position thereafter in order to foster macroeconomic stability and contain the high external deficit,” the draft said.

Bulgaria expects its budget surplus to shrink from 3.2 percent of GDP in 2006 to 0.8 percent in 2007 and then to increase to 1.5 percent in 2008 and 2009.

It forecast growth at 5.9 percent in 2007, 6.2 percent in 2008 and 6.1 percent in 2009.