Olenchenko Vladimir Anatolievich, PhD in law, senior researcher, the Center for European Research of the Institute of World Economy and International Relations, of the Russian Academy of Science.
Currently the topic of euro is unquestionably among the most relevant in Europe and all over the world. It is of interest to politicians and businessmen, economists and citizens. The article is aimed at the analysis of the causes and motives of the desire of the Baltic republics to substitute national currencies with euro. This study may help understanding, why small European countries tend more than others to the introduction of the euro. The research was based on the method of comparing various factors, affecting the state of the Baltic economies, with the expectation to identify those, that are of key importance. The research investigated the circumstances and the mechanism of the Baltic republics joining the euro zone. The study showed, that the desire of the Baltic States to join the euro zone is caused by domestic and foreign economic circumstances. The Baltic leaders wanted to strengthen their authority among the local population and at the same time to promote maximum integration of the Baltics. Simultaneously foreign capital operating in the Baltics and pursuing its goals, dictates when and in what sequence to adopt the euro in the Baltics. In general, it is obvious that the North European capital is the main lever of the Baltic economies and its interests, in particular, introduction of the euro in the Baltic States.
Introduction
2014 was the 10th anniversary of the membership of the Baltic countries in the European Union. The date was not widely celebrated neither in the EU, nor at the national level, as the results of the Baltic decades could not be called successful. De-industrialization, mass labour emigration, high unemployment, weak investment appeal, unclear economic outlook – here are the Baltic economies today, compared with initial conditions for EU accession. Nevertheless, the Baltic leaders continue the integration process. In particular, according to the adopted decision of the European Union dd. 01.01.2015, the euro is introduced in Lithuania and thus all three Baltic republics receive the status of the members of the euro zone (Estonia – from 01.01.2011, Latvia – from 01.01.2014).
Historical background
In the 90s of the twentieth century the states, that formed the Soviet Union or that were a part of the socialist community, faced the choice of a new path of its development due to fundamental changes in the world order.
Curious phenomenon in this regard happened in the Baltics – Latvia, Lithuania, Estonia. Traditionally, they were positioned by American and European politicians and experts as an alien part of the Soviet system, in particular, their organic ties with Western Europe and the whole Western world was emphasised various times. So their singling out of the Soviet system was assumed to be comparable with the effect of overriping a fruit on the tree – you just touch it, and it will fall from its branches.
However, despite the fact that in the early 90s of the twentieth century, a number of key positions in the new political leadership of the Baltic republics was taken by candid russophobes, the general mood of the population was very far from being able to consider it anti-Russian. Moreover, ‘revolutionary’ euphoria of the 90s was melting, Latvia, Lithuania, Estonia drew more attention to the fore questions of supplying population with work essentials, the maintenance of normal functioning of the state.
In this sense, Latvia, Lithuania and Estonia economically remained deeply integrated into the national economic relations of former Soviet republics, who had respectively serious influence on the political life of the Baltic republics. In general, on the eve of the 2000s the Baltics reflected a drift toward the observed prevalence of sentiment in favour of a preferred development of the Baltic republics within the existing historical and geographical ties, especially with Russia and Belarus.
It was clearly shown by foreign capital, primarily North European, that although had rushed to the Baltics, but for about 10 years had stayed in waiting position, not excluding the reversible movement of the Baltics to Russia. For example, the North European banks, which although had resources and expertise, avoided to open business on their own, preferring to acquire small share of the local capital, entering into its structure, retaining its name and acting on its behalf.
In this context the strategy of strengthening the retention of Latvia, Lithuania and Estonia in the area of attraction to the West, which was embodied in the fact, that the presidents of the Baltic countries were invited from the USA (Latvia – Vic Freiberg, Lithuania – Valdas Adamkus, Estonia – Henrik Ilves). During their presidential term these countries submitted applications to join the European Union. Those applications have become an indirect recognition of the fact, that the Baltic economies do not have the capacity of unsubsidized, independent and autonomous development. North European financial capital was selected as the source of borrowed funds.
