I was interested to read Andrew Ward’s report today, suggesting that Latvia is under renewed pressure to devalue its currency. I must admit that I have not been following Baltic affairs with huge attention, since my visit to Lithuania and Latvia last July. But, even then, it was always clear that autumn was going to be the crunch time for the Latvians.
Yet another austerity package has to be forced through – involving painful cuts in government spending and public-sector wages. And this is happening just at the time when unemployment benefits will start running out for many of the people who lost their jobs at the beginning of the year. Also, with winter coming in, heating bills are about to rise sharply.
Under the circumstances, I’m not surprised that the question of devaluation has resurfaced. Like Obama’s decision on Afghanistan, the Latvians’ decision on the currency is essentially a choice between two appalling options. If they don’t devalue, the country looks like it is locked into a downward spiral without any prospect of a boost to competitiveness – whilst hurling scarce cash into supporting a currency peg that may ultimately prove unsustainable. But if they do devalue, they risk bankrupting many Latvians who have taken out foreign-currency loans and provoking a fresh crisis of confidence. And, as ever, there are question marks over the motivations of the foreigners whose loans they are now relying on. Is the European Commission’s opposition to devaluation driven by its concerns for Swedish banks – who are heavily exposed to the Baltic states? After all, Sweden holds the EU presidency at the moment.
Meanwhile, on a neighbourly matter, following my report of Boris Nemtsov’s comments that Medvedev can’t even appoint his own drivers, I was interested/amused to see today’s report that the Russian president has made a bold bid for independence and appointed his own speechwriters. Is this a turning point; or further confirmation of just how powerless he is?
Related reading:
Gideon Rachman’s lunch with Dalia Grybauskaite, Lithuanian president
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