NPA, Alm.del - 2009-10 - Bilag 31: Optegnelser fra komitéerne fra forårssessionen i Riga i 2010

II. Presentation by Ilmars Rimsevics, Governor of the Bank of Latvia, on A Profile of the Latvian Economy2. Ilmars Rimsevics noted that the Latvian economy has suffered a greater contraction than any other EU or NATO member. Tounderstand how this has come about it is essential to look more deeply into the recent economic history of Latvia. He noted thatsince joining the EU and NATO, Latvia had been the fastest growing country in the region. It is legitimate now to ask whetherthat growth was sustainable. Initially it was thought that a very high rate of growth was justified as Latvia was catching up withthe other member states.3. The dangerous overheating of the Latvian economy, due mostly to large and increasing foreign capital inflows, wasrecognised as a potential problem by policymakers as early as 2005. By 2007 inflation had became a serious concern andmeasures were put in place to slow price growth. Wage inflation was particularly worrisome as it was eroding thecompetitiveness of the economy. Mr Rimsevics noted that wages grew much faster than labour productivity, effectively “wipingout the most important part of our economy – our labour competitiveness.”4. While productivity did accelerate in this period the current account deficits of plus-20% were clearly unsustainable in the longterm. A great amount of the inflowing capital underwrote loans for housing and building construction. Much of this capitalfinanced imports and bolstered consumption rather than investment. Importantly, many of the private loans taken out byLatvians were euro-denominated because the fixed exchange seemed to lower the risk to lenders and because equivalent loansin lats were two to three times more expensive. Unfortunately, as the economy slowed and inflationary pressures rose, thesustainability of the peg was increasingly questioned.5. At the height of the crisis, the Central Bank of Latvia took the strategic decision to maintain the tight peg of the lat to the euro(LVL 0.71: EUR 1). This, in effect, disabled the use of monetary policy for fighting the recession. But this also exacerbated therecession. Mr Rimsevics argued this was the wisest policy as it assured long-term stability in the eyes of foreign investors whileprotecting the euro-denominated debt held by many Latvians. Moving to a free floating exchange rate would have boostedprivate and public debts to unsustainable levels. This, he said, would have been “a poison” for the Latvian economy.6. The Governor noted that as a small and open economy, Latvia had little choice but to engage in “internal devaluation” ratherthan allow depreciation of the currency. However, he noted that in retrospect many now realise that fiscal policy “is not the onlyor most important tool in fixed exchange rate regimes”. Of course, fiscal policy does play a crucial role and the fact that theLatvian government had not been in a budgetary surplus meant it had few reserves for the downturn.7. The first quarter of 2010 saw the first quarter-on-quarter growth since the downturn at the end of 2008. As the wage/labourproductivity gap is narrowed, Latvian competitiveness is being restored. Imports and exports are both on the rise and retailsales are now rising well above the trough. The current account balance has swung from a 30% deficit in 2008 to a 9% surplusin 2009. The governor expects the current account to remain in surplus in 2010 and 2011.8. Fiscal consolidation poses a central challenge to the government. The Governor reiterated that the sooner consolidation isimplemented, the sooner the overall economy will be positioned for a full recovery. Overall, the situation remains difficult, but theright measures have been taken and Latvians are still aiming for full euro membership in 2014.9. In the discussion that followed, members asked first about the role the IMF has played in providing emergency funding toLatvia (the only Baltic state to engage in such an agreement). The Governor noted that the IMF has changed its practicesgreatly from 20 years prior and now provides advice based on the government’s proposals and does not advance a one-size-fits-all approach to financial crises. He believes the decision to engage the IMF was the best one as Latvia currently pays

