A daily blog on the thrills, spills, and frequent absurdities of the world's one and only 'non-imperial empire' - as Barroso himself called it - the European Union.

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Monday, 13 June 2011

The Euro May Fall Out of Favour in the Baltic

The Bank of Lithuania, Vilnius. Picture by Alma Pater.

The euro was once the currency that all Baltic economies were supposed to convert to. After the era of Soviet oppression was ended, the euro was their ticket to a better, more prosperous future as part of the western economy - the famed EU single market. It was a general position for all politicians to be broadly supportive of the euro, and for all economists to swoon over it as a matter of course. But times change. The governor of the Latvian Central Bank has launched the most controversial analysis of the euro for years. It's barely opposition at all - in fact, it's more a realistic assessment. But nonetheless it has got the consensus on edge.

'We have to create the necessary conditions for growth. And if we are a state that meets the criteria to introduce the euro, we can take a pause and think, ‘Is it needed?' Latvia is no stranger to the eurozone's strict entry criteria: its neighbour, Lithuania, had its application turned down in 2008 when its inflation was only slightly above target. But by saying that questions should still be asked of the euro's suitability after the criteria have been met, the central bank governor - Ilmars Rimsevics - is widening the scope for the opinion that joining the euro might not be needed at all. His Lithuanian counterpart, Vitas Vasiliauskas, said in an interview that consumer prices and high energy costs would lead to above-target inflation, making joining in 2014 - Lithuania's current target - 'unlikely.' This was four days after PM Andrius Kubilius warned the government would not change course and that the target for joining the single currency in 2014 was still on track.

For the first time, doubts about whether they should join the euro at all are becoming mainstream in Baltic political discourse, and among the inhabitants of the Baltic states. But the disputes of their politicians and economists will matter little in the redefining of public opinion: all eyes are on the tiny state of Estonia.

Estonia joined the eurozone earlier this year, and provides a good test for the other Baltic states to see what would happen if they joined the euro. That's the role given to its economy by media and populace alike, and, so far, they are not impressed with what they see. Despite the initial optimism and the increase of foreign investment in the Baltic state, Estonia has been hampered by a series of economic problems. The Eurosceptics who warned that joining the euro would cause a rise in prices and inflation, dismissed at the time, have been proven correct.

It was never an unsubstantiated opinion: wherever the euro has been introduced, it has been followed by massive price rises. The cost of basic consumer goods in Greece almost doubled; in France, Italy, and Germany, too, there was a considerable impact on family budgets - increases of hundreds of pounds in their food expenses were average for southern Europe. Some people predicted the same thing happening in Estonia. They were dismissed as lunatics, of course, by one of the standard propaganda campaigns, but Estonia's inflation rate, which had hovered at around 3% for the whole of 2010, rose to 5.4% after joining the single currency. Consumer prices have risen dramatically.

And the price that the citizens had to pay wasn't only at the checkout. There were also massive cuts in public expenditure. The budget deficit was high above the European Commission's acceptable levels - and, as a former socialist republic used to decades of the welfare state and government dependency, there was a lot of effort put into bringing the country's budget deficit in line. There were reductions in salaries across the public sector, and public services were scaled back. All this contributed to the country's self-assured promotion of itself as the ideal euro candidate, but it came at a high cost to the average citizen. With higher prices in the shops their most obvious reward, the Lithuanians and Latvians may be less willing to pay.

Unlike the Estonians, they have not only seen the bailouts; they have seen the bailouts fail. When the Estonians went to the polls, Greece and Ireland had been bailed out once. Now Greece has been bailed out twice, and there is still talk of debt restructuring and selling off its assets. Portugal has been bailed out and Spain - with a bigger economy than Greece, Ireland, and Portugal combined - is still uncertain. Belgium and Italy are also under scrutiny by the markets. The Lithuanians and the Latvians have seen the austerity imposed on bailout recipients, and the costs to their creditors who will never see the money again. They've seen the idea of the eurozone as a 'mechanism for stability' and a means of 'resisting irrational shifts in the market,' and of a way of rescuing countries in need, exposed as utter folly, and they've started to wonder whether Estonia made the right decision.

The opinion that the euro may never be a wise option is becoming part of the mainstream - if not the majority.

1 comment:

  1. I share the same vision as you do, very nicely put, I couldn't put it more accurately.

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