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Home arrow Political science arrow A New Model for Balanced Growth and Convergence: Achieving Economic Sustainability in CESEE Countries



The recent cyclical pattern of the Baltic economies demonstrates that under a credible fixed exchange rate arrangement there are several channels (e.g. the real interest channel) that might strongly amplify the effects of various shocks. Therefore there is a need to address the build-up of imbalances and vulnerabilities early and decisively. The necessity of preemptive policy measures is also underscored by the lessons from the euro area debt crisis, which confirm that adjustment afterwards via wages and prices is likely to be protracted and painful.

The experience of the Baltic and euro area countries show that a strong external anchor in the form of a membership in a currency union or a credible fixed exchange rate regime might lead to policy complacency. The current financial and sovereign distress in the euro area is a good example that such an anchor cannot be a substitute for policy discipline in other areas. On the contrary, there is a need for stronger discipline in other economic policies.

The adjustment in the Baltic countries has provided a more solid foundation for future growth. The external and financial vulnerabilities have been reduced and a significant sectoral reorientation and elimination of unsustainable activities and businesses have been achieved. However, various shocks continue to pose a challenge. Therefore a more active use of fiscal and macro-prudential police measures is warranted. Also the resilience of the economies has to be maintained.

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