The Baltic States and the Euro: Protection from the Global Crisis (and Russia)

On the reverse side of the euro coin that will be minted once Latvia has joined the eurozone will be the Latvian coat of arms and the likeness of a Latvian girl who first appeared on the five lat (Latvian currency) coin of 1929. The decision on whether Latvia will join the eurozone will be taken in June 2013, and the Baltic country is expected to introduce the common currency on 1 January 2014. This will be the final stage of the bailout programme on which the government of Prime Minister Valdis Dombrovskis embarked in 2009, when the collapse of Latvia’s second largest bank pushed the young democracy to the brink of state bankruptcy. In 2009 the country survived a severe economic slump, with GDP falling by 18 percentage points, and an even more severe austerity and reform programme, which has helped to keep the Latvian currency pegged to the euro and restructure the economy, putting greater emphasis on output. Latvia has rebounded and in 2012 its economy grew by about 4 per cent, the fastest rate in the entire European Union.

A Mix of the Past and the Present

The evocation of history, as symbolized by the image on the coin, and the common currency, which, by contrast, is a crucial element of future developments, combines two key hallmarks of the political, economic and social decision-making not only in Latvia but in all three Baltic states: An awareness of their own complex history and the struggle for national independence on the one hand and, on the other, the present-day economic situation marked by the stormy developments of the recent years of crisis, which have exposed the strengths and weaknesses of the condition in which Latvia, Estonia and Lithuania have found themselves twenty years after regaining independence.

Overall, Latvia‘s economy has shrunk by 25 per cent of GDP. The country paid a significant additonal price for the reforms and cuts, as tens of thousands of mainly young and educated people migrated to other EU countries in search of work. Nevertheless, the centre-right political leadership with the grumbling, teddybear-like Valdis Dombrovskis at the helm, had no option but to set its sights on the euro.

The domestic political situation is complicated by a sizeable Russian minority that grew from 10.5 per cent of the total population in 1935 to 34 per cent by 1989. Moreover, half of Latvia’s Russians live in the capital, Riga. On the one hand Riga can profit from being the closest EU port to Russia, as well as from the fact that Latvian banks have become a kind of tax haven for the entire post-Soviet space. On the other hand, as soon as Russian oil suddenly stopped flowing through the Latvian port of Ventspils, the largest oil terminal in the Baltic, the Latvians also felt the full impact of Russia’s energy weapon.

Most Russian-speaking Latvians, particularly of the younger generation, are not particularly interested in forging closer ties with Moscow than with Riga. None the less, from time to time Moscow exploits the Russian minority to destabilize the political situation. This happened most recently last February, when the Russian political representation in Latvia forced a referendum on making Russian the second official language. Russia’s Gazprom controls Latvia‘s natural gas infrastructure and it can make use of its natural gas reservoirs at Inčukalns, the only ones in the Baltics, to manipulate gas prices, and thus especially heating costs, not only in Latvia but also in Estonia and Lithuania.

Even though he had launched a painful reform and austerity programme, Valdis Dombrovskis was re-elected once (2010) and and came third in the subsequent general election (2011), something other countries, Greece for example, might find hard to accept. In this respect, he has been a model student of Brussels even though his reforms were introduced under pressure from the IMF and the EU, whose bailout package saved Latvia from bankruptcy in 2009. In sharp contrast to Greece, Latvia’s rescue programme is nearly completed. “The 2012 budget was the last one drawn up under the IMF and fiscal consolidation programme. This brings the budget crisis to an end. The 2013 budget is our first one that is normal,” said Dombrovskis in an interview with the Czech daily Hospodářské noviny in October last year.

At the moment, only 13 per cent of Latvians support the common currency, mainly due to reform and austerity fatigue. However, supporters of the euro in the government coalition have warned that the Russian minority, spurred on by the Kremlin, uses the plans for joining the eurozone as a political weapon and is prepared to do anything to prevent Latvia from forging closer ties with Europe. In this debate, economic arguments have fused with political and historical ones. For geopolitical reasons alone the EU cannot easily dismiss Latvia’s application to join the euro.

Estonia’s Positive Experience

While the Baltic nations resent being lumped together, the success of Estonia, Latvia‘s northern neighbour, has been crucial for Latvia. Two years after joining the eurozone the currency continues to enjoy strong support among Estonians, with 64 per cent of the population regarding it positively. This is even greater than the 60 per cent support it enjoyed at the time of joining the eurozone.

Why do Estonians have such a positive view of the euro? Economic arguments come first, followed closely by historical ones. Estonia has virtually no public debt although, just like the other two Baltic states, it has a small and open economy, dependent on market fluctuations and the unpredictability of its large eastern neighbour. Estonia has managed to avoid a severe crisis on the scale of Latvia, but only just. In 2009 its economy slumped by 14.3 per cent. In 2012 its GDP grew at about 2.5 per cent, which is actually a slowdown compared to the 2001 growth rate of 7.6.

Throughout the crisis years Estonia did not see any public protests, unlike the one major protest that took place in Latvia. Last year, however, Estonian teachers went out into the streets to demand higher wages and doctors went on strike.

As for their attitude to the euro, Estonians have tested in practice what Latvian economists have so far been discussing only in theory: that a small nation‘s currency need not live in constant fear of devaluation and destabilization. Most domestic experts agree on what Europeans, after three years of crisis, might be more reluctant to admit—that a functioning euro shields small countries from bad economic storms, whether caused by global financial markets or neighbouring Russia.

