Defense of Latvia's Currency Is Doomed
Letter to the Editor

Your editorial calling on Europe to help save the Latvian currency peg ("Europe must not let Latvia fail", June, 5) is all too reminiscent of similar calls in 2000 to save the Argentine Convertibility Plan long after that plan had become unsalvageable. It glosses over a number of key facts that would suggest how costly and ultimately futile a defense of the Latvian currency would now be.

As the International Monetary Fund itself has noted, in the years following Latvia's acceptance into the European Union, Latvia experienced an excessive housing and financial sector-led boom that gave rise to big economic imbalances. The external current account deficit widened to a peak of 25 per cent of gross domestic product, private external debt ballooned to 130 per cent of GDP, and the country experienced a major loss in international competitiveness that has only been exacerbated by the recent large depreciations of many east European currencies.

Over the past year, in the wake of the bursting of the Latvian bubble and despite an IMF support programme, Latvia's GDP has already contracted by 18 per cent, while the public sector deficit has ballooned to over 10 per cent of GDP, or to more than double the IMF target. Subjecting Latvia to a further round of budget tightening while maintaining the exchange rate peg, as part of an IMF and EU rescue plan, would almost certainly plunge the economy further into recession and substantially raise unemployment from its present 14 per cent level. It would also give rise to a disorderly process of private sector debt defaults without offering any hope of an economic recovery for a long period of time.

It would seem that if a devaluation of the Latvian currency is indeed inevitable, it would be best that it were done quickly and in an orderly manner rather than subject the Latvian economy to a further extended and painful period of deflation with little hope of success.

Desmond Lachman is a resident fellow at AEI.

Also Visit
AEIdeas Blog The American Magazine
About the Author

 

Desmond
Lachman
  • Desmond Lachman joined AEI after serving as a managing director and chief emerging market economic strategist at Salomon Smith Barney. He previously served as deputy director in the International Monetary Fund's (IMF) Policy Development and Review Department and was active in staff formulation of IMF policies. Mr. Lachman has written extensively on the global economic crisis, the U.S. housing market bust, the U.S. dollar, and the strains in the euro area. At AEI, Mr. Lachman is focused on the global macroeconomy, global currency issues, and the multilateral lending agencies.
  • Phone: 202-862-5844
    Email: dlachman@aei.org
  • Assistant Info

    Name: Emma Bennett
    Phone: 202.862.5862
    Email: emma.bennett@aei.org

What's new on AEI

image The Census Bureau and Obamacare: Dumb decision? Yes. Conspiracy? No.
image A 'three-state solution' for Middle East peace
image Give the CBO long-range tools
image The coming collapse of India's communists
AEI on Facebook
Events Calendar
  • 21
    MON
  • 22
    TUE
  • 23
    WED
  • 24
    THU
  • 25
    FRI
Wednesday, April 23, 2014 | 12:00 p.m. – 1:30 p.m.
Graduation day: How dads’ involvement impacts higher education success

Join a diverse group of panelists — including sociologists, education experts, and students — for a discussion of how public policy and culture can help families lay a firmer foundation for their children’s educational success, and of how the effects of paternal involvement vary by socioeconomic background.

Thursday, April 24, 2014 | 12:00 p.m. – 1:30 p.m.
Getting it right: A better strategy to defeat al Qaeda

This event will coincide with the release of a new report by AEI’s Mary Habeck, which analyzes why current national security policy is failing to stop the advancement of al Qaeda and its affiliates and what the US can do to develop a successful strategy to defeat this enemy.

Friday, April 25, 2014 | 9:15 a.m. – 1:15 p.m.
Obamacare’s rocky start and uncertain future

During this event, experts with many different views on the ACA will offer their predictions for the future.   

No events scheduled this day.
No events scheduled today.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.