Now raising intellectual capital

Latvia: let the lat go

Do as you would be done by. This excellent rule surely applies as much in monetary affairs as it does in other fields of human endeavour. Those who loudly urge Latvia not to devalue its currency should reflect upon it.

Since Latvia’s monetary crisis started in 2007, a host of non-Latvians — led by the European Commission — have urged the small Baltic state to cleave to its currency board system, which pegs the lat at the wildly uncompetitive rate of 0.702804 to the euro. Regardless of the cost in terms of spending cuts, higher taxes and lower wages, this is supposedly all for the Latvians’ own good.

This is simply wrong.

When a country loses competitiveness against its principal trading partners, there are only two ways to regain it; devaluation or “internal devaluation”. This newspeak-like formulation is a euphemism for severe wage cuts and prolonged recession. After all, it is only by cutting real wages (or through increasing productivity) that the country can “grow back into” its unaltered exchange rate.

Latvia has listened to the advice of Brussels and pursued the latter course with dogged determination. The central bank has been obliged to raise interest rates, extinguishing what few animal spirits remain in the country during a severe economic downturn. Meanwhile, the government has slashed expenditure and raised taxes.