Applications for membership in the European Union
Application of the Baltics for EU membership was submitted in the mid 90s, but they were satisfied only in the mid-2000s. It is reasonable to analyze, why it took more than 10 years. The main obstacle was that the concept of activities of the European Union did not provide its development to the east. Only in 2000, during the summit in Nice, the EU took the decision of principle possibility of its expansion to Eastern Europe and the Baltics. Another limiting circumstance was doubts of the European Commission on when and in what form (adoption in groups or individually) the EU could meet the demands, so that new members do not become a serious encumbrance to EU economy. As a result, the question of joining of the Baltics to the European Union was moved only with Jose Manuel Barroso team, who became the new leader of the European Commission. As it is known, his work as a chairman of the European Commission represented the consistent and persistent activities in the Euro-Atlantic direction of the European Union.
It is seen, that the entry of the Baltics to the European Union was not a decision of indigenous Baltic elite, but was introduced from outside. It is also clear, that this idea did not come from the European Union, which is conceptually and organizationally did not plan any activity in the eastern direction. In practice, the idea was implemented only by Barroso team. In other words, the above circumstances are likely to confirm, that the idea of joining the Baltics to the European Union and its practical implementation both have transatlantic origin. Officially, Latvia, Lithuania, Estonia joined the European Union on 01.05.2004.
The role of the North European financial capital
The first few years of membership of the Baltics in the European Union were characterized by an unprecedented surge in the growth of the national GDP, which reached 10% [1(1)]. Outside observers were inclined to treat it due to the capacity of the EU and strongly exaggerated the idea, that the development of the Baltic countries was artificially constrained by the Soviet Union and therefore the other former Soviet republics should be guided not by the Commonwealth of Independent States (CIS), but by the European Union.
However, analysis of the structure of GDP formation in the Baltic countries during this period showed, that its major part consisted of financial transactions of North European banks, mainly Swedish (SEB, Swedbank). Northern Europeans aggressively lent funds to people and local businesses. The primary tool was lending at small percentage (sometimes less than 2%), but for a long term (40 years). Northern European banks thus implemented created by them in the 90es of the twentieth century competitive advantages of equal participation in local credit institutions and ensuring themselves some legal benefits.
As noted above, the North European capital by its nature is very cautious and before joining of the Baltic countries to the European Union it did not believe in many business activities. The new status of the Baltic countries was perceived by the North European capital as political and economical guarantee of further investments to the Baltics.
At the same time, high rates of GDP growth were perceived by Baltic population and leadership as real national economic recovery. The Baltics took initiatives for the entire European Union and almost considered themselves as equal to the founders of the organization.
Reference points for the accelerated introduction of the euro
It is significant, that almost immediately after joining the EU Latvia (national currency LVL) and Lithuania (LTL) appealed to the exchange rate mechanism -2 (MOK -2, Exchange rate mechanism (EKR) – 2), which is an integral part of the Economic and Monetary Union (EMU), known colloquially as the euro zone. The mechanism provides the establishment of a fixed exchange rate of the national currency to the euro, on the understanding that its market rate can fluctuate only within ± 15%. Joining the mechanism is made on the basis of an agreement between the National Bank and the ECB. The two-year participation in the mechanism of the exchange rate without revision ratio (that is, without devaluations and revaluations) serves as the basis for the application to join the euro zone [4(1)]. As for Estonia, its currency (CZK) was initially pegged to the German mark and after the introduction of the euro in the EU the fixed exchange rate of the crown was transformed into a suitable fixed exchange rate of the euro.
Certainly the euro, which has become a reality in the European Union since 01.01.2002, provides a number of advantages to the countries within the euro zone. First and foremost is that the use of the euro in the netting minimizes the risk of loss, usually expected when changing money from one currency to another. Given that most of the commercial and financial transactions in the European Union are accounted for the domestic market, a Member State receives a certain guarantee against such risks. That leads to a relative alignment of prices, which reduces the possibility of speculative transactions related to exchange rate differences – an activity called as arbitration of exchange. The possibility of refinancing on a national scale and at the corporate level appears due to the issuance of bonds, denominated in euros [5(1)].
