What to look out for in 2010 (22)
Autors: Mortens Hansens
Publicēts: 2010. gada 14. janvāris 17:50
Atslēgvārdi: , , , .
x

Nosūti raksta adresi draugam.

Even by the yardstick of recession-induced diminished expectations it may sound preposterous to suggest that 2009 was not such a bad year after all. It was horrible in terms of GDP decline, rising unemployment, foreclosures and what have you – but the stand-by arrangement with the IMF and EU is still intact, Latvia has not defaulted, there was no currency collapse and at the end of the year the country even went partly off the radar screen as trouble in e.g. Greece and Dubai made headlines.

What will 2010 bring? A good friend summed it up very well when he wished me a happy and interesting 2010, yet, preferably not as “interesting” as 2009…

Ten issues that will be on my mind are the following:

  1. Further stabilization. Will the government be able to make further fiscal amendments to ensure fulfillment of the budget targets set in discussions with the IMF and EU and, thus, will the IMF/EU package also survive 2010? It is no secret that I strongly hope so.
  2. Some of the banking system is still on clay feet and standing in quicksand – how many banks will we have on 31 December 2010?
  3. The D-word was used on innumerable occasions during 2009 and don’t expect it to be buried and gone. Discussions concerning the exchange rate will resurface (if they ever submerged) if…
  4. … internal devaluation does not work. To see if price and wage deflation really will work will be one of my major concerns for 2010.
  5. Will Estonia fulfill the Maastricht criteria and apply for membership of the eurozone? I am quite confident they will make it – but where will that leave Latvia? I am concerned of some sort of decoupling in the Baltics – Estonia in the eurozone, attracting more investment due to currency stability, while Latvia and Lithuania are left as the “sick men of the Baltics”. I hope to see a proactive stance to avoid such a scenario.
  6. If Estonia is accepted into the eurozone, at which conversion rate will it be? I cannot imagine that the Estonian authorities will accept anything but the current exchange rate but if not, then expect 4) to reappear.
  7. And while looking at Estonia and the euro I am still skeptical about the performance of the Lithuanian economy and will thus continue to watch out for it.
  8. But the eurozone itself is in for its most dramatic year since its inception in 1999. I do not expect any country to leave the zone but 2010 will display the euro as a major straitjacket for countries like Greece, Spain and possibly Ireland. The “one-size-does-NOT-fit-all” monetary policy of the eurozone is a good reminder of the demands that will one day be imposed on Latvia when it joins the single currency.
  9. And add to all this an upcoming general election in October and all what that might entail and 2010 is unlikely to be boring….
  10. This spot I leave for some, as of today, unexpected event. One of the charms of Latvia is that, in the words of that great (?) poet, former US Defense Secretary Donald Rumsfeld, there are not just “known knowns” and “known unknowns” but also “unknown unknowns”.
x

Nosūti raksta adresi draugam.

(15 balsotāji )
Komentāri

Too many questionmarks. What about answers? :)

Could Latvia try to balance its budget in 2010? I mean – the state and individuals have quite many loans already. We are therefore in a deep hole – and the only sensible advice in such situations is: Stop digging! Why do we need to run another year with a huge deficit, borrow more money, etc.? Does not make sense to me. I do not think that people here have very high expectations about the services that Latvian state can provide; so there is no sense to burn more money – nobody will appreciate this anyway.

On the other hand, no politicians in Latvia are suggesting that 2010 would be without a deficit. I think it would be a good thing to try: We could optimize our government, improve collection of existing taxes, raise the retirement age and take some other bold steps. It is not easy, but it is worth trying! It is election year after all. And people are going to support those parties, which can think long term.

I think we need some positive crazyness – like the slogan from the revolution of 1968: Be realistic, demand the impossible!
If we do not even try to demand the impossible, if we do not make a serious attempt to balance budget in 2010; if we feel safe because of the IMF and EU donations, this complacency is exactly the wrong attitude. In such a case we won’t have a balanced budget in 2011 either.

