There are two schools of thought on whether Latvia should devalue the lat, or fight tooth and nail to keep its currency peg to the euro. One, espoused by the Latvian government, the International Monetary Fund and the European Commission, is that devaluation would destabilise the Latvian banking system, wouldn’t really address the long-term challenges facing the Latvian economy, and would risk spreading shock waves beyond Latvia across the Baltic and into other parts of central and eastern Europe.
The other view, espoused by some of the world’s leading economists, such as Paul Krugman and Nouriel Roubini, can be summed up as: “Get Real”. Without devaluation, the only path that Latvia can go down to extract itself from crisis is massive deflation, through spending cuts and sharp falls in wages that will inflict terrible damage on society and will unnecessarily prolong Latvia’s recession.
If you think the economic news is grim in the US, the UK or Germany, spare a thought for the small Baltic states of Estonia, Latvia and Lithuania. All face the prospect that their gross domestic product will collapse this year by 10 to 12 per cent. Moreover, all operate a so-called currency board regime, or peg, which restricts the movement of their currencies against the euro and prevents them from stimulating economic recovery by means of exchange rate depreciation.
One answer, as the International Monetary Fund pointed out a few weeks ago, would be for the European Union to relax its rules and let the Baltic states swap their currencies for the euro without formally joining the eurozone. This would in principle ease their foreign debt problems and restore confidence among foreign investors. The alternative – severe government austerity programmes, followed by a sharp drop in living standards, social unrest and political instability – seems far too harsh and risky a solution.
At long last, the message is getting across that, as far as the financial crisis is concerned, it makes no sense to view the ex-communist countries of central and eastern Europe as one homogenous bloc. European Union policymakers, both in Brussels and at national level, have been trying to make this point for some months. Only now, perhaps, is it really sinking home.
For example, a report by Moody’s credit ratings agency on Tuesday drew a clear distinction between various countries in the region. Some, such as Hungary, rashly allowed a huge expansion in credit in recent years, much in the form of foreign currency-denominated mortgage loans. Others, such as the Czech Republic, did not. The first group is more vulnerable, even if much will ultimately depend on the willingness of western European banks to continue supplying funds to the regional banks they own.
Jaap de Hoop Scheffer, Nato’s secretary-general, has just told a news conference that the alliance’s foreign ministers have agreed to resume high-level ministerial contacts with Russia. He made no mention of Lithuania’s objections, and no reporter managed to raise the matter in a question.
But there was perhaps just a hint that US Secretary of State Hillary Clinton and her colleagues paid some attention to what the Lithuanians were saying. Because what the foreign ministers have agreed is that high-level contacts with Russia should restart “as soon as possible” after a Nato summit in early April in Strasbourg and Kehl, Germany.
That indeterminate timeframe could be interpreted as a concession to Lithuania’s demand that Nato leaders should discuss the issue at greater length before resuming the contacts with Russia.
Maybe we’ll know more when Clinton holds her own news conference in a couple of hours.
In the meantime, everyone is beavering away here in the press area at Nato headquarters under a big red sign that says: “No classified discussion in this area.” And when I say everyone, I don’t just mean “interested pencils”.
US Secretary of State Hillary Clinton’s inaugural working visit to Europe has run into its first setback. At Nato’s headquarters outside central Brussels, she and other alliance foreign ministers have been discussing how to start a new era in relations with Russia. Last night, according to US officials, it seemed a sure bet that everyone would agree to restore high-level ministerial contacts with Moscow – they were suspended after last August’s Russian-Georgian war.
But this afternoon it has become clear that Lithuania is raising objections. The Lithuanians want the issue to be debated at greater length at a summit of the 26 Nato countries’ leaders in Strasbourg and Kehl, Germany, on April 3-4. Other countries are impatient to get the process started sooner rather than later.
The problem is that Nato works by consensus, rather than by majority voting. So at the moment the Lithuanians can block everything if they choose. Some will remember that they did something similar inside the European Union not long ago, resisting the appeals of other EU states to open talks on a long-term partnership agreement with Russia.
How this is sorted out will be the first serious test of Clinton’s diplomatic skills.
It was the late, great Frank Zappa who said you’re not a real country unless you have a beer and an airline.
Well, Lithuania certainly has the first – a rich, golden brew known as Svyturys. But since January 23, when the main national carrier, flyLAL, declared bankruptcy, it hasn’t had the second. The result, as I discovered last week, is that it is harder to travel to Lithuania than any of the European Union’s other 26 member-states.
Buried in last Wednesday’s €200bn European Commission economic recovery plan for Europe was a proposal that sent waves of relief through Lithuanian policymaking circles. This was the idea of allocating €5bn for trans-European energy connections.
A large chunk of this money is destined for Lithuania, the aim being to reduce the dangers that face the country after the planned closure of its Ignalina nuclear power plant on December 31, 2009. Ignalina supplies 70 per cent of Lithuania’s electricity, and when the plant is shut down Lithuania will be almost entirely dependent on Russia for its energy.
I am in snowy Vilnius, the capital of Lithuania and a city that reminds me of a communist-era joke that I first heard in Poland in 1980.
A Frenchman visits Warsaw, so the story went, and is so shocked by the bleak buildings and empty shops that he thinks he must have arrived in Moscow by mistake. Meanwhile, a Russian visits Warsaw and is so pleasantly surprised by the colour and the range of goods on sale that he thinks he must have arrived in Paris.