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Inflation Drives Baltic Out of Euro Zone
An International Monetary Fund report published yesterday on the world economy states, that the countries of Eastern Europe, particularly the Baltic countries, could be especially hard hit current turbulence on the financial markets. That is largely a statement of the obvious, since inflation in that region has jumped sharply. While annual inflation in the euro zone is 3.3 percent, it is now 16.5 percent in Lithuania.
The situation deprives the countries of any chance of joining the euro zone in the next few years. The “Maastricht criteria” currently in force describe the required level of inflation as not exceeding the average of the three EU countries with the lowest inflation rates by more than 1.5 percent in the last year.
The situation in the Baltic countries can be described as overheated. The deficit on the current account of balance of payments in Lithuania is 13 percent of its GDP. In Latvia, it is 16 percent, and in Estonia, it is 23.3 percent. The holes in the payment balance are being covered by capital influx, but the countries' economies cannot process such massive investment. As a result, wages and prices are growing. Wages are growing significantly faster than the productivity of labor. The situation is worsened by the tension on the labor market. The emigration to Europe immediately after admission to the EU is making itself felt.
The economies of the Baltic countries are rapidly losing competitiveness, which will scare off potential investors and lead to a slowdown of economic growth. The IMF forecasts a drop in GDP growth in Latvia from 10.2 percent in 2007 to 0.5 percent in 2009, in Lithuania from 8.8 percent to 5.5 percent, and in Estonia from 7.1 percent to 3.7 percent in the same period. The countries are not expected o lower inflation to rates acceptable for the EU, however. According to the IMF, petrodollars from Russia and Arab countries passing through American and European bank will play a part in financing Eastern Europe and the Baltic's current account of balance of payments deficit.
www.kommersant.com
All the Article in Russian as of Apr. 10, 2008
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