III. Presentation by Spyros Economides, Senior Lecturer in International Relations and European Politics, LondonSchool of Economics, on The Greek Financial Crisis: Implications for the European and the Global Economy.12. Spyros Economides began by noting that his “own understanding of the current crisis in Greece is that it is primarily apolitical one.” The root causes go back to the attitude of citizens toward the State – the Greeks see the state as a system ofprovision rather than one of support. Thus, he felt that standard Greek economic practices – such as clientelism – were partand parcel of the running up of the enormous public deficits and debt. Indeed, while the Greek debt crisis is a recentphenomenon, it is the result of decades of poor State management.13. Economides noted that navigating through the State bureaucracy was best done through personal contacts rather thanofficial channels, and that this is such a standard practice that few question its effects. There are also persistent problems withtax collection in a country where, in his opinion, tax evasion is the norm. Furthermore, civil servants take for granted perks thatwould be seen as profligate state spending in other EU Member States.14. Athens is required to reduce its deficit by 10 percentage points over the next three years, and has announced it will reducepublic spending by 30% by 2013. But there is a great degree of scepticism because “this is not simply a matter of economics, itis a matter of a society which wants to maintain a system” that is fiscally unsustainable. The unsustainability of Greece’sbudgets had been hidden for years because growth appeared sufficiently strong. However, most of this growth (from theOlympics, joining the eurozone, etc.) was of a short-term nature and externally generated.15. The EU bears its own portion of the blame for not waking up to the problem earlier, he said, as it has not established “anykind of centralized regulatory mechanism” to check that Member States’ treasuries were keeping to the guidelines laid down byBrussels. Economides noted that “The eurozone is a highly politicised mechanism.” It is not guided by the market’s ‘invisiblehand’, it is rooted in the politics of the EU. And yet it lacks a central authority to regulate it as would be expected within any ofthe national economies. It was also out of political considerations that “corners were cut when Greece was forcing its way up theladder to make it into the eurozone,” he added.16. As far as the consequences for the EU are concerned, the political aspects outweigh the economic ones. With less than 3%of European GDP, “a Greek insolvency wouldn’t really matter for the European Union” in terms of trade and prosperity. But theEU’s international standing on the political stage may suffer as a result of Greece’s economic travails, he said. The underlyingproblems are not limited to Greece. “The time has come to start clearing up financial irregularities across the European Union,”at both national and European levels. This does not mean a wholesale restructuring of EU economic cooperation, as “it is notthe right time to open Pandora’s box” in that area. “But I could envisage a two- or three-speed eurozone in which somecountries decide to pool whatever they want to pool, and others are left in some kind of peripheral system,” he said.17. The debate surrounding the Greek crisis and aid package has had the positive effect of encouraging a frank discussion ofnational interests within the EU. “We mustn’t forget that even though this is a European project, it has been created andmaintained because there are state interests at stake. Germany did not enter into this series of arrangements out of some formof altruism.”18. Several members questioned the effects that this crisis will have on Greece’s regional ambitions. It seemed clear to allparticipants that Greece may have to cede some ground on its more costly and controversial positions as part of an overallretrenchment of finances. In particular, there is much hope that a joint agreement between Greece and Turkey can producemutually acceptable cuts to military spending and force draw-downs in the Aegean Sea.19. The eurozone’s stability and long-term viability dominated the remainder of the discussion. Several members wereconcerned about a possible ejection of Greece from the monetary union. However, the speaker made it clear that this wasextremely unlikely as the impact would be devastating for the eurozone and beyond. Several members recognised that theStability and Growth Pact had proven ineffective, but it nevertheless should remain the starting point for any future reforms.Members were also concerned with endemic fraud across the eurozone and that the convergence aims of the EU in generalhad led to the financing of failing or outdated institutions. Clearly, fundamental reform of the EU’s and eurozone’s growth andintegration policies will have to be reconsidered to ensure long-term sustainability.

Chairman of the Sub-Committee, in replacement of Attila Mesterhazy (Hungary), Rapporteur20. Petras Austrevicius (LT) presented the sub-committee’s draft report and provided an assessment of the various economicpolicies adopted by Central and Eastern European governments in the run-up to the crisis. He suggested that integration withthe world economy had reinforced these governments’ discipline, but excessive government spending during the years ofexceptional growth had proven burdensome. Clearly, business cycles and volatility remain important features of the globaleconomy. The Rapporteur suggested that the countries of the region must be even more vigilant in maintaining economicdiscipline in order to possess the resources to manage downturns. This will compel governments to look more closely atnational budgets and slash excess spending. Defence budgets are not likely to be spared. It will nonetheless be essential tomaintain core capabilities even as cuts are made.21. In the discussion, the critical role of free trade in creating prosperity was stressed. Proper regulation of financial marketswas also identified as critical to long-run stability. The Rapporteur suggested that parliamentarians must stand strongly for freertrade in the face of calls for protection. Members were more divided on the best manner to prevent market bubbles. Whilesome saw the need for lower, sustainable growth targets and harder rules against speculation, several participants including theRapporteur noted that regulation can also undermine competitiveness and thereby lower growth prospects for emergingeconomies.

