ECONOMIC CRISIS IN NEW EU MEMBER STATES IN CENTRAL AND EASTERN EUROPE: FOCUSING ON BALTIC STATES

Yoji Koyama
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Yoji Koyama: Professor Emeritus at Niigata University

Romanian Economic Business Review, 2010, vol. 5, issue 3, 31-55

Abstract: After giving a general view of the economic crisis in new EU member states in Central and Eastern Europe, this paper examines the causes, focusing on Baltic States, especially Latvia. Thanks to the Single Market of the EU, workers in this country became able to migrate to advanced EU countries, especially the UK, decreasing the unemployment rate and at the same time causing a sharp increase in wages due to a tightened labor market. Banks from Nordic countries, Sweden in particular, came to operate in Latvia and competed for market shares, stirring a consumption boom. In a situation in which people can easily get loans denominated in foreign currency, monetary policies of the central bank are of no use. The Latvian economy already showed a sign of overheating in 2005. However, in the spring of 2007, the government turned to restrictive policies, causing depression at the end of 2007. In addition, the Lehman shock dealt the Latvian economy its final blow. Baltic States have shared a common weakness in terms of their development relying heavily on foreign capitals. In the case of Estonia and Lithuania, however, the circumstances in which foreign- owned banks have been overwhelmingly dominating the banking sector benefited these countries. As parent banks of foreign-owned banks coped with difficulties, both countries were able to avoid the worst case scenario. Latvia, which is reconstructing its economy under support from the EU and the IMF, set up the introduction of the euro in 2013 as an exit strategy. Latvia is in dilemma: If the country does not devalue its national currency and tries to satisfy the Maastricht criteria (especially having a budget deficit of less than 3% of the GDP) soon, it will be obliged to adopt pro-cyclical policies, causing economic stagnation. There is a scenario in which the financial crisis in Latvia might cause disorder in the EU economy via the possible collapse of Swedish bank(s), but the likelihood that this will come to pass seems very small.

Keywords: Global financial crisis; EU-Phoria; Central and Eastern Europe; Baltic States; Latvia (search for similar items in EconPapers)
Date: 2010
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