Latvia joins the eurozone Dec 30, 2013, Vol. 19, No. 16 • By ANDREW STUTTAFORD
They take austerity seriously in Latvia. After each meeting with a government official he or she would turn off the lights as we walked out of the room. More than five years after the global financial crisis finally burst Latvia’s fragile economic bubble, scrimping is second nature. Given the direction this small, resilient Baltic country took after Lehman fell, that’s no surprise. The usual prescription for cleaning up the mess that overheating leaves behind, particularly in an export-oriented economy (exports amount to some 60 percent of Latvian GDP), centers around a sharp devaluation of the currency to restore international competitiveness. There were quite a few (including within the IMF) who suggested that Latvia should break the peg fixing its currency—the lats—to the euro, leaving the lats to sink to a level that more accurately reflected uncomfortable new market realities.
That’s not what Latvia did. The relatively low value added within Latvia to its exports, and the difficulty that it would have faced in satisfying domestic demand with domestic production, meant that a conventional devaluation would have struggled to work its naughty magic, even if the export markets had been there (by no means assured after the slump in the international economy). Tipping the scales further, local business and the nascent middle class—most of whose boom-bloated -borrowing had been in euros—would have faced catastrophe had they had to repay those debts in suddenly depreciated lati. That would have threatened both social disaster and a dangerous breach with the Nordic banks responsible for a large portion of that lending—banks that would now have a vital role to play in maintaining financial liquidity in the country (the only sizable Latvian bank had foundered).
So Latvia stuck with the peg and opted for “internal devaluation,” shorthand for an attempt to mimic the competitive benefits of a traditional devaluation, but by squeezing costs (primarily labor costs) and excess demand out of the local economy rather than by depreciating the currency. This won Latvia financial backing from a group comprising the World Bank, the IMF, the EU, and the Nordic countries, support that had to sugar some very bitter medicine. Government expenditures were slashed (large numbers of public sector employees were fired and many of those who hung on saw their salaries cut by 20 percent or, indeed, much more) and, to a lesser extent, taxes increased. Between 2008 and 2012 total fiscal consolidation amounted to some 17 percent of GDP.
Most of the pain was front-loaded, both as a matter of practical politics (better to strike before austerity fatigue set in) and a matter of practical economics: Latvian interest rates had soared to damaging heights and confidence had to be rebuilt.
Seen in that context, the 2009 declaration by Valdis Dombrovskis, the dourly impressive center-right prime minister, that Latvia would continue to seek membership in the eurozone (and, more specifically, get there by 2014) made sense. Whatever the mounting problems in the EU’s gimcrack currency union, it appeared to offer a comparatively safe haven from the Baltic storm. For investors and lenders, the obvious seriousness of this commitment, together with the external support that the government had won, significantly reduced the exchange-rate risk associated with doing business in Latvia. It was no coincidence that with the “devaluation ghost” (as the central bank delightfully puts it) held at bay, lats-denominated interest rates started to tumble.
On top of that, targeting eurozone membership provided a benchmark against which the performance of the Latvian economy could be measured. The country would only be eligible to switch over to the euro if it met the currency union’s “Maastricht criteria.” Its budgetary position would have to be on a sound footing, its inflation subdued, and so on.
Perhaps most important, the march towards the single currency signaled to Latvians that their reconnection with Europe would not be derailed by the economic crisis. Austerity was a means to an end, not just an end in itself. Many Latvians had (and have) their doubts about the wisdom of adopting the single currency (over half are still—to a greater or lesser extent—opposed), but the broader aim of anchoring their state more firmly in the West helped them to stay the course through the brutally tough times that followed the financial collapse.
7:24 AM, Dec 13, 2013 • By STEPHEN SCHWARTZ
On November 26, the Financial Times published an extravagant encomium to Lady Catherine Ashton by its Brussels bureau chief Peter Spiegel, under the headline “EU foreign policy chief Lady Ashton comes of age in Iran talks.” Spiegel reported, “her team returned from negotiations in Geneva to a standing ovation . . . from EU ambassadors for their part in clinching a historic deal to limit Iran’s nuclear ambitions.”
9:04 AM, Jul 17, 2013 • By ELLIOTT ABRAMS
This week the EU took a stance that it heralded as pro-peace, pro-"peace process," and anti-settlement. Henceforth, new guidelines require all 28 member nations to refuse any grants, scholarships, prizes, or funding to entities in Jewish settlements in the West Bank. Or any part of Jerusalem that was not part of Israel prior to the 1967 war. Or the Golan Heights.
