Cause and Effect in European Politics and Law

The Eurozone Will Study from Valdis Dombrovskis's Baltic Textbook

Adelina Marini, October 9, 2014

Is there a clearer message about the new European Commission's economic policy in the next five years than the appointment of a Latvian former prime minister on the key position Vice President responsible for the Euro and the Social dialogue? Valdis Dombrovskis's CV is flawless as is his career as a prime minister who took his country out of the severest economic crisis after the country gained independence from the Soviet Union and turning it into the most dynamically growing EU member state, by in the meantime also fulfilling post-crisis the criteria for accession in the ailing eurozone (January 1st, 2013). Valdis Dombrovskis is a physicist by education (as is German Chancellor Angela Merkel, by the way). He has master degrees from universities in Germany and US.

He was a minister of finance and three times a prime minister of his country. He has experience also as a member of the European Parliament. He also worked as a chief economist of Latvia's central bank. The Baltic countries are a source of huge material for economic analyses and can serve as a textbook for mistakes and successful solutions for growth. After exiting the USSR in 1992, Latvia's gross domestic product collapsed by 30%. This happened again with the 2008 crisis leading to a GDP collapse of 18% in only a year. But yet in 2010, Latvia's economy recovered and scored only a minor recession of -1.3% compared to -17.7% in 2009. In 2011, the small Latvian locomotive started in full power - the GDP growth was 5.3%, in 2012 - 5.2% and last year - 4.1%. The predictions for this year see an economic growth of, again, somewhere around 4 per cent.

The recipe is simple, as explained Valdis Dombrovskis, his former minister of finance Andris Vilks and the central bank governor Ilmars Rimsevic - speed, determination and ownership. During this year's Brussels Economic Forum, Valdis Dombrovskis said that after Latvia only Greece experienced such a dramatic and huge collapse of its gross domestic product combined with a large scale fiscal consolidation. But why is Latvia already a growth champion in the EU and Greece is hardly on its way out ailing and devastated? Because, the former Latvian premier explained, we did not delay the reforms. The pain will not go away if treatment is delayed in time. On the contrary, he said back then in Brussels.

Another very important part of Latvia's recipe book is good communication, as Andris Vilks told the European Parliament before the country's accession in the euro area. Essential is the cooperation with the social partners and explaining the need of the measures to the society. Because of all this, it is no surprise at all that the new European Commission chief, Jean-Claude Juncker, chose precisely Valdis Dombrovskis among many others to take one of the most important jobs in the new Commission - a vice president responsible for the euro and the social dialogue. His mission is to steer and coordinate the work of several commissioners, but mainly of the commissioner for economic and financial affairs, taxation and customs; of employment, social affairs, skills and labour mobility; of financial stability, financial services and capital markets union.

Although they deny it publicly, documents have already leaked showing that Mr Juncker had very clearly defined the hierarchy in his economic team and the former Latvian premier will have the final say in the team's work. He will be responsible for the European Semester which is a very important decision because it is precisely work on it that caused France's discontent as the Commission is recommending measures President Francois Hollande is reluctant to impose. Moreover, his former finance minister Pierre Moscovici, nominated to take the once strategic portfolio of a commissioner for economic and financial affairs, said a year ago that France would not take the Commission's recommendations into account and would seek a path of its own. A major task for Mr Dombrovskis would be precisely to oversee the implementation of the recommendations in the European Semester and of the reforms.

Apart from that, the former Latvian premier is tasked to steer the reform of the euro area on the basis of the Four President's Report and Jose Manuel Barroso's blueprint. He will also be responsible for a possible reform of the EU's economic governance (the six-pack and the two-pack) after a thorough review which will begin in the end of this year. Valdis Dombrovskis will also deal with the Troika as the goal is to replace it with a more accountable structure which will prepare measures after a social impact assessment. Valdis Dombrovskis will manage and coordinate the Commission's participation in the Ecofin, the Eurogroup, the monetary dialogue with the European Parliament and all the other EU formats. This means that he will decide who of all in the Commission's economic team should be sent at a specific meeting depending on the issues to be discussed.

Dombrovskis - convincing and competent in the European Parliament

The former Latvian prime minister's hearing in the European Parliament was one of the much anticipated ones and one of the few that went on smoothly and entirely on the substance. There were candidates who were controversial both in personal and professional aspects, as was Pierre Moscovici or the former prime minister of Finland Jyrki Katainen. The confirmation hearing of Valdis Dombrovskis passed without any question marks aimed at his personal or professional qualities. A majority of MEPs, especially from his own political orientation (EPP) hoped that he would apply his experience in taking Latvia out of the crisis in his work on improving the functioning of the euro area. The left-wing MEPs mainly focused on how would he avoid a return to austerity.

Only Paloma Lopez (Spain) from the group of the far left criticised Dombrovskis that Latvia was one of the countries with highest social inequality, claiming this was due to the austerity policies. The World Bank data suggest that the gross national income per capita, measured by PPP, increased from $11 700 in 2004 when the country joined the EU to $22 970 in 2013. Again, according to the bank's data, poverty has significantly diminished in Latvia in the past decade. Nonetheless, in the European Commission's analysis under the European Semester, poverty in working age remains high in Latvia. But although it is far from the living standards in the old member states, Latvia has taken the bitter pills of reforms and as a country that is used to pain (because of its existence in the USSR) there was popular support to continue to the end.