At the same time it should be emphasized, that the outlined advantages appear under certain conditions. The starting point is that these benefits work, when countries are the members of the euro zone. Currently, there are 18 members. As of 01.01.2015 Lithuania is to join them and then their number will reach 19. For comparison, it should be noted that the total number of countries – EU members is 28. It should be taken into account, that a number of countries has introduced the use of the euro as the national currency apart from the membership the euro zone. These countries fall into several groups. So one of the countries that consider the euro as the national currency only for their own in particular, Montenegro and Kosovo. Other countries are not members of the EU, but as per the agreement with the European Central Bank, they have received the right to use the euro, such as the Vatican. Neither one, nor the other group of countries belong to the euro zone and therefore cannot enjoy the full benefits of it.
It implies, that the Baltic countries theoretically faced several variants of behaviour in relation to the euro. Two were described above. One more variant was the biggest integration into the European Union and then raising the question of joining the euro zone. All three countries opted for rapid joining the euro zone.
Fiasco of Lithuanian application for the euro
In the early 90es taking into account prevailing anti-Soviet mood Lithuania assumed the role of the leader among the Baltic republics. It put forward the ideas, that required in its view, joint implementation, and often spoke on behalf of the Baltic republics. It was partly motivated by the fact, that Lithuania was the largest in terms of population and territory in the region, and its leaders seemed to be more active and so to say perter, than their Baltic neighbours. In particular, the initiative of Lithuania to cooperate within the Baltic countries was institutionalized by establishing inter-parliamentary body, which was named the Baltic Assembly.
It was very difficult to make this intention economically profitable. Generally Baltic economies are of the same type, based on the provision of services in the field of transit and production of agricultural and fishing products. By virtue of this fact, they are more prone to competition than cooperation. For example, during Soviet times their mutual trade accounted for only 5% of the national trade with other Soviet republics [6(1)]. In fact, the Soviet Union leveled the competition between them and provided the Baltic republics such a division of labour among the Soviet republics, which allowed them to prosper economically, without hindering each other.
However, Lithuania continued to proactively take on mission of unifying the Baltic republics and tried to push Latvia and Estonia for cooperation in the economic field. Basically, it relied on the fact, that Lithuania had a nuclear power plant (NPP Ignalina), which was built by the Soviet Union as a regional plant, in good faith to fulfill its role, and the Baltic economies were in a certain extent dependent on it. Lithuania also initiated various kinds of joint activities for the preparation of the Baltic republics to join the EU.
After the entry of the Baltics into the European Union Lithuania continued for a while to position itself as the leader of the Baltic republics and, in particular, persistently declared joint accession to the euro zone. At the same time, as if to confirm its leadership ambitions, Lithuania separately was preparing for applying to the introduction of the euro.
The procedure for submission and consideration of the application usually covers a two-year period, which is as follows. The application is filed at the beginning of the calendar year – around February and it is based on economic statistics of the previous year. Five indicators are considered as key factors, which are called the Maastricht keys and which reflect the rate of inflation, state debt, comparing with the average for the euro zone. In March, the application is reviewed at the meeting of EU finance ministers. If they support it, it will be sent for approval to the European Commission and then approved by the European Union summit in summer, meaning that the country’s accession to the euro zone will occur the following January. To support the application are important indicators of the economy on the eve of the application. These indicators are formed as a result of the comparison with the previous year.
Therefore, a country, that intends to apply for joining the euro zone, should think about prosperous economic performance and take measures to ensure the two years prior to the planned introduction of the euro. In addition, a two-year regime of the host country of the applicant in the exchange mechanism 2 must be also observed (described above).