12:00 AM, Jul 13, 2013 • By IRWIN M. STELZER
Here’s a TTIP for you. No, that’s not a typo missed by our ever-vigilant editors. It stands for Transatlantic Trade and Investment Partnership, what British prime minister David Cameron calls a “once-in-a-generation prize” that can create two million jobs on both sides of the Atlantic, and Sir Peter Westmacott, Britain’s ambassador here in Washington, reportedly describes as the “Holy Grail” for resuscitating transatlantic economies.
The European Union’s coming attack on the Anglo-Saxon financial sector Jul 1, 2013, Vol. 18, No. 40 • By ANDREW STUTTAFORD
Take a visit to the cyber-belly of the beast, to a website run by the European Commission, the EU’s bureaucratic core, and you will be told that “the financial sector was a major cause of the [economic] crisis and received substantial government support.” Soon it will be payback time, in the form of Europe’s new Financial Transaction Tax (FTT), set to be levied at a rate of 0.1 percent on equity and debt transactions, and 0.01 percent on trades in derivatives. It will ensure that the financial sector “makes a fair and substantial contribution to public finances.”
3:05 PM, Mar 18, 2013 • By DANIEL HALPER
The Russian energy company Gazprom is offering to bailout Cyprus in exchange for gas exploration rights, according to media reports.
"Russian energy giant Gazprom has offered the Republic of Cyprus a plan in which the company will undertake the restructuring of the country’s banks in exchange for exploration rights for natural gas in Cyprus’ exclusive economic zone, local media reported," reports GreeceReporter.com.
12:31 PM, Mar 17, 2013 • By GEOFFREY NORMAN
Recall how improbable it seemed that the tiny nation of Greece might bring down the Euro and cripple the world's financial mechanisms? And, then, the story – if not the danger – seemed to fade away. Well, it now appears that the even more insignificant island of Cyprus may provide the spark. As Liz Alderman reports in the New York Times:
12:00 AM, Feb 9, 2013 • By IRWIN M. STELZER
Growth is the summum bonum of economic policy. Tough to arrange at home: stimulus packages don’t work very well, and monetary policy produces lots of fiat money but not very many jobs. The solution: export-led growth—the other guy will buy so much of your goods and services that your economy will grow. There are two ways to make this sort of growth happen. Lower the international value of your currency so that your output is cheaper overseas, or increase productivity at home by lowering labor and other costs and therefore the prices you need to charge foreigners.
1:29 PM, Feb 6, 2013 • By LEE SMITH
Yesterday the Bulgarian government announced the results of its investigation into the July 18, 2012 bus bombing that killed 5 Israeli tourists and a Bulgarian bus driver in the city of Burgas. At least two members of what appears to have been a three-man team belong to Hezbollah. More specifically, explained Bulgaria’s interior minister, Tsvetan Tsvetanov, they were part of Hezbollah’s “military wing”—a peculiar turn of phrase that hints at the political implications of the Bulgarian investigation, which may have a major impact on European Union foreign policy as well as Hezbollah’s ability to operate on the continent. And yet the most serious repercussions may be felt inside Lebanon, where Hezbollah is already feeling the pressure.
7:32 AM, Jan 18, 2013 • By STEPHEN SCHWARTZ
Bosnia-Herzegovina has seen the last of hundreds of employees of the European Union, United Nations, and other international agencies, including dozens of non-governmental organizations (NGOs) that once gathered there. They have left the country a politically-partitioned and economically-distressed state that, if not failed, seems ever deteriorating.
Leader of the Finns party, Timo Soini, at a polling station in Espoo last JanuaryDec 24, 2012, Vol. 18, No. 15 • By ANDREW STUTTAFORD
He won more votes than any other candidate in Finland’s 2011 parliamentary election, and the maverick party he leads is a profound embarrassment to the current eurozone regime, but there’s something refreshingly down-to-earth about Timo Soini, the leader of the euroskeptic Perussuomalaiset (PS), or, perhaps more easily for you and me, the Finns party.
12:54 PM, Nov 19, 2012 • By ILANA DECKER
After a year and a half of conflict, and despite some 40,000 deaths, the world still stands impotent to end the bloodshed in Syria.