It is time for fiscal Russian roulette? I don’t get it!
When I saw that the government plans a 2.9% of GDP budget deficit for 2012 for its negotiations with the international lenders I thought it was an April Fools stunt. I then realized that it was not but it is still a joke….
Sure, 2.9% is less than 3%, the Maastricht threshold for budget deficits, and thus complies with the letter of the law.
But not with the spirit of the law – 2.9% cannot be interpreted as a serious attempt to fulfil Maastricht. Frankfurt’s Hard Money men in the European Central Bank will not be convinced that Latvia is serious enough about fiscal policy.
Did whoever came up with the 2.9% not have a statistics course to tell him/her/them that one thing is the target, another is the actual outcome? Targeting a 2.9% deficit is difficult – the deficit is partly influenced by shocks to the economy over which we have little control and even less knowledge since they haven’t happened yet. Just a small adverse shock, say, a very likely devaluation in Belarus, could imply less exports going in that direction, thus less economic activity in Latvia, thus less tax revenue thus a bigger budget deficit, the 2.9% target is exceeded and the Hard Money men can justifiably keep Latvia out of the eurozone.
True, Latvian budget deficits have recently been adjusted downwards because of the economy doing better than expected but to just assume that will happen again is like flipping a coin and believing in the same outcome every time. Membership of the Economic and Monetary Union is too serious to be left to such casino mentality.
And how can one overlook the link between credible fiscal policy and interest rates? Greece, Ireland, Portugal all pay exorbitant interest rates because their fiscal policies are perceived not credible and their ability to service debt as rather absent. Latvia is aiming at going to the financial markets to refinance some of its international loans. Naturally, this should take place at low interest rates – great for the country, great for the tax payers – and rates have come down but can still go further. This is unlikely to happen if doubts about Latvia’s aim of joining the eurozone are renewed together with doubts about its commitment to prudent fiscal policy.
So here we are, some 2½ years into the tough but necessary austerity programme. Latvia has come so far, it has brought its runaway budget deficit almost under control, rating agencies like Standard & Poor’s have raised their outlook to positive and a rating increase is just around the corner, bringing lower interest rates – and then the powers-that-be think it is time for fiscal Russian roulette??? I don’t get it.
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