VII. Consideration of the draft Report of the Sub-Committee on Transatlantic Economic Relations Global Recession,Poverty and Insecurity in the Developing World [052 ESCTER 10 E] by Jeppe Kofod (Denmark), Rapporteur24. Jeppe Kofod (DK) presented the sub-committee’s draft report which assesses the economic, developmental and securityimplications of the global financial crisis for the developing world. He noted that during the past decade, capital inflows to poorcountries increased enormously, and that much of this capital went into productive investments and into the scaling-up ofregulatory structures, particularly in the banking systems. Critical macro- and micro-economic reforms help explain the relativeresilience of these poorer economies during the recent crisis.25. While developing economies fared far better in this crisis than in the past, the Rapporteur noted that the global recessioncame immediately on the heels of the global food crisis, which severely hurt the health and vitality of many people in thosecountries. Indeed, the surge in commodity prices during the boom of the past decade reduced access to food for millions ofpeople, resulting in widespread rioting and civil unrest. Although many developing countries rely heavily on the exports ofcommodities, millions of farmers and landless labourers gained little from price rises as their input costs (i.e. fertiliser and petrolfor transport) had also increased.26. The Rapporteur took particular note of the plight of the Least Developed Countries (LDCs), the populations of whichsuffered especially hard during the food price crisis and the global financial crisis. While these countries saw minorimprovements in their economies during the boom, they were largely unable to establish stable political and economicstructures. They thus remained vulnerable to absolute poverty and civil strife. From a security angle, these countries meritparticular attention, and donor support is clearly needed. Yet some donor governments are slashing aid budgets, and this couldhave important humanitarian and security consequences.27. The Rapporteur concluded his remarks with a call for western governments to remain committed to developing countriesand to support both those that are emerging as global traders and LDCs. He suggested that the rapid completion of the Doharound of trade talks could bolster global growth. Donor countries need to remain committed to improving and coordinating aidprogrammes in order to ensure a strong development impact for given aid levels.28. In the discussion members commented on the specific focus of aid programmes. The Rapporteur stressed that aid shouldbe targeted on emerging countries and LDCs. But, again, aid must be better co-ordinated as stressed in both the Paris andAccra declarations. The role of China in Africa was also discussed, and in particular the questionable development impact of theaid it provides. Chinese investment is important, and the Rapporteur suggested that donor countries need to engage with China

VIII. Consideration of the draft General Report Long-term Economic Change and the Shifting Global Balance of Power[051 ESC 10 E] by Simon van Driel (Netherlands), General Rapporteur29. Among other things, this report addresses the slow but steady shift of relative economic power from West to East. TheGeneral Rapporteur, Simon van Driel (NL) suggested that this shift should not be seen as a bad thing in itself as these broadtrends present opportunities as well as challenges. Members of the Alliance, however, will have to think seriously aboutmanaging their economies and foreign policies in a world in which their own relative weight has diminished. Although the Euro-Atlantic Alliance remains the pre-eminent security and economic bloc in the world, ignoring the rise of other powers would beperilous to global security.30. The Rapporteur noted that the key theme of the report is that economic and strategic powers are closely interlinked.Economic dynamism will continue to underpin military strength and political and diplomatic influence. This is epitomised in thechallenges many member states are facing in consolidating their budgets while maintaining adequate funding for their armedforces. Alliance members will ultimately have to put their fiscal policies on a sustainable foundation and thereby ensure not onlytheir long-term economic viability but also the sustainability of their military posture.31. The rise of powerful players such as Brazil, China and India reflects a range of economic, policy and even demographictrends. As these countries become more self-assured, their policies will likely turn outward from their traditional domestic focus.The implications of this are not entirely clear, although it will certainly lead to new challenges as well as new opportunities.China, for example has been an engine of the global recovery and this has relieved the United States from what has been itstraditional burden. But it is also a rising naval power with which the US will have to contend.32. The Rapporteur argued “adjusting to these broad changes will require creativity and flexibility coupled with a strategic visionthat is informed by our values.” The strengthening of the G-20 forum is a clear sign that this broad shift in power can bemanaged amicably. Maintaining the competitiveness of our aging societies will require serious analysis and discussion, focusedon long-term solutions. The Rapporteur concluded his remarks saying our “greatest test as an Alliance may lie in how werespond both nationally and collectively to these critical challenges.”33. In the discussion, several members questioned the assumption of a zero-sum game in the global economy. While therewas general agreement that the improved economic situation for the world’s poor was a universal good, there was equallyrecognition that the investment role of China in Africa could undermine the push for democratisation and human developmenton the continent. There was a suggestion that the report include more specific data reflecting China’s rise and on thedemographic and economic situation of the Alliance from a long-term perspective.34. In terms of building greater fiscal sustainability over the long run, it was suggested that strengthening the EU’s Stability andGrowth Pact would enhance economic viability. As for the role of the Alliance in the long-term, the Rapporteur suggested thatwe will need to learn to work with rising powers, because Allied countries can no longer operate as world policemen due toserious economic constraints, among other things.