The IMF at war with the EU


by F. William Engdahl
Global Research, August 3, 2009


The global financial and economic crisis has hit the small Baltic country Latvia harder than any single country with the possible exception of Iceland. As part of its attempt to join the European Monetary Union the country has fixed its currency the Lats to the Euro. The result has been to make a bad situation catastrophic. How the situation develops will have direct bearing on the fate of many emerging countries of eastern Europe. It marks the death of the radical experiment with Thatcherism in eastern Europe.

On the surface the crisis the country is experiencing the result of a borrowing binge among consumers which got out of control and now must be reigned in by tough government austerity measures. In reality, it is a tale of greed of foreign bankers, a failed economic reform and a political system that is fixated on Euro entry as the Holy Grail for the economy.

Events in Latvia over the past two years signal the death of the radical neo/liberal Thatcher economic shock therapy imposed after the dissolution of the Soviet Union when the West, led by Washington, mandated that the IMF dictate terms of economic transformation for the former Soviet economies.

On the one side are western banks, above all Swedish banks which more of less colonized Latvia after 1990 as their ‘sphere of influence.’ They are allied with the IMF and the EU, though of late the latter two are themselves in a deep policy split.

On the other side is a growing grass roots popular protest which since January has led major marches against the government, and which has just elected to Parliament an ethnic Russian party for the first time since 1990, with ethnic Latvian support, as a signal of the depth of protest to the free–wheeling plunder era of the past two decades. Until the present crisis, Latvia was praised in western financial markets as the ‘poster child’ of free market success in the region. It was growth based on easy credit, a real estate bubble and consumer debt. The success was only for a tiny elite of bankers and local oligarchs as now is clear.

The IMF at war with the EU

At the moment all eyes are on what the IMF and the EU will do in terms of emergency financial support to the country. Much of the present crisis has to do with the Governments fixation on holding the currency peg to the euro rigid in hopes it will be able to enter the Euro zone in four years. The only ones that gain advantage from the currency peg are those with Lats-denominated paper assets. It makes little sense ultimately, because the deflation of the economy required to maintain the peg will result in the paper assets defaulting anyway, except for government paper.

As always the IMF is demanding savage austerity from the Government as precondition for its loan. To meet the demands the Government adopted a package of measures last month that include a huge wage and pension cuts.

An average Latvian earns around Euro 400 a month. Slashing wages results in more deflation as consumers buy even less and business bankruptcies climb. The IMF medicine is simple, but deflation something the US and EU countries are desperate to avoid at all costs. Eager to shift blame for the growing fiasco, IMF officials claim they demanded the savage austerity package on the urging of Latvia’s neighbors.

According to informed EU banking sources, the EU and the IMF are in a bitter internal fight over Latvian aid terms. In December Latvia got a €7.5 billion emergency “stabilizationâ€