Baltic convergence: steep and yet stable?
Siegfried Steinlein and Kristine Vlagsma (Directorate General for Economic and Financial Affairs)
Baltic convergence: steep and yet stable?(233 kB)
The Baltic states (Estonia, Latvia and Lithuania) have made remarkable progress in aligning their institutional and economic features with the longer-standing members of the EU. They have embarked on a steeper real and financial convergence path than the other countries that have recently acceded to the EU. Nevertheless, the potential for further catching-up remains high and it is important to keep the process stable. Ensuring sound private investment and sustainable consumption as counterparts to the high current account deficits will be particularly crucial for the realisation of a virtuous convergence scenario and the avoidance of boom-bust cycles.
All economic policies will need to be enlisted to achieve this goal, but fiscal policy will be key. A prudent fiscal policy needs to send the right signals to investors, avoid pro-cyclicality against the backdrop of potential overheating, and prevent an over-estimation of potential growth and structural revenues. Strengthened medium term fiscal planning will help to set growth-enhancing expenditure priorities, while keeping prudent fiscal balances.
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(Country Focus. 15. September 2005.
Brussels. 6pp. Tab. Free.)
ISSN: (internet) 1725-8375