Economic and political challenges of acceding to the euro area in the post-Lehman Brothers world:

Latvia

Jānis Bērziņš – Riga Stradins Universityjanis@berzins.in

Background

‣ Euro adoption as main goal

‣ Until 2007 was fulfilling all indicators of the Maastricht criteria, except inflation

‣ Although facing a process of unsustainable social and economic development, could have adopted the Euro

Latvia’s economic problems

‣ Deepening economic restructurization after joining the EU

• Ineffective model/strategy of development, both from inside (Latvia) and outside (impositions from the EU)

• Changing strategy of the actors of the financial sector after Latvia joining the EU

• Lack of appropriated regulation, as a result of neoliberal ideology

✓ Market determines everything

✓ Politicians and civil servants have no responsibility for what is going in the economic and social spheres.

Latvia’s GDP Structure

Credit dynamic

Issued credit by sector

Structure of issued credit - %

Latvia’s GDP - %

Price Stability

‣ M2 increased 163% between May 2004 and Jun e 2008

‣ Official discourse:

• Increasing wage affecting costs and profits

• Fuel

• Food

• Indirect taxes and administrated prices

• Energy

• Lagged effective depreciation of the lat

• Buoyant domestic demand associated with credit growth

M2 X Inflation

Government Budgetary Position

‣ Deficit of -3,9% of the GDP in 1999

‣ Surplus of 0,1% in 2007

‣ After the crisis: expected to be around -13%

Exchange rate

‣ Exchange rate was fixed against the Euro in 30 December 2004

• Ls 0,702804 for 1 Euro

• Corridor of + or - 1%

‣ Member of the ERM II since 2 May 2005

Long term interest rates

Additional factors

‣ The ERM II indicators aren’t adequate to deal with Latvia

• They are based on models related to well developed countries

• They presuppose some level of “normality”

✓ Sustainable development

Additional factors

‣ The ERM II indicators aren’t adequate to deal with Latvia

• They are based on models related to well developed countries

• They presuppose some level of “normality”

✓ Sustainable development

• May be temporally falsified (Latvia did it!)

• These indicators became an autonomised expression of the Maastricht criteria, turning to be an objective per se

✓ Lost objectivity

Latvia and the adotion of Euro

‣ Maastricht criteria is irrelevant in Latvia’s case

‣ The political gains surpass the economic problems

• Latvia’s economic size is less than 1/3 of Munich’s GDP

• No risk of spreading inflation to the monetary union

• Economic stability as development facilitator

• Even the IMF doesn’t believe it is possible through “normal ways” (last report October 2009)

Thank You!