If the economies of Eastern Europe are like a Poski Fiat, can they keep up with Western rivals?

He cited the problems in East Germany, where industry faced severe adjustment problems after the country was unified with West Germany under a common currency, as one of the dangers of premature euro membership.

The EU is currently negotiating with 12 countries about accession, with six (Poland, Hungary, the Czech Republic, Slovenia, Malta, and Estonia) being given priority.

The IMF said the pressures on budgets, state-run firms, and the exchange rates for these countries could parallel the difficulties faced by EU countries in the run-up to the single currency. Candidates could experience pressures on their exchange rates such as those in the European Exchange Rate Mechanism, which was torn apart in 1992 after severe turbulence on foreign currency markets.

Flexible labour markets

The IMF also warned Eastern European countries that they must retain their flexible labour markets and not adopt the rigidities in many EU countries if they were to avoid high unemployment in the future.

The IMF said low wage differentials between skilled and unskilled workers, and generous unemployment benefits that characterise much of Western Europe, were detrimental to the goal of labour market flexibility.

But it dismissed fears that large numbers of workers would migrate to Western Europe following EU enlargement, citing a study suggesting that only 335,000 more people each year would seek work in the EU after immigration controls were lifted.

However, it pointed out that the EU itself should try and reform its own labour markets in order to ensure that it could absorb the new workers.

And it acknowledged that there could still be big regional differences within Eastern European countries after accession, with a "dual economy" developing, based on a wealthy export-led sector near the border, while rural regions remained areas of high unemployment and low wages.

EU reform needed

The IMF pointed out that there were still many unresolved issues of EU structure and funding in relation to the accession countries.

In particular, the amount of aid that the EU might be able to provide could significantly ease the huge costs of transition, which it said could amount to 1-3% of GDP each year.

It also pointed out that reform of the Common Agricultural Policy would be necessary to release more resources to Eastern Europe, especially to Poland, the area's biggest economy and still heavily agricultural.