Does the euro answer the Eastern Question?
Europe seems to be moving into gear on the “Eastern Question” – how to stop the financial crisis in Latvia and Hungary from coming back to haunt us.
EU finance ministers, meeting in Brussels ahead of a G20 summit in Sussex this weekend, say they want to double the size of IMF funds to $500bn (£362bn).
“Our priority must be to support those countries most at risk from the aftershock of the global financial crisis, starting with those on our own doorstep in Europe,” the chancellor, Alistair Darling, wrote in The Guardian.
The problem with the IMF though, is the “austerity measures” which come with any bailout (and Romania seems to be next).
For the IMF and its funders expect the needy post-communist East to cut public spending in exchange for help – while the Americans, British, French and others carry on spending their way out of recession. In other words, one rule for them, and another rule for us.
The Latvian PM, Valdis Dombrovskis, told me his country would not unpeg its currency from the euro. The issue is so sensitive that it is ILLEGAL in Latvia to “speak untruthfully” about the currency crisis there.
But a well-informed viewer says governments always say they won’t unpeg – and then do just that. And this is his prediction of what will happen in Latvia…
“I think that the way the currency board (fixed rate of exchange with the euro) would go is if people started to move from lats into euros – under a currency board, the government can’t print money.
“This would slash the money supply, which would then trigger a miserable deflationary downward spiral. In a sense, a currency board is self regulating, but at a cost of fierce deflation – ie, excesses are purged away, literally.
“The currency board has created problems for Latvia because the country trades a fair bit with Russia and the UK, both of which have seen their currencies plummet against the euro. If the government terminated the board it would have to reissue loans denominated in a lat/euro parity. This would rip through the financial system, but it would be Sweden’s problem rather than Latvia’s, as the banks are mainly Swedish-owned.”
It would also wreak mayhem in Estonia, Lithuania and Bulgaria, the other countries with currencies pegged to the euro.
One miserable footnote: the World Bank forecast in a report this week that the global economy is likely to contract this year for the first time since the second world war and that trade will decline by the most in eight (yes, eight) decades. Aaagh.
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