Austerity Advocates

The Euro's Hard Core

grybau
Dalia Grybauskaite, the president of Lithuania, leads a group of Baltic and eastern European countries that are increasingly advocating for a hard euro.
  • Why it matters

    Why it matters

    Increasingly confident euro members like the Baltics could re-shape some of the long-held alliances in Europe as they throw their weight behind Germany’s more conservative “northern” way of thinking.

  • Facts

    Facts

    • The Baltics are the euro zone’s newest members: Lithuania joined in 2015; Latvia in 2014 and Estonia in 2011.
    • All three Baltic states went through a tough phase of austerity, shrinking their economies and budgets in order to join the common currency.
    • Bordering Russia, the three Baltic states have also been outspoken about the geo-political risks facing Europe.
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    Audio

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Lithuanian President Dalia Grybauskaitė isn’t one to mince words. A black-belt in karate, she is one of Europe’s most outspoken leaders on issues ranging from dealing with Russia to same-sex marriage.

She’s also taken a hard line in the recent talks over whether Greece should remain in the euro. Ms. Grybauskaitė, who leads the latest country to enter the euro currency bloc, has offered some of the toughest words of any leader in the past few weeks.

“The Greek government still wants to party, but the bills have to be paid by somebody else,” she complained in a tweet last month, ahead of a make-or-break summit on whether Greece should get its third bailout in five years and avoid exiting the 19-nation euro.

Ms. Grybauskaitė leads a confident and tough-talking group of leaders and ministers from the euro’s newest members – the Baltic states of Lithuania, Latvia and Estonia, and Slovenia and Slovakia, which are increasingly preaching a new kind of fiscal tough love.

Their influence is re-shaping some of the continent’s long-held alliances.

The bloc is giving Germany a new set of conservative economic allies who are demanding that E.U. governments stick to the rules, exercise budget discipline, and resist the siren call to spend their way out of slow growth or a debt crisis.

“The leading policymakers here are clearly behind the Germans. You could argue that they are more German than the Germans,” Karsten Staehr, a former official at Estonia’s central bank and now an international finance professor at Tallinn University of Technology, told Handelsblatt Global Edition. “We here would like to think of ourselves as part of ‘northern’ Europe,” he added.

“The leading policymakers here are clearly behind the Germans. You could argue that they are more German than the Germans.”

Karsten Staehr, International finance professor, Tallinn University of Technology

The new austerity advocates have much in common: The countries are all post-Communist states; their populations are poorer than Greece in terms of income and pensions; many went through tough austerity reforms to join the euro; and they all have, in one way or another, contributed to three rounds of emergency bailouts for Greece.

To these countries, the protests in Athens and accusations of Greek policymakers that Europe’s creditors are practicing “monetary terrorism” have fallen on deaf ears. While their leaders may express “solidarity” with the Greek people, all backed Germany in its push to demand tough reforms of Greece for the country to stay in the 19-nation euro.

“A concrete approach was needed. Germany took this concrete approach and I think that it was actually the only way to stop this limbo that we have seen in the last five six months,” Urmas Paet, Estonia’s foreign minister from 2005 to 2014 and now a member of the European Parliament, told Handelsblatt Global Edition.

“If we manage to handle the Greek situation, it is my first preference. It means that Greece stays in euro zone and we try to solve this Greece issue with a common effort…but it does not mean that one government can keep hostage all the rest of the European countries,” Mr. Paet said. He said he sees a “50-50” chance the recent bailout deal with Greece will hold.

Estonian Prime Minister Taavi Rõivas tends to agree, warning in an interview with Handelsblatt published today that it will be “difficult” to convince lawmakers in his own country to agree on a third bailout for Greece.

 

Outpacing Greece-01

 

The tough stance from the Baltic nations comes as the Franco-German alliance has suffered. With France remaining one of Greece’s most outspoken allies in the recent talks, Germany has turned north for support to countries such as Estonia to push through its austerity mandates.

The reason is partly down to experience.

Mr. Staehr said that Estonia’s own economic crisis of the past decade is a microcosm of the Greek debt crisis over a much shorter time frame. Like many countries around the world, households in Estonia over-borrowed in the run-up to 2008 until banks could no longer get loans repaid. The economy contracted nearly 15 percent in 2009 alone.

