Economists: Latvia has more benefits from joining the European Union than losses
One can always wish for better, but the economic trend is upward
Since Latvia’s accession to the group of European democratic countries, a number of significant economic structural policy changes have been made, which created the preconditions and gave the opportunity to overcome the financial crisis, the Covid-19 pandemic and the challenges of the new geopolitical reality. However, despite the increase in investment and welfare, Latvia is one of the poorest EU member states, and in recent years even Lithuania has caught up.
The chairperson of the Council of Fiscal Discipline, professor of the University of Latvia Inna Šteinbuka emphasized – one can always wish for faster economic development, but one should be aware that Latvia is a developed member of the EU and the Organization for Economic Cooperation and Development (OECD), and despite economic ups and downs, The trend of Latvia’s economy is upward.
“We are still not a donor country, we are a recipient country. And especially in moments of crisis, the European Union’s investments were the only lifeline, if you can call it that, which provided us with some kind of development,” said Steinbuk.
Mārtiņš Āboliņš, the economist of “Citadele” bank, also noted the main point, looking back on the past 20 years: “There have been many problems, people have left, but the increase in welfare in Latvia and in the Eastern European region in general has been extremely rapid. Economic indicators have improved – wages have increased more than 7 times, prices have also increased, purchasing power has increased 3.5-4 times and there are not many regions in the world where this has happened.”
From free movement to a large market of 450 million inhabitants, the benefits are many
Experts also highlighted the benefits of free movement, opportunities to work and study in different EU countries, access to cheap telecommunications.
Another benefit is that entrepreneurs now have access to a market of 450 million inhabitants and new partners, said Daunis Auers, professor of the University of Latvia, chairman of the board of the “LaSER” think tank.
“If we look at the export indicators, they have grown by 50%, if we look at Latvia’s economy as a whole. That is, 20 years ago Latvia’s export was about 40% of the country’s gross domestic product, now it is about 60%. And our trading partners have also changed. Now the biggest partners are the neighboring countries, Great Britain, Germany, the Nordic countries,” Auer noted.
Modernization was a big benefit, thanks to European funds, but we have to ask, how fully has Latvia used the fund’s money? Parks have been arranged in small towns and national cities, bicycle paths have been installed, cultural centers have been renovated, but the question is what does this mean for the national economy, taking into account the fact that the population is decreasing, especially outside of Riga. This raises the question – how wise is it to invest in new swimming pools, has it been useful?
European funds cover most of the costs, but it must be remembered that the municipality must then maintain such facilities, which requires significant funds.
Auer said: “When we joined the European Union, our income was about 40% of the European Union average. Now we have reached about 70% of the European Union average. In the future, we will receive less from European funds and they will go more to Ukraine, Georgia and other countries that will occur [Eiropas Savienībā] and which have a less developed economy.”
There were also fundamental problems
The government is also often criticized that the tightening of the belt was too severe, that the government did not react in time, but Professor Steinbuk thinks that the causes of this crisis began even before joining the bloc: “It seemed like such euphoria, soon we will develop and be at the level of Germany. For us there were very fast growth rates, around 10% before the crisis. The misfortune was that it was unhealthy growth.”
However, despite this difficult situation, Latvia was able to introduce the euro in 2014, which Professor Šteinbuka assessed as a huge achievement.
One of the most severe crises that Latvia had to go through was the global financial and economic crisis in 2008. Then many residents also left Latvia to go to work in other countries. It affected Riga less, it applies more to rural regions.
When the country was hit by the Covid-19 crisis, Latvia had no problem borrowing in the international financial markets, as it was an EU member state with good indicators. Speaking about the energy crisis, the experts pointed out that if there was no possibility to supply energy resources in a single block, overcoming the crisis would be much more complicated.
Steinbuka agreed with the opinion that the neighboring countries have overtaken us and one of the reasons already started to form during the global financial crisis, when Latvia was forced to borrow when the “Parex” bank problem had to be solved, whereas Estonia established a reserve fund during the crisis.
On the other hand, economist Āboliņš reminded that upon joining the EU, there were exaggerated expectations of how quickly the growth process would take place, which were not fully fulfilled, but it was not only in Latvia.
Aboliņš said: “There were also real estate bubbles in other countries – Spain, Ireland, the USA. We made ours even more euphoric on top of such a common global euphoric bubble. What perhaps allowed overheating to happen and led to such a big crisis was that we they were ready to lend money so much and so easily, expecting that there would be very rapid growth, but it was at the expense of spending borrowed money. When you start living on borrowed money, the moment you stop giving money, then you have a hangover heavy always and everywhere.”
A stricter fiscal policy is recommended
Now it can be seen that priorities are rapidly changing and safety has become the main thing. After the European Parliament elections, the bloc’s new priorities will be visible, but it is already clear that security and assistance to Ukraine will be one of them.
Professor Šteinbuka predicts that the opportunities for structural funds will narrow, so we should use these opportunities while they are available: “We have to calculate that we will have to rely on our own forces. On the internal state budget, on private investments, and it already depends on ourselves.”
Both the OECD and the European Commission recommend Latvia to follow a stricter fiscal policy.
Šteinbuka emphasized that Latvia must maintain a reserve or safety cushion, which is essential in cases of crisis: “We don’t know what the next crisis will be, and we don’t know when it will start either, so that reserve is needed. Of course, the stricter the fiscal policy, the the bigger the margin.”
Economist Āboliņš invites us to look towards Lithuania and understand what allows the neighbors to develop so strongly. The economist has come to the conclusion that Lithuanians prefer to do first and then think, but the opposite is true for us. More excitement and ambition to do is needed.
On the other hand, Auer concluded that in development we have followed the path of Spain or Portugal more, when the money has been invested, but the question is how useful it is. Ireland, which has become one of the wealthiest EU member states, has chosen a different path. In this century, only the neighboring country Lithuania’s income has grown faster than Latvia’s income, so the experience of Lithuania, which has allowed it to grow faster, should be analyzed more. One of the answers could be that the Lithuanian government decided to invest significantly in traffic infrastructure, education, developing the agglomeration of Vilnius and Kaunas. Latvia should develop a specific development scenario and vision to move towards – will Latvia be a Nordic country, a Baltic tiger, or will it follow some other development path in order to have a clear fiscal policy.
Auer said: “We need to think about how we will structure the tax policy, which is the most important function of the state, with which we will cooperate in the near future, both in trade matters and in politics, and what type of state we will create.”
In the future, there will be a demand for quality education and health services, we will have to think about whether to change taxes, as expenses will increase. It is already clear that expenses for security will increase, because Latvia has a border with Russia, so we must expect greater needs.
The Ministry of Economy has already set the goal of reaching 83 billion euros of the gross domestic product (GDP) of Latvia by 2035 – this means that the size of the economy must double compared to today’s situation. In order to achieve this, average economic growth rates of 4-5% per year will have to be reached in the coming years, under the condition that inflation remains stable within 2%, and this will require both labor capacity resources and greater exports, higher productivity and investments. This means that the future challenges will be great, also taking into account the security situation in the region.
