Download Economic and political challenges of acceding to the euro

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