Analysis

Latvia: a country refusing to look at the other side of the coin

On Monday, 4 March 2013, the government of Latvia formally requested permission to begin the process of joining the Euro. Brussels doesn’t seem so keen. Maria Eugenia Filmanovic investigates.

Euro_coins_and_banknotes

Like many European Union member states, Latvia suffered dreadfully from 2008 global financial crisis. In 2008, its economy contracted by more than 20 percent due to a gradual loss of competitiveness, growing financial deficits and a banking crisis.

Yet the government’s response, a vigorous austerity drive, made it possible for the economy to recover a 5% of GDP in the past year alone. This impressive recovery came as the budget deficit decreased to 1.5% of GDP, public debt rebated to 41.9%, price stability was restored at around 2%, and the 10-year bonds interest rate fell near to 4.5%. Despite the protests of the neo-Keynesian economist and austerity doubter, Paul Krugman, it’s hard to believe a stimulus programme could have yielded better results.

Hardship has long been common in Latvia. In the 1990s, its economy contracted by nearly 50%. In 1995, Latvia’s largest commercial bank, Baltija, declared bankruptcy completely wiping out people’s savings. And in 1998, the impact of the Russian financial crisis was keenly felt. After a decade of economic boom, the economy relapsed when the global financial crisis swept into Europe in 2008.

In spite of the perceived weaknesses of the Euro, Latvia’s Prime Minister, Vladis Dombroskis, now sees membership as integral to Latvia’s future. Indeed, he is at pains to emphasise Latvia’s readiness, desperately looking forward to making of his Latvia the eighteenth Eurozone member and the third East European country after Estonia and Slovenia. With Poland and Lithuania also in the waiting room, there is a growing sense that Latvia’s request may trigger a dash for an additional Eastern European expansion.

At first glance, the wish to join the Euro at this precise moment might seem perverse. Yet Eastern European states fear being left on the periphery of a two-tier Union. Although Poland‘s eurosceptics have gained in popularity when joining the Euro has been discussed, Prime Minister Donald Tusk has made it clear that ‘being only partly in Europe is an illusion.’

Another peculiarity is the reluctance to treat the prospect of expanding the Euro seriously.

Even if Latvia has met the five convergence criteria in the Maastricht rulebook, the European Central Bank (ECB) does not see an economic miracle in a country that was bailed out with 7.5 billion Euros by the IMF, World Bank and the EU in December 2008. ‘Measures to reduce inflation temporarily or easily reversible measures to lower the fiscal deficit do not represent sustainable convergence’ said Joerg Asmussen, Executive ECB member, last June in Riga. More recently, Olli Rehn, Monetary Affairs Commissioner, affirmed that ‘Brussels needs to assess whether the Latvian model is sustainable.’

In part, this reluctance probably stems from the consequences of the Greek Eurozone accession, now shared among the 17 Eurozone countries. Yet in a major speech two weeks ago, Rehn failed to even pay lip-service to the idea of Eurozone expansion, preferring to focus on external trade and the deepening of Eurozone governance (the two-pack of increased surveillance and sanction of governments’ budget policies).

Politically, the power of the Union’s Eastern membership is growing. Yet there is still a chronic lack of trust on the part of the Brussels bureaucracy, perhaps driven by the belief that their economies are too small to contribute to the European Stability Mechanism. Will the Latvian economic miracle convince both the European Commission and the European Central Bank to enlarge their private club? In the case of Latvia, satisfying the Maastricht criteria has not been sufficient. The European Commission’s myopia seems to be a serious barrier to Mr Dombroskis’ ‘Euro dream’.

Advertisements

One thought on “Latvia: a country refusing to look at the other side of the coin

  1. Yet, we may only hope that the government’s vigorous austerity drive won’t lead straight into long-term poverty traps 😦

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s