However, everyone you talk to will also immediately raise the historical and political argument. Sometimes it doesn’t even have to be verbalized. The antechamber of the Estonian cabinet meeting room bears the portraits of eight pre-war prime ministers. In four of them the date of death is shown as 1941, in one as 1942 and in another as 1945. A miniature sculpture of the last prime minister, Jaan Tonisson, whose exact date of death or the exact location of a Soviet camp where he perished, are not known, adorns the desk of current Prime Minister Andrus Ansip, one of the longestserving prime ministers in Europe.

Ansip is not a politician who enjoys historical debates. He is more inclined to look to the future, offering a clear explanation as to why for Estonia the European Union is primarily a security project. “Our main reason for joining the European Union was security. Our people know that, rather than being a a defence organisation the Union has been a peace-building project right from its inception. And we all still remember the outcome of the last great war,” Ansip said in an interview with Hospodářské noviny in October 2012, pointing out that the second main reason was the vast EU market, the destination of 70 per cent of Estonia’s exports.

Lithuania’s Uncertainty

In 2006 Lithuania was the first Baltic nation to come up against the eurozone, failing the inflation criterion by three hundredths of a per cent. Joining the eurozone was also an issue in the parliamentary election last autumn. Although Prime Minster Andris Kubilius’s centerright government tried to rein in the economy and meet all the Maastricht criteria, Lithuanians felt that the belt-tightening had gone too far. As a result, a populist left-of-centre coalition won the election. Whereas Kubilius hoped that Lithuania would join the eurozone in 2014, the new Prime Minister, Social Democratic Party chairman Algirdas Butkevičius, has mentioned 2015 as the earliest possible date. But not until “the eurozone has sorted out its own problems.”

Lithuania, whose growth rate reached 3 per cent GDP last year, is likely to be the least keen on joining the euro. For one, the impetus for economic reform is likely to slow under the new government, for another the populists‘ influence will grow, reviving discussion about the right economic policy for a country suffering an enormously high emigration rate.

Lithuania is the largest Baltic country with the smallest Russian minority, which might suggest that economic arguments should prevail. However, as the current row about the country’s energy infrastructure indicates, here too historical and political arguments carry much weight. Just like Latvians and Estonians, the Lithuanians realize that, although they cannot relocate their countries away from Russia, they can tie them closer to the EU by means of a tighter transport and energy infrastructure. After all, their electric grid is still controlled by Moscow as part of Russia’s north west region. By comparison, Estonia will soon be connected to Scandinavia by a second undersea cable which, in an emergency, can satisfy all its electricity needs.

Lithuanians have attempted something similar with natural gas. The Baltics have yet to reach an agreement on a joint terminal for liquified gas (LPG). Moreover, Latvia‘s reservoirs as well as a gas “interchange” are controlled by Russia’s Gazprom. That is why the Lithuanian government has begun constructing its own floating terminal in Klaipeda, in the teeth of fierce opposition from the Lithuanian gas company Lijetuvos Dujos, controlled by Gazprom and the German E.ON Ruhrgas. At the end of the year the company went as far as to lodge a complaint against the government with the European Commission. However, Lithuanians pay more for their gas supplies than the other Baltic nations, which is a highly sensitive issue given that the vast majority of households—mostly living in houses that are not weatherproof—spend between a third and a half of their income on heating.

The Euro as a Security Guarantee

Estonia’s experience and Latvia’s and Lithuania’s preparations highlight an interesting paradox arising from the combination of the economic approach with the historical and political one: For the Baltic countries, the introduction of the common currency provides an easier way of forging closer ties with an integrated Europe—and, more broadly, with Western civilization— than a physical infrastructure linking them to the European Union would. The experience of motorway construction in Poland, or the Rail Baltika railway project that has yet to move beyond the planning stage (rail travel between Vilnius, Riga or Tallinn is currently possible only via Russia and involves several train changes), points to the same conclusion. The energy dependency on Russian supplies and Russian control of communication networks has been mentioned earlier.

Air safety in the Baltics is currently provided by NATO allies. However, the terms safety and security have a much broader meaning for the Balts, beyond the police and the military sense. In Estonia the euro has also become a synonym for security. The Latvians are likely to follow suit this year and the Lithuanians might join later.

The Baltic attitude to Europe‘s common currency thus differs in many respects from the rest of the eurozone where historical and political arguments play a minor, if any, role. The closest possible integration with the core of the European Union enables the Baltic states to distance themselves geopolitically from Russia and from the painful memories that are still vivid in the minds of their inhabitants. It is worth mentioning that between the two Russian occupations (1940–1941 and 1945–1991) and during World War II these countries lost as much as a third of their population. The most severe experience was that under the first occupation, during which the Soviet Union deliberately eliminated local elites (through executions and deportations), resulting in mass emigration of the local populace who fled along with the Baltic Germans when the front lines changed in 1944 and 1945. Those who remained lived in fear— for themselves, their families, for the future, their language, culture, history and homeland. Regaining political independence in 1991 was merely the first step on the way to getting rid of those fears.

“I grew up under the influence of Soviet propaganda and was hardly aware of my country‘ s true history,” wrote Latvia’s first European Commissioner Sandra Kalniete in her memoir, “With Dance Shoes in the Snows of Siberia,” about the “self-censorship” that her parents used to protect her from being traumatized by events which had turned them into exiles in Siberia where the future politician of independent Latvia was born. “My childhood wasn’t blighted by fear because I did not realize how dangerous the consequences of independent thinking could be and what monstrosities the Soviet regime was capable of.” She went on to become a leading anti-communist activist.

These days people in the Baltics enjoy freedom of speech and thought as well as access to education, and business, development and travel opportunities. Their past experience stands as a warning to present-day politicians: history must not be repeated. And the closest possible ties with the European Union—the most successful European peace project in history, an achievement honoured by the Nobel Peace Prize last year—are thus both an end and the means to that end.