A decisive week for Latvia

 

`Let´s hope for the miracle save´

That was the response from a high-level official at the Swedish Central Bank in December 2008 when former IMF senior economist Torbjörn Becker questioned the policy towards Latvia. The comment was made public last week, when the Supreme Administrative Court gave me access to some of the official Swedish documents regarding Latvia´s economy.

Not as friendly as it seems. Swedish Prime Minister Fredrik Reinfeldt and Latvian Prime Minister Valdis Dombrovkis. Photo: Gunnar Seijbold/Swedish Government Offices

Torbjörn Becker, Director of the Stockholm Institute of Transition Economics, had sent an e-mail first to Christoph Rosenberg at the IMF, then to the Swedish Central Bank (Riksbanken). In his e-mail, Becker criticized the painful defense of Latvia´s fixed exchange rate with argument he and others have later used in the public debate (although with somewhat more diplomatic language):

`It seems that (the IMF statement on Latvia) mostly is a way of defending the honour of their politicians and central bank, as well as protecting the Swedish banks, when nothing is done about the currency in a situation when every normal person understands that an overvalued currency does not help the necessary adjustment of the current account balance. Now they will instead get a meltdown of the real economy, if there is not a miracle save of the world economy´ (my translation).

No one seems to have listened. The laconical response was: `Let´s hope for the miracle save´.

Swedish Finance Minister Anders Borg had already decided to support the Latvian government´s efforts to preserve the exchange rate of the currency, lats. According to several sources, one reason was the heavy losses Swedish banks would suffer if there was a devaluation in Latvia (although Anders Borg denies this).

The rescue package put together almost a year ago is now close to failure. Developments next week will be crucial.

Tomorrow, the Latvian government is supposed to agree further reinforcements of the budget with 175 million lats. At the latest ECOFIN meeting, Anders Borg threatened Latvia with serious consequences unless the budget target was achieved. After some friction between the Latvian and Swedish government, the aim is now to have a budget decision ready when EU Commissioner Joaquín Almunia visits Riga on Tuesday.

Whether all parties in government can agree to further budget cuts and a property tax remains to be seen. Drastic reductions of social welfare and public salaries are already taking a heavy toll. Latvian Prime Minister Valdis Dombrovskis is right in saying that further budget cuts would hurt the economic recovery and increase social unrest.

Still, Latvia will be forced to close even more schools and hospitals, because of the rigid policy of the EU and the IMF.

I have written extensively earlier about Sweden and the crisis in Latvia, and many others (including the Financial Times) have criticized the approach by international lenders.

The question now is whether the Swedish EU Presidency will continue along a path that could led to economic collapse in Latvia and dangerous political instability in a strategic part of the European Union.

Do all EU governments believe in miracles or is there still some strategic thinking left?

Sarkozy should read Reinfeldt´s election programme

 

The financial crisis is high on the agenda when Nicolas Sarkozy today visits Stockholm for talks with Prime Minister Fredrik Reinfeldt.

Yesterday, Mats Odell, the Swedish minister responsible for the financial sector, told the Financial Times that Sweden would be careful with new regulations on private equity. There is heavy lobbying against the Commission proposal on “alternative investment funds”, such as hegde funds.

After meeting Gordon Brown last Monday, Fredrik Reinfeldt sent similar signals about the percieved risk to overregulate the financial sector.

However, Nicolas Sarkozy could find some comfort in a report on the financial sector adopted by Reinfeldt´s Moderate Party before the European elections.

The report, written to a large extent by Finance Minister Anders Borg, contains harsh criticism of the financial sector and proposes tougher regulation, also on hegde-funds and similar instruments. It is much closer to the Sarkozy-Merkel position than to Mats Odell´s statements in the Financial Times.

Now, it seems that Reinfeldt has forgotten what his party has promised voters. My editorial in Aftonbladet  today describes the situation in more detail, for those of you reading Swedish.

More on Latvia

OpenDemocracy has published a longer article by me on the Latvian crisis and the role of Sweden.

Boriss Cilevics: Harmony Centre is prepared to govern

During my visit to Riga last week, I met prominent Harmony Centre politician Boriss Cilevics. He said, inter alia, that his party is prepared to take responsibility for implementing economic reforms after the municipal elections.

If this would happen, and a party with mainly Russian-speaking voters would govern for example Riga City Council together with one or more parties with mainly ethnic Latvian voters, it would bring both opportunities and new dangers to Latvian politics in the economic down-turn.

Read the interview here: Interview med Boriss Cilevics

Today, the debate about Latvia continues in Swedish media. My recent texts in Aftonbladet are available here, here, here and here.

Is Latvia on the brink of devaluation?

“Devaluation would be the best way for the moment”, says Egils Baldzens, vice chairman of the Latvian trade union federation LBAS. This is a controversial statement in Latvia, but according to reports in Swedish business daily Dagens Industri today, it might be coming true.  

The central bank in Latvia is running out of resources to defend the currency and might have started to discuss a devaluation, contrary to all official statements so far.

I met Egils Baldzens last week in Riga. He made many interesting remarks, on the factors behind the crisis, on the inequal Latvian society, on the joint proposals from trade unions, employers federation and municipalities for a way out of the crisis.

If the IMF and Swedish government had listen to him and other trade unionists earlier, the economic situation could have been managed better.  Instead, drastic wage cuts and a contraproductive increase of VAT and accise taxes have worsened the situation.

The EU, including the Swedish government, bears a great responsibility for finding ways out of the dramatic crisis in the Baltic countries, as I have argued in Aftonbladet. This will be a main issue for the forthcoming Swedish Presidency of the EU, whether Finance Minister Anders Borg likes it or not.

Quotes from my talk with Egils Baldzens are available here: Interview with Egils Baldzens