The Economist is wrong, I hope (III)

October 24, 2007 at 12:16 am Leave a comment

The Economist Intelligence Unit
Edward Lucas caused a huge discussion in Lithuania after publishing an article in the Economist calling the Baltic States’ economy ‘the
eastern Europe’s Achilles heel’.  The Economist is also arguing that Latvia might devaluate its currency. 

The Lithuanian financial experts have warned that if Latvia did devalue its national currency tha would deal a heavy blow to the other two Baltic States.  However, as the BNS stated they advised to take with a pinch of salt predictions by Western analysts about a possible devaluation of the lat and the negative outlook for all three Baltic economies.

“If the Latvians really devalued their national currency, the speculative attack on the other states would be extremely strong. However, everything would depend not only on the economic situation, but also on the determination of the government and the central bank to defend the currency,” Gitanas Nausėda, advisor to the president of SEB Vilniaus Bankas, said in an interview with Lithuanian Radio on October 22.

However, as the specialist noticed “In the past 10 or 12 years, we have overcome much more difficult situations, for example, the Russian crisis of 1998. If this determination to defend the national currency remained strong, then we would be able to withstand that pressure”.

Nausėda said that The Economist’s predictions do not always prove correct. “The Economist Intelligence Unit predicted several years ago that the litas would be devalued by 25 percent, but that did not happen. So, their forecasts should be taken conservatively. But even making such predictions public has a negative effect on all Baltic economies. Unfortunately, it does,” he said.

The analyst said that in the current situation, the currency board arrangement does not help fight inflation as it leaves the central bank with very little room for maneuver. Lithuania recorded an annual inflation rate of 7.1 percent in September. Its current account deficit reached 14.8 percent of GDP at the end of the first half.

Lithuanian PM Kirkilas even expressed an original thought stating that since the Baltic countries are developing so rapidly some hence some commentators and our economical partners ‘not too cheerful about this’.  ‘Even though we should listen to it very seriously, I treat this talk with some degree of skepticism.’

I do not share insights of our PM, and do not believe of Edward Lucas conspiring against the Baltic States I would love to believe that Edward is wrong this time.    

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Entry filed under: Baltic States, Economics, Estonia, Latvia, Lithuania, Northern Europe.

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