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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!