Latvia and Lithuania which joined the European Union as of 01.05.2004, joined the mechanism of the exchange rate – 2 (IOC) in summer of the same year. Estonia, known to “fix” itself even earlier to the German mark, took the obligations under which it adopted the euro. Thus, in summer 2006, the Baltic countries could have considered themselves to fulfill obligations under the exchange mechanism-2 and qualify for joining the euro zone. However, there were no other necessary grounds, since the Baltics joined the European Union in the middle of the year and that year could not have been considered as a full-fledged economic year in the European Union. This year could have been the year of comparison. In other words, the only economic performance in 2005 was the basis for comparing the performance in 2006, i.e. the earliest period of application was only 2007.
Lithuania took the opportunity and at the beginning of 2007 applied to join the euro zone, while other Baltic republics abstained. The Lithuanian application did not find proper understanding of the European Union, who doubted, that all economic indicators of Lithuania quite reconciled and fully complied with the Maastricht requirements. Already at the first stage of consideration – at the meeting of finance ministers – the application was rejected in a gentle manner with a proposal to revise the issue later. However, the Lithuanian leadership insisted on the consideration of the application at the European Commission and obtaining an official response. It was negative on formal grounds: indicators of Lithuania at the average rate of inflation exceeded the established figures for a few tenths.
It was dramatic for Lithuania. Lithuanian experts at the time conceded that in case of refusal Lithuania would be able to re-apply in 8-10 years. Its economic potential, created during Soviet times, was subject to large-scale changes as per the structure of the division of labour in the EU, where there was no need, as it turned out, in Lithuanian industrial assets. In addition, the process of de-industrialization of Lithuania took place against the growing crisis that led to the global financial and economic crisis of 2007-2009.
The real reason for reticence of the European Commission in granting Lithuania’s membership in the euro zone was that North European capital, personified in the EU by North European countries, which opposed the idea. Lithuania’s transition to the euro would have slowed down the lending process and narrowed the credit lending to Baltic population and business. Loans were provided in the national currency – Lithuanian LTL. Its replacing with the euro would lead to a jump in prices – usually the euro is accompanied by a rise in prices by 20-25%, which would weaken the solvency of the population and its interest in lending. In a broader sense – it would serve as a “bad” example for Latvia and Estonia, which also were developing lending mechanism.
The global crisis of 2007-2009
Current international assessments and studies have the practice to determine the timing of the global crisis precisely by these years and to call it financial, economic, because it has happened during this period in the United States. So it was classified by US Fed officials. Apparently it served as an indirect admission that hotbed of crisis was USA, on the other hand it stated that it is still the largest economy in the world in terms of the impact on economic processes in the world and individual countries.
In the current period, many experts, resorting to a retrospective analysis of the events, that preceded the global financial and economic crisis, advised the conditions of the growing crisis. At the same time, if we look at studies of the period, especially Baltic ones, the beginning of the crisis was in doubt. Doubts were set out in such a way, that households and business retain a sense of expediency not to weaken the expansion of production, but to continue to resort to borrowing and investment plans unabated. This pertains not only to the Baltics, but since the focus of this article is there, it is reasonable to ask, what guided the researchers of that time.
Analysis of their status showed that they somehow were associated with northern European capital, whose influence they could not deny. The most authoritative Baltic experts are both full-time or engaged analysts of Swedish banks. They are supported by economic and financial Baltic media, which in turn are controlled by North European media groups. It is necessary to take into account the fact, that with all due respect to the Baltic experts, their names and their views are not considered as global and even regional, i.e. they cannot be counted among the original and most of them base their arguments, relying on the opinion of American and Swedish experts, besides they quote them often as a basis for their findings, i.e. findings for the Baltic economies.
It should be taken into account, that the economic processes of the Baltic countries are traditionally characterized by a certain inertia, meaning that they occur with some delay. In particular, under the influence of incentive estimates generated by north European capital, local businesses and households continued to be filled with borrowed funds and accordingly the operations increased the GDP. From this we can firmly state, that the Baltic processes are not in the center of the world, but on the outskirts or close to the edge, if you measure the effect of concentric circles. Secondly, they copy the “world standards” and they need time for the development and implementation.
