Baltic Pain

Gideon Rachman’s column in the Financial Times focuses on the ongoing economic troubles in the Baltics – and the threat it poses to European and Russian recovery.

The economic downturns in the region are shocking. Last week, Lithuania announced that its economy had shrunk by 22.4 per cent, at an annual rate, during the second quarter of 2009. Latvia and Estonia are likely to record similar falls when they announce their figures. Dalia Grybauskaite, the Lithuanian president, told me last week that her country might have to apply to the International Monetary Fund for a loan. Latvia has already trodden that path. Last week it agreed its second loan in eight months from the IMF and the EU. (…)

I last visited Vilnius in the early 1990s, when the place still felt very Soviet. It is moving and impressive to see how prosperous and cared-for the city now looks – and how many visitors from western Europe are visiting the sights and drinking in the cafés. Riga, too, now looks more like western Europe than Russia.

But, for the first time for a long time, there is a sense that these gains are under threat. The EU authorities in Brussels are well aware of what is at stake and are overseeing Latvia’s recovery efforts with an almost imperial authority. Europe’s fear of the destabilising effects of devaluation is completely understandable. But, in an effort to preserve the impression of stability in the Baltics, the defenders of the peg risk creating the conditions for another almighty economic thunderclap later this year.