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Saturday, 04.01.2025, 21:22
Swedbank: Baltic states lost their competitiveness
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Devaluation could add to strengthening competitiveness and export conditions for the Baltics. At the same time, global demand declines sharply, which would reduce the effect of the devaluation. Besides, the devaluation could have a negative effect on demand on the financial markets, rising debt on loans in foreign currencies, and the likelihood of more bankruptcies.
What is important, devaluation in one country can also drive devaluations in neighboring countries. Given that the current account deficit rapidly improved as a result of the weaker demand and the accompanying lower import growth, and export development stable good for a long time, apparently the internal devaluation is happening now to provide the necessary restructuring of the current account, the experts note.
Choosing an internal devaluation, and continue to stand behind the goal of a quick euro accession appears to be the most effective – not least on the basis of countries' export structure, global demand mode and countries' desire for participation in EMU.
It is also interesting to note thatin current situation the criteria for participation in EMU countries deflating their economies have great potential to meet the criteria. Countries with deflation meet the inflation criterion. Given that the country has a low public debt to GDP ratio (like in the three Baltic countries) they may in any year to ensure that the budget deficit is below 3%.
The balance of payments problem – which is not a crucial criterion but nevertheless followed up – is also enhanced when countries implement an internal devaluation and imports are falling faster than exports. It may therefore seem that the criteria for participation in EMU should be designed so that they take account of several years of stability in public finances and current account deficit. While it may be worth considering to shorten two-year period for participation in the ERM2 as currency.
Intern devaluation in combination with changeover to the euro is the strategy Baltic countries choose.
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