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Economic Crisis In The Baltic States: Focusing On Latvia

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  • Yoji Koyama

Abstract

This paper examines the causes of the economic crisis in new EU member states in Central and Eastern Europe, focusing on the 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 labour market. Banks from Nordic countries 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 a foreign currency the monetary policies of the central bank are weakened. The Latvian economy already showed signs of overheating in 2005. However in the spring of 2007 the government turned to restrictive policies, causing a depression at the end of 2007. The Lehman shock dealt the Latvian economy its final blow. Latvia set up the introduction of the Euro in 2013 as an exit strategy. Latvia is in a dilemma: if the country does not devalue its national currency and tries to satisfy the Maastricht criteria soon, it will be obliged to adopt pro-cyclical policies, causing economic stagnation.

Suggested Citation

  • Yoji Koyama, 2010. "Economic Crisis In The Baltic States: Focusing On Latvia," Economic Annals, Faculty of Economics and Business, University of Belgrade, vol. 55(186), pages 89-114, July – Se.
    • Handle: RePEc:beo:journl:v:55:y:2010:i:186:p:89-114
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    References listed on IDEAS

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    1. Jesmin Rahman, 2008. "Current Account Developments in New Member States of the European Union: Equilibrium, Excess, and EU-Phoria," IMF Working Papers 2008/092, International Monetary Fund.
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    Cited by:

    1. Brizga, Janis & Feng, Kuishuang & Hubacek, Klaus, 2014. "Drivers of greenhouse gas emissions in the Baltic States: A structural decomposition analysis," Ecological Economics, Elsevier, vol. 98(C), pages 22-28.

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    More about this item

    Keywords

    Global financial crisis; EUPhoria; Central and Eastern Europe; Baltic States; Latvia;
    All these keywords.

    JEL classification:

    • O19 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - International Linkages to Development; Role of International Organizations
    • O52 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Europe
    • P26 - Political Economy and Comparative Economic Systems - - Socialist and Transition Economies - - - Property Rights
    • P52 - Political Economy and Comparative Economic Systems - - Comparative Economic Systems - - - Comparative Studies of Particular Economies

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