June 27, 2009 By Citizen M

Latvia’s currency peg: Politics 1, Economics 0

I see that Anders Aslund from the Peterson Institute née IIE is defending Latvia’s currency peg again, this time in the Moscow Times. Given the dearth of such defenders among the conventional economics wisdom crowd, and considering Russia’s kabuki-like rhetoric over its own currency policy, I thought this something worth drawing attention to. Not only that, but I dare say currency peg cheerleaders are a dying breed. This is not to say that pegs are uncommon, but simply that nowadays no country is ultimately considered to be fully developed until it can float its own currency in the international foreign exchange market, somewhat like sitting for an exam without a crib sheet to consult (Hong Kong is an obvious exception, but also not technically a country).

Now, I could get all petty-nitpicky-snipey with Aslund’s defense and quibble that rejecting a comparison to Russia c. 1998 and ignoring a comparison to Argentina c. 2001 while choosing to compare Latvia with Denmark and Barbados – all while contending that Latvia is a special case – is a non-sequitur, self-serving, disingenuous and lazy all wrapped up in one. Or, I could get all econo-geeky and point out that substituting the triple-whammy of wage cuts, tighter government spending and deflation for a currency devaluation is tantamount to trading six for half a dozen when faced with an asset-liability mismatch as deeply embedded as Latvia’s.

But that’s not what I want to do here, in part because plenty of others have already taken enough of a swat at it from an economic standpoint (and indeed, those predicting a devaluation are many: Business Monitor International, Paul Krugman, Edward Hugh, Ambrose Evans-Pritchard, Marxist theoretician Boris Kagarlitsky, and, with an Op-Ed that frankly reads as though it was penned by one of his underpaid student assistants, Nouriel Roubini). No, what I would rather do is propose the Latvia currency situation as an example of politics trumping economics.