New research shows that EU integration may mean smaller rewards for Baltic States
A doctoral dissertation released this week by the Helsinki School of economics shows that the integration of the Baltic States into the EU, in trade, monetary and fiscal policy may have varied results. The author, Niina Pautola-Mol, argues that although enlargement for the Baltic States of Estonia, Latvia and Lithuania involves deep integration into the EU -from free trade to a common market and harmonized rules and policies - it confers relatively minor trade advantages. This is because most of the bilateral trade has either already been liberalized or remains protected on sensitivity grounds. While the EU has played a significant role in opening up the West European market for Baltic industrial products, the report argues that the latter could demand more in terms of liberalization of agricultural trade. If the EU opened up its agricultural trade with the Baltic States, however, it would be under political pressure to do so with the other Central and Eastern European associated countries as well. Surveying the monetary systems of Estonia and Lithuania, the dissertation argues that their currency board arrangements are experiencing increasing problems, which mainly stem from persistent real appreciation, high current account deficits and increasing capital mobility. The third section of the study indicates that Estonia and Latvia have been more successful in maintaining fiscal discipline than Lithuania. The average annual budget deficits of Estonia and Latvia exceeded the Maastricht convergence criteria value of 3 per cent of GDP only once in the period, 1996 to 2000. Lithuania, however, finished above the target four times out of five in the respective period. The study suggests that if the Baltic countries commit themselves to the medium term objective of keeping their budgets in balance, the Stability and growth pact would offer enough room for automatic fiscal stabilizers to function in Estonia and Latvia, but not necessarily in Lithuania. All in all, given the 'pros' and 'cons' of fiscal institutions, it is concluded that the 'Maastricht' fiscal targets do represent good policy goals for the Baltic States, but rather from a longer run perspective than today's policy making. Niina Pautola-Mol is a member of the Delegation of the European Commission in Russia. Her research, carried out from 1998 to 2002, was partly funded by the European University Institute (EUI), Florence.