Friday, July 24, 2009

Cuts, squeezes and the Latvian litmus paper for ourselves. 

The Latvian mess continues to rumble on, with lessons perhaps even for stronger economies, such as our own. Something to ponder as our party looks at our spending commitments and decides what we can afford to promise...

A central point is the political will to carry through policies, and the way the EU is being 'played off' against the IMF by countries in severe difficulties. See the latest (23 July) AFOE story by Edward Hugh

what the IMF are evidently worried about is the possibility that some (Latvian government) coalition members may support the agreed measures just long enough to get the payout, and then effectively disown them. This seems to be a far cry from the substantial political commitment that was earlier considered to be so essential to maintaining the peg.

And the issue goes well beyond Latvia, since as Apps points out, a string of other countries are in a similar if currently marginally better condition, including Bulgaria, Romania, Lithuanis and Hungary, all busily making cuts while coming to rely more and more on multilateral lenders.

So if there is no clear resolution to Latvia’s growing dispute with the IMF, the European Union could end up facing a dilemma - whether to bail out troubled emerging European countries who won’t make cuts or face the consequences of not doing so. As Lars Christensen, head of emerging markets research at Danske Bank in Copenhagen says:

“This could be a test case for Europe….In Latvia, it’s domestic politics that really become the driver. The question is what the EU would do if the IMF walks away.”

A good question.

And what about our own domestic politics?

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