It might actually be the election that makes 2010 boring. Election years are far more about electioneering than about doing anything useful for the country, and the unpleasant characters that dragged Latvia into this mess (particularly Skele and Tautas Partija) are already positioning themselves up as the saviours of the country. People have short memories and will respond to perceived “strong leaders”, who will use inspiring words, but then drag the country further down into its spiral of corruption and ineptitude in the event that they get elected. These people & parties can throw any amount of money at their election campaigns and if they break the funding rules then they’ll manage to mostly dodge the legal consequences as they have done in the past. So just when Latvia needs action, there will probably be none.

I feel sorry for Dombrovskis. Despite being a technocrat rather than a politician, he knows the problems and the partial solutions. However, the insidious vested interests, and the nature of the coalition prevent him from doing what he wants to restructure the government. Dombrovskis will always be judged as a bad Prime Minister because of the nightmare circumstances he has to work with, rather than because of the decisions he takes. No wonder it’s impossible to balance the books when there are far too many ministries. Many of the workers in those ministries have been fired, but the protected bureaucrats who do almost nothing and have higher salaries, still have their jobs.

Despite there being many smart economists and political experts in Latvia, they are mostly too young, and (more importantly) not rich enough to be influential. Therefore, the electorate will have to pick the best of a bad bunch.

Economically, I predict that 2010 will be no better or worse than 2009. Realistically, the best Latvia can hope for is political reform, a balancing of the books, and in a few years time, very modest year on year growth.

I hate to admit this, but Latvia is weak in almost very economic respect (work ethic, skills, experience, qualifications, business standards, politicians, natural resources, infrastructure, international reputation, financial system). There have to be specific factors driving the economy at the moment and I don’t see what they are.

I ask many smart people in business where the improvements will come from and they can’t tell me. Perhaps someone else can? I hope so……..

@Aapsis

I like the ‘68 slogan but just meeting the budget deficit agreed upon for 2010 will be very difficult. Not least with the ruling from the Constitutional Court re pensions.

@Lauris

If Latvia does pull this one off and manages to get through the crisis as agreed PM Dombrovskis will be celebrated and get the credit for it – but not until some 20 years from now when a book on the economic history of Latvia is written. Cuts, even when so necessary, don’t win you friends (or votes) in the short run, I fully agree on that.

In my view, p.8 erases all the significance for points 5 and 6. There is too much risk in single currency now to make it not so attractive. Luckily, our “comrade” Hugo Chavez just accomplished D-thing, so taking out some real life enthusiasm for p.4. I seriously doubt Venezuela’s success – by the way it show that previous devaluations of 2004 and 2005 did not help much.

Yes, balance the books earlier mostly reducing the state impact and spending. We can not run social welfare state before we learn how to work- which requires at least 20 years of ULTRA conservative pro private business government.

Its time to leave the value degrading postsocialist system in the past and start to add value to Latvian total net assets instead of reducing it as has been done last 70(!!!) years.

For 50 years Soviets reduced every possible asset we had, and last 20 years even the Soviet assets were reduced and replaced by loans.

Time to start generating wealth again, and its not the state who will do it- it stands in the way.

Luckily, ultra conservatism is becoming more popular also in the West, USA, UK as liberal management of countries run into usual problems of big governments, so Latvia will not be alone. Estonia is setting a good example on a way towards fiscal conservatism and reduced state.

I would not count on Estonia introducing the Euro yet. We saw Lithuania miss the Mastricht Criteria by 0,001% and get rejected. We also see Greece as a thorn in the ECB’s side. Even if Estonia claims to have fulfilled the criteria per se, the ECB may still invoke a side note in the Mastricht Criteria written in small print: “sustainability has to be proven”. Taking in account the subjectivity of this variable, and the possible unrest in the region with just Estonia joining, it is more likely that ECB will reject Estonia’s application until the other Baltic States are able to join, i.e. 2014.

