Baltic Monetary Regimes in the Xxist Century

A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Viksnins, George J. Article — Digitized Version Baltic monetary regimes in the XXIst century Intereconomics Suggested Citation: Viksnins, George J. (2000) : Baltic monetary regimes in the XXIst century, Intereconomics, ISSN 0020-5346, Springer, Heidelberg, Vol. 35, Iss. 5, pp. 213-218 This Version is available at: http://hdl.handle.net/10419/40777 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. 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Ironically, the success of the IGC that is completely eliminated before accession does not supposed to pave the way for enlargement may make mean that there is nothing for the EU or candidate it even more tempting for member states to use their countries to do at the present time. The candidates vetoes. The reason is that the IGC aims to make it should decide what they want fixed above all: the date more difficult for individual member states to obstruct of entry, the derogations they wish to have at the collective decisions. Hence, as happened on several negotiations or the entry criteria? They need to occasions in the past, they would naturally tend to rely prioritise the issues to be tackled by both the EU and on the few instances that they can wield a veto in themselves. order to apply pressure on their partners to make D Third, the analysis above suggests that they should concessions on other, perhaps completely unrelated, aim for the entry criteria because vague criteria have issues of vital interest to them. a much greater potential to stall the enlargement process on both sides. No one can predict with any high degree of accuracy how enlargement will progress in the next • Fourth, the EU should begin identifying the pre- couple of years. It is nonetheless possible to surmise commitments that can be made by its members now that there are circumstances that will make that in order to facilitate their bargaining later on. progress easier and circumstances that will slow it • Fifth, although the identification of viable pre- down. This article has identified conditions that can commitments is not an easy or riskless process, the do either. George J. Viksnins* Baltic Monetary Regimes in the XXIst Century The accession of Estonia, Latvia and Lithuania to the European Union would mean that they would join the Economic and Monetary Union in the status of "countries with a derogation". They would remain committed to adopting the euro eventually and to this end to joining ERMII. The following article examines the present monetary regimes of the three countries and the progress made so far in their preparation for EMU. n looking at the decade of transition in East and North America and Western Europe. While real output ICentral Europe, even economists seldom focus in the USA fell by about one quarter in the 1929-1933 sufficiently on the enormous extent of the decline in contraction, real GDP in most of the former Soviet exports, output and income which has taken place in Union has declined a lot more. For example, output in the countries of the old Comecon (or CMEA, as it was Russia itself fell by one half in the 1989-1996 period also known in Europe). This collapse has been much and has not recovered very much since then. In sharper than the Great Depression of the 1930s in Georgia, beset by civil war and hyperinflation, 1996 output was only 25% of the 1989 level, and statistics for Turkmenistan are not yet available.1 To be sure, * Georgetown University, Washington D.C., USA, and Bank of Latvia, Riga, Latvia. some of the decline in output was both to be INTERECONOMICS, September/October 2000 213 EU ENLARGEMENT expected and beneficial. The classical socialist supply-side and demand-side responses to the policy system was based upon "physical success changes as well as bad initial conditions contributed indicators" - on exceeding, but only slightly, the to the dramatic output losses during the early years of annual target quota. Now things have changed - tons reform. Countries that initiated comprehensive of potatoes produced no longer include rocks, a reforms were able to return to positive growth rates. splash of water and all of the rotten ones in order to Delays in policy changes and the failure to continue maximize the weight indicator and make the kolkhoz with reforms after some minor initial steps appear chairman look like a good manager. Cows no longer to be the central causes for the ongoing bad giving milk can nowadays be culled from the herd. performance in a number of transition economies".2 Also, petty cheating in the reporting of output statistics has probably declined - if anything, sales It is true, of course, that in much of eastern Europe and production are likely to be understated for tax there exists a substantial amount of what is called reasons. "shadow economy" activity, often estimated at 20- 25% of GDP, which is not included in the official The three Baltic countries of Estonia, Latvia and statistics. This includes illegal activities (smuggling Lithuania were especially exposed to disaster in the and prostitution), but also barter and the exchange of early part of the transition decade. All of them services. Moreover, some economic activities exported about two thirds of the "Gross Republic favoured by people in the Baltic area - recreational Product", according to Soviet statistics, and 95% of fishing and hunting, gathering mushrooms and these exports went to the rest of the USSR or the berries, and the growing of vegetables and flowers on "brotherly socialist republics". This trade was based private plots - are completely outside the standard upon the poorer areas of the USSR providing UN system of national income accounts, which makes subsidized or nearly free raw materials for Baltic these three countries appear to be much poorer than industries, especially in Estonia and Latvia, and they are. In much of Western Europe, on the other receiving finished products in return. The collapse of hand, most food is bought in stores or markets - and the Comecon trading system led to a fall in real output mushrooms and berries cannot be collected from of about 50%. Today, ten years later, Baltic export nature to any great extent due to pollution and forest destinations have been switched toward the west, death. Few people would go mushroom-hunting in the mainly the EU and the Scandinavian countries. woods surrounding the Frankfurt airport, for example. Although exports to Russia today constitute less than 20% of the total, all three countries continue to be The European Union's decision to open nego- vulnerable to potential economic sanctions applied to tiations with Latvia and Lithuania was announced raw materials, especially energy. The ports of the shortly after the Helsinki Summit in mid-December region have all experienced some recovery in income 1999. The EU macroeconomic indicators, often called levels in recent years, but Russia's planned efforts to the "Maastricht criteria", do not appear to present a bypass the Baltics states as far as possible in foreign serious problem to the three Baltic countries. Most of trade and to build a pipeline and port facilities near St. them have already been reached. The central Petersburg are a matter of concern, particularly to government budget deficit came in at about 3% of Ventspils. GDP in all of them in 1999 (actually, 3.8% in Latvia, but there had been a rough balance in the budget in Among the countries of East and Central Europe, 1998). Foreign debt is well under 60% of GDP (only ten are currently considered candidates for formal slightly more than 10% for Latvia) and inflation targets accession negotiations by the European Commission. are being approached quite successfully. The dollar In only three of these ten - Poland, Slovenia and exchange rate for the Latvian lats was certainly Slovakia - does real GDP currently exceed the 1989 a good deal stronger than the euro in 1999, and level. As Hans Pitlik concludes, "..It seems that both the other two countries operate currency board arrangements. 1 See Martha de Melo, Cevdet Denizer, and Alan Gelb: Patterns of Transition from Plan to Market, in: World Bank Economic Review, September 1996; Holger C. Wolf: Transition Strategies: Choices and Outcomes, Princeton Studies in International Finance No. 85, June 1999; and Hans Pitlik: Explaining Economic Per- 2 Hans Pitlik, op. cit., p. 45. See also A. Berg et al.: The formance During Transition: What Do We Know?, in: INTER- Evolution of Output in Transition Economies: Explaining the ECONOMICS, January/February 2000, pp.

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