As a result, the crisis in the Baltics if we analyse GDP, came in 2008 – 2010 [1(2)]. It is a kind of indicator of how much and to what extent the Baltic economy delays or you can say to what extent it is influenced by North European Capital.
Introduction of euro in Estonia
The outbreak of the global financial and economic crisis of 2007-2009 led to several findings. The first – that the EU, that seemed unshakable to its members and outside observers, turned to be easily vulnerable to the crisis. Second – the fact that the EU as the union of the most European countries, was not ready for a crisis. There were no anti-crisis strategy, no established coordination mechanisms of member countries during the crisis. The third – that the Member States and national levels did not take proactive measures to mitigate the crisis and did not propose ways out of the crisis. In both cases the reaction took place in the spontaneous mode, which is called ad hoc.
However, a number of countries, particularly the North European countries, led the line for regional isolation in the European Union as a means of fencing from the crisis. In addition, the North European business took a number of preventive measures in case of deterioration of the situation in the country of investment. I mean the Baltic. In particular, the status of the North European banks changed, which converted into branches. Subtlety is that the branches were not necessarily to provide mortgage capital in contrast to full-fledged banks. New private companies were established, which bought the buildings of banks and the branches, and then branches of the banks rent it. This measure was effective for social-economic exacerbation in the country, as local authorities had nothing to nationalize the bank property, which looked only stationery. It was emphasized, that all North European banks were close to their parent banks or their parent banks were situated in Tallinn (Estonia).
These measures have shown, that northern european business seriously assessed the situation in the Baltic countries, allowing for the possibility of social and political actions of the process, caused by the crisis.
Apparently such a move prompted thoughts of persistent proposals from Baltic businessmen and a number of politicians, who called for the devaluation of national currencies. The materialization of appeals to the devaluation would mean a depreciation of the debt, obtained by local businesses and the community. While the figures appeared 20-30% devaluation, which was the same percentage fell to debt and creditors (North Europeans) and borrowers (Baltic business and households). Given the small scale of the Baltic, North European experts expected the activation of the principle of dominoes. An effective resistance could be the introduction of the euro, which the national authorities were not entitled to devalue, in addition euro would raise the amount of the debt (the debt was formed in the conversion of dollars into the local currency). Although the crisis in the euro zone experienced the incubation period (trudged public form in spring 2010), but for certain adept individuals in financial circles it had already been obvious.
Estonia was selected as key, that on one hand was determined by the North European capital as a springboard to the Baltics – head offices of represented companies were usually based in Tallinn (Estonia). Secondly, being the smallest and most absorbed by North European capital, economy in the Baltics, it could be easier made to meet the Maastricht parameters, comparing other Baltic economies.
In respect to established procedure in early 2010, Estonia applied and in the midst of the crisis in the euro zone received all necessary approvals, becoming as of 01.01.2011 a full member of the euro zone.
Formation of conditions of joining of Latvia to the Eurozone
The next candidate among the Baltic countries to join the euro area was Latvia. Her preference to Lithuania was due to a number of circumstances.
Thus, Latvian political leadership with its inherent hardness, typical for Latvians, strictly adhered to the principle of laying problems out of the crisis on the local population, which was achieved at the expense of the hard social sequestration of the budget and consistent wage cuts, reduction of which reached 40-50% of the pre-crisis level. At the same time the state firmly suppressed any attempts of national business to raise the question about the devaluation of the Latvian lat. Policy of containment and antisocial Latvian policy was full supported by international financial institutions such as the IMF and the World Bank. Their leaders believed possible to periodically visit Riga (Latvia), which repeatedly showed Latvian leaders as role models for the European countries during the crisis. Especially Latvia was often used in the debate on the crisis in the euro zone and for criticism of countries designated as the source of the crisis: Greece, Italy [6(1)].
At the same time Latvia faced faster and stronger than in the other Baltic countries growing moods of protest, which was becoming large-scale and resulted in open demonstrations and a clash with the police in Riga.
