By James Lewis
DC Foreign Policy Examiner (July 28. 2011)
In 2004, Latvia joined the European Union and plans to follow Estonia’s lead and join the Euro in 2014. However, the financial crisis was not kind to Latvia which prompted many in the business and academic community to question if Latvia’s full integration to “Europe” was the best option for all Parties.
According to Andrejs Pildegovics, Latvian Ambassador to the United States and Mexico, the “answer is more Europe….more solidarity.” Recently, Poland assumed the presidency of the EU. Latvia “fully supports” its regional neighbor and is looking forward to focusing on the EU and solving the last outstanding issues in the region, specifically energy security.
Ambassador Pildegovics categorized Latvian ambitions for the Polish presidency under three broad issues: Energy, Economics, and Financial.
Ambassador Pildegovics says that seven years ago Latvia was an “energy island”, but since, it has “improved interconnectivity” to the rest of the European energy market physically, with liberalization of the electricity market, and legal connectivity. Upon Redeclaration of Latvian Independence after the Soviet occupation, energy security was Latvia’s third priority after joining NATO, the EU, and joining the Euro.
Despite increased integration to the European energy grid, Latvia still faces many of the same challenges as many other countries including the US and Europe with energy: increase diversification and sustainability. Natural gas and oil are certainly important but hydrocarbons are not the exclusive answer. According to Ambassador Pildegovics, 35.6% of Latvia energy renewable, mostly hydrologic and Latvia is investing in new energy generation including wood and biomass.
Energy most certainly plays into the second goal of the Polish presidency, economics. Increased coordination of Europe’s energy markets and the creation of a common energy market will certainly benefit Latvia in the short and long term.
On a large scale, Ambassador Pildegovics again highlighted the need for “more Europe…more solidarity” calling the EU a “unique model of integration.” The Ambassador recalled that during the recession there was a lot of gloom and doom amongst economic pundits calling for the decoupling of the European economies and currency.
Ambassador Pildegovics says Latvia stayed the course and maintained the currency peg to the Euro via internal deflation and other domestic reforms addressed below. The Ambassador noted that the other Baltic States, Estonia and Lithuania, have also engaged in similar policies and that “major partners in the area have growing economies.”
The Euro has remained intact but there are still questions about Spain, Greece, Italy, Ireland, and Portugal. The Ambassador noted that Latvia does not face the same debt issues. The CIA estimates Latvia’s debt at 46.2% of GDP (2010) and increase of 9.6% of the 2009 estimate.
More certainly the largest issue is financial. Starting in the mid-1990s, Latvia was one of the fastest growing economies in Europe experiencing “China-like, double digit” growth rate. The financial crisis sacked Latvia; in just three years, Latvia lost 22% of its GDP. The Latvian government saved the State’s second-largest bank. Latvia instituted an austerity tax, structural reforms and cuts to salaries and pensions.
According to Ambassador Pildegovics, Latvia undertook a series of austerity measures and strict discipline and an aggressive fiscal policy to combat the crisis. The ambassador highlighted the success of his government quoting 4% economic gains in the last four quarters. He also cited that exports have surpassed pre-crisis levels and as of June 2011 and the rate of Latvian bonds was below the pre-crisis level.
Ambassador Pildegovics said that Latvia’s “strong industry put economy back on growth track.”
However, many in the business community are less inclined to agree with what they call “government spin.” Michael Johnson is an American businessman, who lives and operates a business in Latvia, agrees. “I fully agree on is that the economy has suffered greatly and small businesses in Latvia are struggling to survive and many are just not making it.”
However, Mr. Johnson disagrees with Ambassador Pildegovics’s assessment. Mr. Johnson equates the government’s policy to a “budget cutting frenzy” that was concerned with only a bottom line of cuts instead of program examination and spending cut finesse. According Mr. Johnson, “The government ‘hacks’ in their budget cutting have done nothing to make it easier for a new small business to be started and how VAT/PVN taxes are processed, reported and paid. …They have simply “hacked” away at the budget items using ratios and percentages without listening to the people, the customers and the businesses that have to live and work in the system that the government creates.”
Those living in the United State are familiar with the spending debt as it is currently the central theme across all major news networks. In Latvia’s case, there are several issues that outsider have critiqued and to an extent these issues still remain for the government to address including lags in communications, disorganized taxation and banking fraud.
Hopefully, European and trans-Atlantic cooperation can help put these issues to bed once and for all. When asked about his greatest achievement while in Washington, Ambassador Pildegovics said he was excited and proud to see the last artificial barriers to communications between the US and Latvia fall during his tenure.
The financial crisis and Latvia is a highly complex topic and Ambassador Pildegovics provided “How Latvia Came through the Financial Crisis”, published by the Peterson Institute for International Economics for this piece. The book is co-authored by former Swedish diplomat, Oxford PhD, and former economic advisor to the governments of Russia, Ukraine and the president of Kyrgyzstan: Anders Aslund and Latvian Prime Minister, Valdis Dombrovskis.
If Latvia’s pre-crisis growth is any indication of future growth potential, Latvia is well positioned to roar into the Euro if she continues energy security efforts, a governmental priority, and can answer the questions and concerns of the business community like Michael Johnson.