US economist: Latvia should devalue

20.01.2010, 12:55

Solutions forced upon Latvia by IMF and the European Commission that only protect the interest of banks will give a deathblow to Latvia's fragile economy, says influential US economist Mark Weisbrot.

Weisbrot who heads Washington-based Centre of Economic and Policy Research (CEPR) said in an interview to Latvian business newspaper Biznes&Baltija that currency devaluation remains the best solution for rescuing the Latvian economy from its perils.

According to the economist, Latvian government made a huge mistake when it turned to IMF and the European Union for assistance since they have slowed down the country's economic recovery and made it more painful for businesses and people in general.

Weisbrot said that while the first mistake of the Latvian government was to allow the economy to overheat to such extent, it should not be seen as the only culprit. "Major mistakes were done later, under the dictate of IMF and the European Commission."

According to Weisbrot, there was no need to push Latvian into such a deep downturn and that since the lat is considerably overvalued, it is difficult for the economy to recover without giving up the currency peg.

While it is true that initially IMF demanded the devaluation of the lat, it later agreed to preserving the currency peg. As for the European Commission, it is only protecting the interests of European banks which have extended large loans to East European economies, as Swedish banks have done in the Baltics.
Latvia should follow the example of Argentina that managed to turn its economy around quickly after it released itself from the IMF dictate and says that, instead of IMF and the European Commission, Latvia could consider borrowing, for instance, from China.

Claims that it is too late for devaluation are misguided since the greatest worry in case of devaluation is inflation, but Latvia already has deflation. All possible cuts have been made, but the downturn continues. "Devaluation could help and it is a medicine that should be taken. It cannot go any worse. The lat is hugely overvalued and things must be put back to their rightful place," concluded Weisbrot.