In parallel a new trend of convergence in the political and social level of the indigenous and Russian-speaking population began to develop, which culminated in the creation of a party, uniting in almost equal proportions both (party Soglasie). As one of the main slogans the united party declared the creation of a uniform civil society in Latvia. The trend developed in spite of the official line on the discrimination of Russian speakers in Latvia and the opposition to Latvians. The party won parliamentary elections of 2011 and municipal elections of 2013, culminating in the re-election as the mayor of Riga, the centre of political and social life of Latvia, the leader of Soglasie, Russian-speaking N. Ushakov.
To summarize the choices and processes in society, it signalled increased distance between the official authorities and the population. It seemed particularly alarming to representatives of foreign capital, especially financial Northern European. Of course, it was not about revolution, but changes could have been sudden and unpredictable. Accordingly, from any other more moderate leadership that would come to replace the current, one would expect a risk of devaluation of the debt. Probably one also considered the fact, that in the hierarchy of scales of North European presence in the Baltics, Latvia capital followed Estonia. North European capital controlled 80% of assets in the Estonian banking sector, 70 % - in Latvia.
Intention to adopt the euro in these conditions, consistent with the wishes of the Latvian political leadership, which sought a way to increase its credibility, coincided with the interest of North European Capital and was supported by the IMF, World Bank, ECB.
However, the status indicators (see above) needed for a positive review of the potential of the Latvian application was far from the requirements. For their rapid and radical improvement Latvia decided to use foreign loans. It was organized in the form of bonds release in the amount of one billion, which was almost entirely acquired by American investors, not publicly named. Moreover, the transactions were concluded in the United States, where Latvian officials traveled for the relevant negotiations [9(1)].
The funds, obtained in this way by the Latvian authorities, brought the required performance for the introduction of the euro to the standards. In particular, some of these funds passed through social clauses of the state budget and increased consumer demand, stimulated the real sector and at the same time increased the level of debt repayment to Northern European capital and loan service. Improved performance for 2012 led to the submission by Latvia in 2013 the application for joining to the euro zone, which were approved by all EU authorities and as of 01.01.2014 of Latvia has got the status of a member of the euro zone.
Promotion of Lithuania by joining to the Eurozone
Overcoming of the global crisis of 2007-2009 by the Baltic republics occurs with appreciable difficulties. Labour emigration continues in a noticeable scale. Unemployment remains high. The market of investment proposals remains very narrow. With regard to such criteria as the restoration of the pre-crisis level of GDP, it is estimated by the profile of the EU Commissioner, that the Baltic countries may reach it by the end of the decade.
Accordingly, Lithuania – the last Baltic republic not covered by euro zone, has a difficult task to introduce the euro. We cannot say that Lithuania shows the worst performance among the Baltic States, but it has a number of specific features. Under these conditions it would be problematic for Lithuania to get EU approval of its potential application to join the euro zone. No improvement in sight and levers, at least required (Maastricht) economic indicators. Lithuania didn’t meet the same understanding among potential lenders, as Latvia did: over the past few years, the overall economic situation deteriorated and investors became more careful.
In this regard, the political leadership of Lithuania made a bet, apparently, on foreign policy activity, which apparently had to compensate the economic disadvantages of potential joining the euro zone for Lithuania. Win-Win was the maximum Lithuanian participation in anti-Russian projects.
The case happened during Lithuania’s Presidency in the EU, which occurred in the second half of 2013. The defining agenda was the implementation of the Eastern Partnership program, primarily designed to hold a dual EU summit in Vilnius (Lithuania): one on the Eastern Partnership, another – traditional EU summit in the second half of this year. The first expected to sign an association agreement between Ukraine and the EU, as well as the initialling of association agreements with Armenia, Moldova and Georgia.
Eastern Partnership Summit turned a failure in the sense that Ukraine proposed to postpone the signing of the Association Agreement, and Armenia refused to initialling. It is unlikely that these results can be regarded as favorable to Lithuania’s EU presidency as a success, despite the fact that Lithuanian officials in preparation for the Eastern Partnership summit crossed political ethics and international law in many cases [10(1)].