But rather than boost spending to make up the difference, the Estonian government held back on spending to meet the European Union’s demands to bring its budget deficit below 3 percent of GDP — a condition for joining the euro. The tough medicine pushed Estonia into a depression – unemployment peaked at nearly 20 percent – but it also bounced back quickly: Estonia’s economy grew more than 8 percent in 2011, though it has grown more slowly in recent years.

Estonia’s model was repeated in the neighboring Baltic states, which implemented the same tough mix of austerity and structural reforms to join the euro a few years after Estonia did in 2012. Mr. Paet argues that the pain was worth it to join the euro club of nations.

“Before the euro, people were still sitting and waiting before making investment decisions. Now with joining the euro zone, this kind of hesitation stopped immediately,” he said.

The Baltic rebound has many in the region scratching their heads and wondering why Greece has been so unable to do the same. While critics of austerity in Greece have blamed the tough economic medicine, Mr. Staehr said the failure of reforms in Greece probably has much more to do with politics and society – whether a country’s policymakers and people truly accept the medicine – than with economics.

Merkel-Lithuania-DPA
Between Angela Merkel and Francois Hollande: Lithuanian President Dalia Grybauskaitė. Source: DPA

 

In their reluctance to ease the stranglehold on Greece, the new euro members join a more established group of nations with bailout fatigue – mostly northern euro zone members that have long been more closely aligned in terms of their economic ideology with Germany rather than with France or Italy.

Some of these states have taken an even tougher stance than Germany. Anders Aslund, a senior fellow with the Atlantic Council, says that Finland, a notorious opponent of bailouts, clearly played an “outsize role” in the talks with Greece after a euro-skeptic party, the True Finns and their leader Timo Soini, threatened to pull out of the country’s governing coalition.

“No doubt Finland pushed Germany to go further than Germany otherwise would have done,” Mr. Aslund told Handelsblatt Global Edition. “Even though Mr. Soini wasn’t sitting at the table, he had more impact than anybody else apart from [German finance minister Wolfgang] Schäuble.”

For Germany, the additional support of states like the Baltics arguably helped officials take a tougher line in the discussions with Greece than they may have done otherwise. The fact that a number of smaller countries backed Germany’s hard-line position has made it more difficult to depict the country as the sole supporter of a tough deal.

“Small countries were making a sort of grouping to say to “no” to Greece,” Tatjana Muravska, director of the Centre for European and Transition Studies at the University of Latvia, told Handelsblatt Global Edition.

“New members, which have been very disciplined countries, feel that others should be very disciplined as well,” Ms. Muravska added. From that point of view, she says a “Grexit” was supported by many in the Baltics if Athens had refused to stick to the rules of the common currency.

 

Baltic Success-01

 

But while countries like Finland, the Netherlands and Luxembourg are considered traditional German allies, states like the Baltics, together with Slovenia and Slovakia, have offered a different storyline compared to past arguments over Greece.

For the former Communist states, the arguments over whether Greece should be helped go beyond a simple question of wealth and economics. While countries like Finland are used to taking a strong line with their neighbors, the Baltic states are still finding their way. Mr. Aslund said many were simply happy to have a seat at the table and let their voice be heard.

The Greek crisis has also been viewed through more of a geopolitical prism in the Baltics. Fears of instability on Europe’s eastern border if Greece should leave the euro were taken to heart more here than in many other European countries, argued Ramūnas Vilpišauskas, director of the Institute of International Relations and Political Science at Vilnius University in Lithuania.

“The meetings of the Greek prime minister and some of his colleagues with the Russian president and ministers were understood as a signal regarding potential risks of a Grexit,” Mr. Vilpišauskas told Handelsblatt Global Edition.

It is here where Mr. Vilpišauskas also feels that the Baltic states have more to contribute. Their history and expertise with Russia, he argues, have come in handy for Europe in other crises, such as that with the Ukraine, where the Baltic states have also been among the most outspoken in demanding tough sanctions.

These and other crises facing Europe have given the Baltic states increasing confidence that they have something to contribute – and that their voice will be heard increasingly going forward.

“There is a very strong feeling of growing importance,” Ms. Muravska of Latvia University said. “Latvia is gaining confidence being a member of the European Union, that’s for sure. There is a growing feeling that we belong to the European Union and the euro zone.”

 

Christopher Cermak is an editor with Handelsblatt Global Edition in Berlin, covering politics, economics and finance. To contact the author: cermak@handelsblatt.com

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