It is no accident that Valdis Dombrovskis began his opening remarks precisely with this during his hearing on 6 October. He said that he was born and raised behind the Iron Curtain. For 50 years Latvia was forbidden to be part of Europe. For 50 years Latvia was forbidden to have basic democratic rights and freedoms. The very perspective to join the EU was sufficiently motivating for a complete transformation, Dombrovskis said. It is because of that perspective that the presence of the Baltic states in the euro area will bring a new vision about the goals of the project of the single currency and its meaning.

In his written answers to the MEPs from the economic and the social committees, the former Latvian premier points out that the functioning of the social dialogue was a key factor that convinced a majority of Latvians to agree with the unpopular measures. That is why, he is of the opinion that the most important thing in his work will be the implementation of structural reforms so that the conditions for investments and jobs could improve. He will mainly work on seeing how the member states implement and accelerate their work on committed reforms. What the EU needs is well functioning labour markets, capital markets and goodя markets, as well as a positive business environment. In other words, everything that can be read in the recommendations for France and Italy.

Generally, the fiscal consolidation stage is over, but not everywhere in Europe, he said. Now the direction is structural reforms to enhance the EU's competitiveness in general and individually of the member states, to strengthen the internal market, especially in the area of services, energy and digital content, investments in innovation and knowledge. The most frequent questions to him during the audition were related to the Troika's work and the austerity policy. There is no doubt that the financial and economic crisis has created deep social problems and increased significantly the unemployment, he said, but pointed out that there was much room for debate on the reasons and consequences. The austerity policy is a consequence of the crisis. It does not come out of the blue, he added. It happened in countries with deep macroeconomic imbalances.

The new MEPs, mainly from Nigel Farage's group Europe of Freedom and Direct Democracy (EFDD), like Steven Woolfe (UK) and Bernd Lucke from the German eurosceptic party Alternative for Germany, provoked Valdis Dombrovskis with statements about the harm the euro inflicted on the EU. At least 3-4 times he emphasised that he did not share their analysis about the role of the euro in the European economy. Different countries undertook various approaches, he said. But the euro is not to be blamed because non-euro countries, too, experienced severe crises, like Latvia. The reasons for the crises are the deep macroeconomic imbalances. Dombrovskis reiterated that he was a supporter of the euro and that he campaigned for his country's accession to the euro area. According to a Eurobarometer poll from June this year on the attitudes toward the euro, the Latvians' support for the single currency increased from the end of last year till mid-2014 to 68%. This is a year and a half after the Latvian lat was replaced by the euro.

According to Valdis Dombrovskis, the countries whose currencies are pegged to the euro, as was the case with the lat and as is the case of Bulgaria, it is better to join the eurozone because this will ensure their security in a large currency union. The countries with floating exchange rates, however, prefer to avoid fulfilling the Maastricht criteria because this would mean a radical change of their monetary policy, Dombrovskis added taking the position that the door should remain open for new members.

Asked about the mistakes he made in Latvia, Valdis Dombrovskis was very honest saying that his and his team's desire was to exit the crisis as fast as possible. In spite of the severe cuts, additional social networks were created to mitigate the pain. But the errors can be best seen in the Commission's recommendations, he explained thus admitting them concretely and giving his full support for the Commission's analyses. This year, the Commission gave five recommendations to Latvia. The first is to keep its fiscal position stable as well as not to deviate further from the mid-term objective for the budget deficit, allowed because of the radical pension reform being implemented currently. The second recommendation is to launch a reform of the high education. Latvia is also expected to reform its social assistance, to accelerate the development of gas and electricity interconnectors with neighbouring countries, to complete the judicial reform, especially in terms of insolvencies, arbitrages and mediation.

Valdis Dombrovskis is of the opinion that the EU should evolve together with all its 28 member states. His responses made it also clear that he will insist the countries with current account surpluses to work more to boost domestic consumption. Although he did not name any country in particular, there is no doubt he meant Germany which last year was for the first time included in the macroeconomic imbalances procedure because of its excessive current account surplus.

During the three hours exchange, Valdis Dombrovskis radiated confidence, competence and experience which was appreciated by most of the MEPs who were left completely convinced in his ability to take this very tough post. This decision puts an end to the domination of the old member states over the EU's economic policy. Something that is being acknowledged by ECB President Mario Draghi too. In a speech in Lithuania (which is to join the euro area on January 1st) in the end of September, he said that beyond economic aspects, the Baltic success shows that fiscal adjustment is politically feasible. In spite of the significant fiscal consolidation, there were no protests against any of the government measures. How is this possible, Mario Draghi asked. "In my view, we can draw an important lesson from the Baltic experience: governments not only acted boldly, but also immediately. They used the momentum of the crisis to implement the necessary consolidation and thus managed to convince the public of the need for these measures. Besides being politically astute, this swift and bold action was key in strengthening investors’ trust", Mr Draghi added.

With his performance in the European Parliament and his selection to take this strategic post, Valdis Dombrovskis is an illustration that the EU has learnt a lot  from the crisis and is able appreciate merits. This is a recognition for Latvia as well, which decided to give Juncker one of its most experienced politicians - a strong message for those countries that failed to overcome narrow interests for the sake of their country or the EU. With Valdis Dombrovskis overseeing the euro area a new chapter is being opened - from small Baltic tigers the Baltic nations are turning into euro area motors. Who could have predicted that 10 years ago?