As I was going through The New York Times in search of the article about Greece and the boys at Goldman, I stumbled upon an interesting, yet very misinformed article. The article was titled ‘Greece’s Woes May Give Pause to Euro Zone Candidates’, so I naively thought the article would discuss the different views toward the eurozone in countries such as Estonia, Latvia, Lithuania, Poland, the Czech Republic and so forth, all looking to join the eurozone. After reading the first paragraph, it was apparent to me that the journalist had yet again taken the path of least resistance and opted for the easy choice - he took Latvia as a basis and extrapolated the results to come up with a very misinformative headline that has got nothing to do with the content of it.
“Countries like Estonia and Latvia were once desperate to get in,” said Alf Vanags, director of the Baltic International Center for Economic Policy Studies in Riga. “The euro is not looking so attractive now.”
Such were to words of Alf Vanags, the director of an obscure organization that comprises of him and 18 other members. Let me point out to international readers that in the Baltics, think tanks don’t have any say in public matters, they don’t every represent anyone but themselves. And more often than not, people don’t even know they exist. In any case, the (personal) opinion voiced by Mr. Vanags is far from the truth when it comes to Estonia. Estonia is very eager to join the eurozone. Being an Estonian, I would like to think that I know better than Mr. Vanags, who resides in Latvia.
Estonia and the eurozone
The eurozone is as attractive as ever for Estonia and there are no second thoughts (with the exception of a few populist politicians and a few communists such as Mr. Savisaar*). Why? Well, it’s because the Estonian national currency, the Estonian kroon has been linked the German Mark ever since its inception in 1992. According to the law, the exchange rate is one German Mark for 8 Estonian kroons. Germany is now using the euro, so the Estonian kroon is now linked to the euro at 15,64 kroons for one euro. The key point to understand here is that in Estonia, devaluation is a political decision de jure and de facto. Devaluation is a political decision de facto in most countries, but in Estonia, only the parliament can decide to devalue the kroon, making it a de jure political decision, which means that it cannot be done without serious political repercussions to follow. Political chaos is the last thing a country needs during a recession and politicians will surely do what it takes to avoid one. There is no reason for Estonia to put off joining the eurozone since our national currency isn’t floating anyway and there is nothing in it for us to devalue.
Moreover, it is important to understand that joining the eurozone is not an if question, it’s a when question. When Estonia joined the EU in 2004, we pledged to join the eurozone. We’ve even had to change the constitution to accommodate the euro. It is not only that we’ve given a promise to join the eurozone, we really do want it. The financial crisis has proved that foreign investors don’t trust the kroon as much as they do the euro, which is only natural. Against the backdrop of the crisis the imperative to join the common currency area has become even more pressing. We don’t have any childish illusions about the eurozone being a harbinger of great riches, but we realize that joining the eurozone means that we can cross perceived devaluation panics off the list of possible risks. Estonia has fulfilled every single criteria according to the central bank of Estonia and the Ministry of Finance.
The same might be said about Latvia, but they key point here is that Latvia hasn’t even fulfilled the Maastricht criteria, which it needs to do to join the eurozone. They might talk all they want, but there is not way they are going to join the eurozone any time soon. Even with Latvia being where it is right now, aiming to join the eurozone in the future is still a prudent goal to work toward. Being left out in the cold is not something Latvia wants.
“These governments have reason to fear that, like Athens, they will be caught in a vise: unable to pay for expensive social programs demanded by citizens while staying within the euro zone’s debt limits.”
Newsflash, Mr. Kramer, Estonia and Latvia are nothing like Greece. We don’t have elaborate social programs, in fact, we have the bare minimum that we’ve been able to provide for our citizens in the almost 20 years that we’ve been independent. We also don’t have a history of street riots. It would be advisable to study history before you start writing things you don’t know about. And unlike Greece, our sovereign debt is too small to cause a meltdown in big European banks.
“To keep a faltering country’s economy in line with the euro “is a tall and very unpleasant order,” Mr. Vanags said.”
I really don’t know who is the foolish one here, the journalist for not pointing out the obvious flaw in Mr. Vanags’ reasoning or Mr. Vanags for saying something so naive. Probably both. Here is what Mr. Kramer should’ve added: eurozone requirements aren’t something pulled out of thin air. The requirements are such that if any country were to follow these in the long run, it would do well. And that is precisely why the requirements are what they are – to ensure the stability of the eurozone.
How bad can one journalist get?
Mr. Wannabe Journalist tops the article off with another fallacy, a favorite of Western bankers who would like to see countries such as Latvia fail so they could cash in on their credit default swaps:
“Despite some negative effects, devaluations have helped many countries over the years, giving a lift to their economies by making foreign goods more expensive and domestic goods more attractive.”
I would really suggest reading a bit of history before making statements like that. Devaluation per se solves nothing unless the country whose currency is being devalued has either a huge manufacturing or a huge services sector that exports most of its production (Latvia doesn’t). It is a pity that journalists trust economists’ statements without actually making sure those statements are correct. The devaluation of Argentina, which is a favorite of journalists’, didn’t save Argentina. Argentina had pegged its currency and devaluation was just one part of the big overhaul that led to the stabilization of their economy. It didn’t save Argentina, but it was done to keep the central bank from bleeding out. Net exports played a boosting role during the first year of recovery, but what saved Argentina in the end was investments and personal consumption. In fact, after the first year of positive contribution to the GDP, net exports actually had a negative effect on Argentina’s GDP. And let me remind you that Argentina’s exports were mostly comprised (still are) of agricultural products, fuels and industrial products (something not found in large quantities in Latvia). Furthermore, Argentina had it easy because the rest of the world was not going through a recession, which meant strong demand for their exports. Devaluation is not a life saver. If it was, countries would be doing it all the time. For some odd reason devaluations are not that commonplace as mainstream media would suggest useful.
Before putting this issue to rest, let me just point out that this is not the only misinformed article written about Estonia, or the Baltics for that matter. I don’t want to spend my days looking for childish articles about the Baltics and ripping them to pieces, but I had to write one of these to point out the fact that not all information is of the same value. If you want correct information about the Baltics, turn to our experts and our statistical offices. They’re not magicians that play with numbers unlike the central planners of days gone by (there was once such a thing as the USSR and we were an unwilling part of it). For those that are interested in truly objective information, take a look at Swedbank’s financial statements. They’re one of the biggest banks in the Baltics and their results give a pretty good feel of the state of the economy in the three Baltic countries. Swedbank’s numbers are good for comparison too.
* Yes, dear fellow Estonians, I called him a communist. I call a spade a spade when I see it. Deal with it.
These governments have reason to fear that, like Athens, they will be caught in a vise: unable to pay for expensive social programs demanded by citizens while staying within the euro zone’s debt limits.
