Economic and political challenges of acceding to the euro area in the post-Lehman Brothers world: Latvia Jānis Bērziņš – Riga Stradins University

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, 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!