When initiating the desire of Lithuania to join the euro zone, it must be taken into account and that the European Commission of that time, which was personified by its Chairman Jose Manuel Barroso and his first deputy Ashton, was ideologically close to the Lithuanian leadership. Both adhered to outright Euro-Atlanticism in the foreign policy, virtually ignoring Europeanism as an independent ideological trend.
Such ideological affinity helped Lithuania to rectify the situation with the introduction of the euro. Initiated from outside destabilization of the situation in Ukraine, which led to the coup in February 2014, increased the credibility of Lithuania’s anti-Russian orientation, in particular, its activity was marked during the preparation and conduct of the Vilnius Eastern Partnership summit, which some observers interpreted as a prelude and momentum to Euromaydan in Kiev.
EC had reason to encourage Lithuania. Thus, in early 2014 the Lithuanian capital was visited by the Commissioner in charge of the euro, who made it clear to local leaders, that their possible application for accession to the euro zone could count on favorable consideration. Lithuanian president and prime minister hurried conversation to make public, by expressing the firm conviction that in 2015 their country becomes a member of the euro zone [11(1)].
Indeed, the Lithuanian application was considered without attracting widespread attention to it and “understanding” its weak performance, which were so far from matching that a special base calculation was applied, specifically beneficial for Lithuania, and the outcome document of the European Commission explicitly stated that Lithuanian indicators were obvious tend to deteriorate, which gained strength-to-date of the introduction of the euro. The authority of the European Commission headed by Jose Manuel Barroso, which expired 01.11.2014, was also taken account, as there were no doubts that the new European Commission will not allow condescending attitude to a mismatch Lithuanian performance requirements of Maastricht. These circumstances clearly indicated, that the decision on Lithuania’s accession to the euro zone from 01.01.2015 was based not on the economic considerations and not performing all the prescribed requirements of Lithuania.
Against this background, it is funny that a positive decision on the possibility of Lithuania to join the euro zone from 01.01.2015, was adopted by the same Commission, which rejected the Lithuanian application in 2007 with better indicators of the Lithuanian economy.
Baltic States as an indicator of US attitude to the euro
Getting Latvia a billion loan in the United States in the form of long-term deployment of Latvian bonds (see above) gave evidence, that major American business was interested in Latvia joining the euro zone. So money, obtained by the Latvian authorities in the United States, was sufficient to pour into the national economy in order to bring economic indicators of Latvia in accordance with the requirements of the euro zone and get an approval from the European Commission on the appropriate Latvian request. Moreover, while placing bonds in the USA, the Latvian officials did not hide their intentions with respect to the euro. If we compare these facts with the background of the time, when leading American financiers, for example, such as D. Soros offered apocalyptic scenarios for the future of the European Union, and predicted that the euro would soon disappear from the scene, it may cause some confusion. There are two explanations. Either only a part of American business retains an interest in co-existence with the dollar and the euro, and another part rejects such an alternative. Or either to take the crisis in the euro zone as a large-scale and long-term stock game on the world market, aimed at obtaining benefits from the sharp fluctuations in the exchange rate difference of the dollar and the euro. It seems reasonable to assume a combination of both.
One should also study the fact, that the attitude of the Baltic republics and Eastern European countries (Hungary, Czech Republic, Slovakia, Poland) to euro is diametrically opposite after the deployment of the crisis in the euro zone. Thus, when joining the European Union, various countries were competing each other for the right of the first to join the euro zone. It was not until the global financial and economic crisis of 2007-2009 and the beginning of the crisis in the euro zone (spring 2010). Then, Eastern Europe changed drastically its approach. They did not hesitate to announce publicly the decision to postpone the filing of applications for the introduction of the euro, not specifying the period of such break. Eastern European countries referred to the negative perception of the euro in their country and the difficult economic situation in Europe and the world. Slovakia, which is already a member of the euro zone, a widespread, including in the local parliament, held various debates about the feasibility of leaving the euro zone. At the same time the leaders of the Baltic republics, despite the observed and in their countries significant negative perception of the euro, steadily continued course of joining to the euro zone.
