The Great Debate UK

The economic consequences of Mr Rimsevics

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alf vanags- Alf Vanags is director of the Baltic International Centre for Economic Policy Studies. The opinions expressed are his own. -

On April 28, 1925 the then Chancellor of the Exchequer, Winston Churchill, put Britain back on the gold standard at the pre-World War I parity, a move that was strongly criticized by Maynard Keynes in his pamphlet “The Economic Consequences of Mr. Churchill”.

The lack of competitiveness that faced Britain as a result of Churchill’s action pales into insignificance when compared with Latvia’s today, where the Churchill role is taken by Bank of Latvia President Ilmars Rimsevics. The scale of the problem is illustrated in the following chart, which tracks real exchange rate developments using unit labour cost indices since EU accession in 2004.

latviachart

Source: Eurostat

As can be seen Latvian competitiveness has declined by more than 75 percent as against countries such as Sweden or Germany and rather less against the EU 27 as a whole. The so-called internal devaluation will be a very painful and prolonged process. A major adjustment of the exchange rate would provide an overnight adjustment to competitiveness, would remove the ongoing uncertainty about the exchange rate and would provide a boost to demand for Latvian produced goods – both from exports and import substitution.

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