The same “all or none” concept was utilized with EU accession, so we do have a precedent for such policies.

`The same “all or none” concept was utilized with EU accession, so we do have a precedent for such policies.’

not much of a precedent if slovakia and slovenia already joined.

Now we have also ultraconservative prime minister candidate-Inguna Sudraba.

The key slogan for winning 2010. parlament election is :

“I have never been in ANY party”.

Mikelis,
I did not know that either Slovakia or Slovenia are part of the Baltic States?

‘The same “all or none” concept was utilized with EU accession, so we do have a precedent for such policies.’

all or none was when eight eastern european countries + Malta and Cypurs joined the EU at the same time in 2004. dont see how you can separate the baltic states from a process that brought all those countries into the EU at the same time.

@Janis:

I agree – if the ECB had it their way they would not let Estonia in and they would not have let in Slovakia either, citing, as you say, lack of sustainability (in Estonia’s case easy: negative inflation is not sustainable….) or lack of market integration. But it seems that the politicians of the EU – who make the ultimate decision – view a continuous eurozone expansion as positive and thus, somewhat, neglect the fine print.

And yet ultimately it is for the ECB to decide, not the EC or the ministers that make up the EU Council’s.

Especially with Greece still pending on what will happen more scrutiny is to be expected.

actually in this regard the EC has more of a say than the ECB. the ECB can block entrance into ERM-II but once in there its very hard if not impossible for them to stop euro acession if criteria are met and the EC has the political support.

Oficially:
“The EU’s executive Commission reviews efforts to meet euro zone entry criteria, and its invitation to join then has to be backed by EU finance ministers.

The European Central Bank, EU parliament and EU leaders are also consulted in a process that, usually takes about 6 months, leading to another 6 months of preperation by the candidate before the introduction of the Euro.”

Unoficially, matters with regards to finance both on the EC and ECB end are controlled by representatives of one state, which stands to loose the most if the Euro project fails. (Take an educated guess, which state that is). Decisions are taken in close cooperation with that countries national bank and politicians. And their stand is fairly clear – they will not risk economical, social and/or political unrest within the EU.

Estonia’s happiness is not worth it. Greece obliging to Stability and Growth pact is.

And as stated previously, the past three/four ECOFIN council meetings have been overshadowed by scolding Greece at those meetings. Hence also the touchiness of the subject.

“they will not risk economical, social and/or political unrest within the EU.”

dont see what estonia has to do with that. the ecb couldnt stop slovakia’s euro entry, and it may not be able to do it this time. almunia said its quite possible estonia may adopt in 2011, lets see how it plays out. seems to early to be calling it as you are doing.

What it has to do with Estonia see above – effects of possible Estonian adoption of the Euro before other Baltic States.

Slovakia’s entry did not need stopping. Other than Belgium and Greece they are not hiding deficits/public debt in peculiar approaches to statistical data.

But we shall see :)

P.S. for Estonia to adopt in 2011 proposal has to be made now and decision taken before june, 2010. I do not see that happening.

“P.S. for Estonia to adopt in 2011 proposal has to be made now and decision taken before june, 2010. I do not see that happening.”

an assesment has to take place and it hasnt yet. so you’re not seeing it because these things dont come out until April, May or June.

on slovakia it was clear that the ECB did not want to expand the eurozone. the author of this blog mentions it as well in a comment on this thread, but political considerations took over and they got it. I’ve never seen anyone make an argument from the ECB that the baltic states have to join the euro together, and i wonder if you have any real evidence or this is just some opinion.

For an EC assessment to be there first we have to have a commission in place. Currently Barosso’s first attempt seems rather bleak as some candidates might have to be changed. Then the new Commissioners have to take office and try to get to know the status quo. All of this delays any decisions.
Aside from that, an EC assessment to come out by April/May/June is rather late for a 2011 introduction of the Euro. The assessment first will have to be deliberated on all Brussels working formats (expert work groups, permanent reps, ecofin).
Mind you Ecofin meets only once per month. July/August are empty months in terms of decisions. Aside from the Brussels process, they also have to consult the Parliament and the ECB.