In particular, it should be noted, that the decision on joining of Lithuania to the region, as stated above, was of undeniably political character, and economic element was simply taken into account. The main criterion was taken unwavering loyalty of Lithuania to Euro-Atlanticism concept in its most conservative form. Lithuania is distinguished by the fact, that the Lithuanian commitment to Euro-Atlanticism has the character of active work on its promotion and especially in terms of anti-Russian contents. It should be noted, that the Lithuanian political leadership ignored public calls to hold a national referendum on the desirability of introducing the euro in Lithuania.
In general, some observers are inclined to see a significant part of the Euro-Atlantic component in the pursuit of the Baltic republics to participate in the activities of the euro zone in the sense that the expansion of the euro zone due to sluggish Baltic economies will undoubtedly weaken the euro zone and distorts the performance of its development, that somehow affects the authority euros, its quotations.
The role of the euro for the further development of the Baltic economies
Among the most obvious consequences of the introduction of the euro in the Baltic countries was the increase of prices of goods and services – an average by 20-30%. It has become real in Estonia and Latvia, and soon it will be felt by the population of Lithuania. If you wonder about the potential positive impact of the euro on the positive development of the economy, the euro supporters emphasize that the euro can save a significant part of the financial costs of turnover of goods and services in trade and economic relations in the European Union. This thesis is not disputed and is the result not only of theoretical calculations, but also long-term practice of EU activities.
However, the majority of the supporters of the euro forget the fact that saving effect begins to acquire practical importance only under certain scale of trade and economic operations – when it comes to the functioning of big capital and its relations also with big capital.
With regard to the Baltic, large capital is associated mainly with foreign capital, which is represented mainly by northern European capital. Therefore, it is logical to assume, that the main benefits of joining the Baltic states to the euro zone will receive foreign companies operating in the Baltic area.
Moreover, the inevitable price hike, that accompanies the introduction of the euro, a negative impact on competitiveness of agricultural products, which a substantial part of export of Latvia, Lithuania, Estonia. Their neighbours, also focusing on the export of similar agricultural products, will undoubtedly get price win. We can talk about Poland, the Czech Republic and Hungary.
Theoretically possible to consider the possibility of the euro as an instrument for the protection of force majeure in the national economy. In particular, what useful role could render the euro in a situation of confrontation between anti-Russian sanctions and other protective measures at the Russian sanctions regime with the EU. Neither the status of the euro, nor its theoretical purpose does not create the preconditions for the Baltic countries to count on him as a tool to compensate for their current difficulties, arising from active participation in the anti-Russian sanction activities.
One can hardly expect that the joining of the euro zone will improve the conditions of trade and economic relations with other members of the euro zone. The leading countries has used euro for more than 10 years, they have established stable relationships and the existing structure of the division of labour, they are not going to change because of the accession of the Baltic States. In other words, neither the EU nor the Baltic republics further diversify its economy in order to fit into the current in the euro zone of division of labor.
One may wonder on whether the euro will strengthen regional integration, with a view to strengthening cooperation between the Baltic States, which are not experts tend to perceive as a single entity, what is a fallacy. Baltic economy, as noted above, are the same type that naturally pushes them to the centrifugal tendencies in the relations between them. In political terms, also observe the process of separation. For example. Estonia strongly focuses on their ethnic and geographic proximity to the Nordic countries and constantly raises the question of how to treat it as part of the Nordic countries, and not as the Baltic states. In this context, the euro does not have any resources other than the nominal, that would be a reason to say that the introduction of the euro could cement the unity of the notorious Baltic states, which appears only on the anti-Russian. As a general conclusion it can be stated, that the introduction of the euro in the Baltic countries cannot be considered a pulse or a tool to accelerate the development of the national capital and the advancement of the population.