Wednesday, 30 September 2009

Has Icarus Landed?

Icarus has landed

Those who have been following the tale of the Icarus Economies (see previous post) will be familiar with the view that the economies that have risen the highest and the fastest in recent years have been subject to some of the largest falls. The latest chart from The Economist (see article) suggests that Icarus has stopped falling and finally has landed. The question now is the degree to which Icarus has experienced a hard landing.

Looking at the chart, it would appear that the growth in industrial production in the three Baltic Economies has fallen from a band of 5%-10% pa to falls of 20%-30%. This is a large fall and suggests that Icarus has taken a hard landing. hat does that mean?

The significance of these falls will be felt in Europe. The Baltic economies are pegged to the Euro and supported by European institutions. In order to recover from this fall, reform is needed in the Baltic Economies. And yet, economic reform is politically unpalatable. If reform is not undertaken, then the Baltic Economies have the capacity to deteriorate further (Icarus keeps falling). If reform is undertaken, then there is the risk of the political destabilisation of the Baltic.

This would matter because the Baltic States are members of the EU (perhaps their entry in 2004 was a bit premature?), members of NATO (was this a sound expansion policy?) and have borders with Russia. This is where the problem might come in the future. An expansionist Russia looking to restore its sphere of influence in Eastern Europe would see the Baltic States as a prime object. The only way to counter this is to keep up the flow of Euros supporting the Baltic Economies. Is there the political will in the EU to do this?

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