The previous year was rich with events that developed dramatically. Their outcome, contrary to the process of development, was, for the most part, not that bad. Let’s recall some of the most significant ones.
Deflation: a state of uncertainty
We had to recall the terms ‘deflation’ and ‘low inflation’ at the beginning of 2015. Not only that, we had to live with those terms for the whole year. Prices on goods and services had either decreased or had been growing at a minimal pace. At first economists warned about the dangers of this process and the repetition of the Japanese scenario. The lack of inflation in Japan has led to major problems in economy. It has also led to a new term – ‘lost decade’. This is because Japan’s economy remained in a coma for ten years. Eventually Eurozone member states got used to the fact that prices do not grow. Experts expressed hope that deflation would remain only in the first half of 2015. Nevertheless, the situation did not change much in the second half as well. Ilmars Rimsevics, Governor of the Bank of Latvia, described the state of things by saying that Latvia’s economy was in a state of uncertainty. He called it a state of healthy stagnation. Local economists stopped dramatizing the situation after a while. They then proceeded to say that deflation is not necessarily the herald of economic apocalypse. There could be multiple reasons behind stable prices; some of those reasons may be positive as well. This can be a result of developing technologies. The possibility of beneficial inflation is high in small countries like Latvia, said the economists.
Mutual sanctions: no one wanted to budge
It is too soon to speak of technological development as a cause for deflation in Latvia’s case. The cause behind zero growth of the cost of consumer goods and services lies in low oil prices, mutual sanctions between Russia and Europe, poor development of Eurozone’s economy and weakened Russian economy. All of this has had a major impact on Latvia’s national economy. Latvian Foreign Ministry published a report at the end of 2015. In it, officials mentioned that the Russian food embargo cost Latvia EUR 60 million or 0.25% of GDP in 2015. Considering the losses related to the recession in Russia, the total size of losses for Latvia exceeds EUR 200 million. Some experts believe the indexes of losses of Latvia’s economy are significantly underestimated. Specialists had previously predicted the loss of EUR 200 million in fish processing industry alone. Another EUR 50 million of economic losses were noted in Latvia’s dairy industry, which also had a rough year because of sanctions. The total losses of the country’s agricultural sector are estimated at EUR 140 million. On top of all this, the EU Council has decided to extend sanctions against Russia until July 2016.
Another topic that remained notable throughout the year is the migration crisis and Latvia’s duty to resettle refugees. What is good is that clarity that was not present in the first half of the year finally appeared in the second half. In particular, it is now known that Latvia will have to resettle 531 refugees. The refugee resettlement plan was approved by the government by the end of 2015. In order to make sure they do not remain in Latvia for too long, benefits have been reduced to EUR 139.
Experts believe that migrants are unlikely to remain in Latvia. It is far more likely that those people will want to depart for richer countries instead. Estimates suggest a single refugee would cost Latvia EUR 1,584 for the first nine months of stay. It is said the EU will provide member states EUR 6,000 per refugee, which is not enough. Countries will likely be forced to either finance resettlement on their own or force refugees to work or leave.
Presidency over the EU Council: the party was great
Last year, Latvia presided over the EU Council for the first time. The country’s presidency term lasted for the first half year. On 1 July, Latvia handed the post to Luxembourg. As noted by some experts, Latvia managed to avoid making serious mistakes. This was most likely because of the fear of doing something wrong. The Eastern Partnership summit, which was part of Latvia’s presidency programme, was neither sensational nor unsuccessful. It was never planned to sign any historic agreements or accept new members in the EU. Latvia, especially Riga, was quite popular among foreign tourists during the presidency term. This also helped compensate the decline of Russian tourists.
Greece: sirtaki for the whole Europe
The only thing to dampen the mood during Latvia’s presidency was the unfortunate growth of problems in Greece. Nevertheless, one very important decision on the Greek problem was made during Luxembourg’s presidency after a referendum was held in Greece in regards to paying back the debt owed to international creditors: Greeks voted in favour of not upholding their end. This was incredibly hard for Eurozone. Fortunately the problem was resolved in August. After long debates the Greek parliament managed to approve the programme for bailing the country’s economy with previously developed memorandum of the European Commission, IMF and the European Central Bank.
This memorandum includes conditions like recovery of fiscal stability, provision of financial stability, contribution to growth, competitiveness and attraction of investments. The bulk of attention will be focused on raising efficiency of the government sector. Finally, all Eurozone countries have agreed to support the new bail programme for Greece worth a total of EUR 86 billion.
Budget and taxes: irony and fairness
2015 will go in Latvia’s history as the year of appearance of the so-called solidarity tax, which will apply to Latvia’s wealthiest people. Latvian Finance Ministry has also come up with a general portrait for such people: it is a person who earns EUR 4,000 or more per month or EUR 48,000 – EUR 75,000 per year. It is estimated that Latvia has only 4,700 such people. They are the ones who will have to pay the solidarity tax. Finance Ministry believes this tax will put an end to the contradiction that a certain number of people are allowed to pay less tax from their income than others.
The geopolitical situation and mutual sanctions have negatively impacted the country’s economic development. At the same time, experts say the need for defence, healthcare and education continue to rise. Money has to come from somewhere. This has led to sudden initiatives for tax change and the fight for every spare euro during talks regarding minimal wages. Everything pointed towards chaos and lack of systemic approach caused by the need to create a sustainable budget under conditions of chronic deficit of funds in the country. The budget was approved in the end and Prime Minister Laimdota Straujuma called it the fairest budget created in the interest of each Latvian resident to balance out the interests of different groups of people and reduce income inequality. Internal and external security, better healthcare and education are the main priorities of Latvia’s budget for 2016. However, neither doctors nor teachers have had their wages increased. In spite of that, EUR 700,000 have been allocated to raise wages of the prime minister, members of the government, parliamentary secretaries of ministries and heads of parliamentary committees. Income of the aforementioned people has increased by EUR 600-700. Basically their wages were increased at the expense of doctors and teachers, people who work in industries mentioned as priorities of the budget of 2016. What is ironic about all this is that Laimdota Straujuma will not be able to enjoy this fair budget and increased wage, as she announced her resignation in December 2016. Parties of the ruling coalition have yet to pick a replacement for her.