I do not see responsible policy (Baltic state politicians aside) being combined with rushed decisions.

P.S. and there is nobody stopping Lithuanian/Latvian officials to argue behind the curtains for a delayed Euro introduction in order to maintain the little economic stability we have left.

P.S.S. An argument from the ECB will not be heard publicly. They are too influential on finance markets. So you can call it an opinion, but I do have my sources.

“P.S.S. An argument from the ECB will not be heard publicly. They are too influential on finance markets. So you can call it an opinion, but I do have my sources.”

ok, so readers of this thread should believe your unnamed sources? sorry but i dont find that convincing. if thats the only argument you have, then i dont believe it. The ECB signaled its displeasure with slovakia publicly, then slovakia increased the value of its exchange rate to comply. that was the pound of flesh, they couldnt block it, and they wont be able to block estonia this time if all the criteria are met.

Well. In Estonia we anticipate the acceptance to the EURO-zone to take place. We are well aware of the fine print and the amount of subjectivity related to this decision.

Regarding the failure of Maasticht criteria of Lithuania of 0.001%, this will most likely not be the case of Estonia. The national statistics bureau estimate is that goverment deficit was only 1,7% instead of 3,0% allowed by the criterion.

The overall area of interest is that if Estonia for some subjective reason is left out of the E-zone ECB will send a message to other potential joiners (Poland, Chech Republic) that, no matter how hard they try, joining the area might not be granted. This will allow these countries to set their fiscal policies in a way that might not be appreciated by ECB and also delay them joining the E-area.

Vēl šajā sadaļā
Viesi raksta » Mortens Hansens
Meanwhile, 26,1% later… (40)
Mortens Hansens

Since GDP reached its zenith here, in Q4 2007, the cumulative decline has been 26.1%. It is a huge decline by any standards. GDP is back [..]

Lasi visu »»
Viesi raksta » Mortens Hansens
The eurozone is too big… (24)
Mortens Hansens

I have used the graph below in another context but I thought some might find it interesting and at least it made me think. A [..]

Lasi visu »»
Viesi raksta » Mortens Hansens
Can’t pay? Can pay! (97)
Mortens Hansens

That is the beauty of Latvia. You think you’ve seen it all and, nevertheless, something crops up and surprises you. Thus Inguna Sudraba, Head of the [..]

Lasi visu »»
Viesi raksta » Mortens Hansens
Spending like the Nordics, taxing like Americans (68)
Mortens Hansens

I know I have used this sentence before but it is a good one. It was used in despair about the Latvian economy by a [..]

Lasi visu »»
Viesi raksta » Mortens Hansens
What type of economic recovery? (21)
Mortens Hansens

For there will be a recovery; there always is but that may be the last positive item of this entry. The graph below tries to show [..]

Lasi visu »»
Viesi raksta » Mortens Hansens
Irish vs Latvian lessons (52)
Mortens Hansens

A small, relatively poor country on the periphery of the European Union. Unemployment close to 20%, soaring public deficits and debt. Main export article: People. Yep, [..]

Lasi visu »»
Viesi raksta » Mortens Hansens
Convergence ® divergence (40)
Mortens Hansens

Prior to 2007 Latvia’s economy enjoyed several years of convergence i.e. catching up with the average income level per person of the European Union.  These [..]

Lasi visu »»
Viesi raksta » Mortens Hansens
The price of uncertainty (63)
Mortens Hansens

One of the main questions in the economic-political debate right now is how to jump start the economy. Unfortunately, it is a question with preciously [..]

Lasi visu »»

Mūsu draugi:

BNS LETA Lielie.lv Lursoft Robert's Books