Saturday, January 11, 2014

The Eurozone asterisk

As we already noted, Riga was overrun today by VIPs from Brussels who arrived to bask in their own glory of Latvia joining the Euro. Here's European Commissioner for economic and monetary affairs Olli Rehn with the "there's just one thing I should have mentioned before" moment of his speech --

Latvia joins the euro area as a catching-up economy. There is a potential for further price level convergence in the long term, as income levels rise towards the euro-area average. While this does not automatically imply a loss of price and cost competitiveness, the process needs to be managed carefully in order to pre-empt excessive price pressures at an early stage. This in turn requires productivity growth, continuous improvements in business environment and new investment. Looking ahead, it is essential that sustainable convergence is not jeopardised by another round of re-emerging imbalances assuming that real interest rates may remain for a while lower in Latvia than in the euro area on average.

The issue is that technocrats can use all the formulations they want about the wonders of structural reform, but Latvia is bound to have lower real interest rates than other Eurozone countries because the interest rate is set in Frankfurt but local prices have to rise as it gets richer.

See under: Ireland, Portugal, Spain, Greece. Is the Commission at least tacitly admitting that the Euro was flawed for these countries? Maybe the Eurocrats used their time in Riga to buy property.