Baltic states need not devalue; monetary policy consistent with pegs: Steve Hanke

Aug 02, 2009 (LBO) – The Baltic states of Latvia, Estonia and Lithuania are running monetary policy consistent with maintaining their currency pegs, and should adopt the Euro rather than give into devaluation calls, a top monetary economist has said. Some US economists including Paul Krugman and Nouriel Roubini are predicting another wave of defaults and economic collapses to sweep Europe on the premise that Latvia will be forced to devalue and default on its debt like Argentina did in 2002.

But Steve Hanke, from the The Johns Hopkins University in Baltimore says the Baltic nations are running monetary policy consistent with a strong currency peg and should not give into devaluation pressure.

“The data speak clearly,” Hanke wrote in the August issue of GlobeAsia, an Indonesian based publication.

“Latvia and its Baltic neighbors are not repeats of Argentina. Their economies have suffered greatly from a sudden stop of foreign investment and from recession in
Western Europe, but they retain ample foreign reserves.”

All three countries have foreign reserves to fully back their monetary bases (domestic money supply made up of circulating money and