:00:02. > :00:12.promised to tackle what he's called the "menace of terrorism". Now on
:00:12. > :00:15.
:00:15. > :00:19.The Baltic way out of the financial crisis has been austerity and
:00:19. > :00:21.Latvia led the way. When the banking collapse wiped out a
:00:21. > :00:27.quarter of the economy and unemployment hit 20%, it took
:00:27. > :00:32.drastic action. Critics say the correction was harsher than
:00:32. > :00:35.necessary because Latvia pegged its currency to the euro. Why does he
:00:35. > :00:44.hope that in Brussels this month the EU will say yes to Latvia
:00:44. > :00:49.joining the euro, when many of his own citizens want to say no? Well
:00:49. > :00:59.they make it the 18th member of the eurozone? My guest today is Valdis
:00:59. > :01:15.
:01:15. > :01:21.Dombrovskis, Latvia's Prime My guest today is Valdis
:01:21. > :01:27.Dombrovskis, Latvia's Prime Minister. This month the finance
:01:27. > :01:32.ministers will confirm you as the 18th member of the eurozone. Five
:01:32. > :01:39.years ago the global crisis almost destroyed the economy and many
:01:39. > :01:46.people think you would be mad to join? In fact, it was during the
:01:46. > :01:55.crisis when we decided it would be the date for us to join the
:01:55. > :01:59.eurozone. The currency was pegged to the euro. Not being part of the
:01:59. > :02:05.eurozone was part of the problem not the solution. Besides doing all
:02:05. > :02:12.of the adjustments we had to defend the currency. There were questions
:02:12. > :02:18.about that. We were also dealing with those problems band the
:02:18. > :02:21.budgetary problems. E-coli, because it was paid to the euro people say
:02:21. > :02:26.your hands were tied because you could not devalued to help reduce
:02:26. > :02:31.the pressure and you needed to go through come severe measures. One-
:02:31. > :02:40.fifth of your economy, one quarter vanished. A third of the public
:02:40. > :02:49.sector was fired and 30 % of people had a pay cut. Certainly, when you
:02:49. > :02:53.are in a crisis as Latvia was in 2008 and 2009, 17.7 % recession and
:02:53. > :03:00.we had to do the necessary adjustments. We look at the options
:03:00. > :03:05.and clearly it was even more painful that option. We are very
:03:05. > :03:15.small and open economy. Whatever gains we would get would disappear
:03:15. > :03:22.quickly. And we had to consider inflation. Energy costs and so on.
:03:22. > :03:28.You said this to the newspapers, joining was a kind of insurance?
:03:28. > :03:38.Joining the eurozone has been a long goal of Latvia ever since we
:03:38. > :03:40.
:03:40. > :03:50.joined. The members need to commit to that. Exactly. Our first target
:03:50. > :03:53.
:03:53. > :04:01.was set in January 2008. We thought it was a good idea. We tried to
:04:01. > :04:06.defend the currency. The banks within the eurozone have access to
:04:06. > :04:12.liquidity. Allow banks did not have access to the liquidity and that
:04:12. > :04:18.made the situation of the banking sector worse. Is it really such a
:04:18. > :04:23.good decision for the future? Decisions in the eurozone mean that
:04:23. > :04:31.the future bail-outs will not be available and that people will take
:04:31. > :04:35.a hit for up to eight % if the bank goes under of the resources. They
:04:35. > :04:45.will be the depositors and the creditors. You cannot just run to
:04:45. > :04:50.Brussels for help. Clearly, in certain cases there will be
:04:50. > :04:56.problems. It's often discussed and it's not the case within the
:04:56. > :05:03.eurozone but also outside the eurozone. How to make the tax
:05:04. > :05:08.payers pay for the bank mistakes. It should be the credit tours and
:05:08. > :05:17.the shareholders. The say the country is committed. You will join
:05:17. > :05:22.the eurozone and the currency. The voters are not so sure. In
:05:22. > :05:30.September last year a 59 % were against joining the eurozone.
:05:30. > :05:36.There's also 35 % and men would never join. Amongst the yes vote,
:05:36. > :05:45.22 % said some time in the future but that does not seem like much
:05:45. > :05:50.enthusiasm. What could you expect, given the situation for three years.
:05:50. > :05:56.People have heard about the eurozone and all of the crisis. No
:05:56. > :06:01.wonder the people don't want to be too enthusiastic. There to be cast
:06:01. > :06:06.to explain the economic reasoning. Why is it a good idea for Latvia to
:06:06. > :06:11.join? Helping the interest rates and the currency problems. Judge in
:06:11. > :06:15.by these figures you are not doing a good job. Those figures were from
:06:15. > :06:23.October last year. By now, the public support is steadily
:06:23. > :06:29.improving. For the past six months with an information explaining that
:06:29. > :06:38.the economic reasoning and the nature of the crisis. The currency
:06:38. > :06:44.seems to be doing just fine. April the survey said the Yes vote
:06:44. > :06:53.was 36 % which is a long way short. We have continued to work on that.
:06:53. > :06:57.The final decision will be in July. Then we will launch another
:06:57. > :07:03.campaign to explain the practicalities. Exactly what the
:07:03. > :07:10.people can expect. Macro economic worries but mostly people worry
:07:11. > :07:16.about practicalities. The savings. Costs going up. We need to explain
:07:16. > :07:22.those practical reasons. The Baltic way of Economics has been posterity.
:07:22. > :07:26.You had a lot of praise from Christine de garde saying you have
:07:26. > :07:30.returned to strong growth with price cuts and restored confidence.
:07:30. > :07:38.Do you have any doubts that all about the effect of austerity
:07:38. > :07:42.within Europe? Certainly, austerity per say is not helping the economic
:07:42. > :07:47.development It's clear but it's also clear that when you are in a
:07:47. > :07:52.situation like we were in 2009 when the financial markets were not
:07:52. > :07:56.trusting you, you'd better act quickly and do the necessary
:07:56. > :08:01.adjustments in order to be able to return to a financial market.
:08:01. > :08:08.did come as a prize with a big price for many people in your
:08:08. > :08:13.country that have suffered as a result? Yes, but we are the
:08:13. > :08:18.fastest-growing EU economy. By your other third poorest country. We
:08:18. > :08:28.were poor are before. He economy is 12 % smaller than before the crisis.
:08:28. > :08:32.You have 4% growth but it's from a low base. Certainly, we could not
:08:32. > :08:38.continue with development as before that crisis because it was not
:08:38. > :08:43.sustainable and we ran 20 % of GDP with a current account deficit with
:08:43. > :08:46.double-digit economic growth and the budget was not balanced and the
:08:46. > :08:52.real-estate bubble and the consumption boom and the amount of
:08:52. > :08:59.credit in the economy in four years' time has increased about
:08:59. > :09:03.four times. You cannot sustain that. According to the IMF before the
:09:03. > :09:09.crisis, the Latvia economy was overheated about 10 % above the
:09:09. > :09:14.potential. Over the past few years would add growth of about 5.6 %
:09:14. > :09:20.meaning that currently the economy has returned to a potential and now
:09:20. > :09:26.we can grow the economy and we don't have a bubble any more.
:09:26. > :09:30.advantage you have enjoyed is an open economy for a long time. Has
:09:30. > :09:35.had the advantage of foreign investment. Many of the banks, that
:09:35. > :09:40.was part of the problem before the financial crisis with some of those
:09:40. > :09:44.Danish and Swedish banks with cheap credit and money available. The
:09:44. > :09:51.second largest bank collapsed and that was the catalyst for the
:09:51. > :09:54.crisis. The bank has signed off on joining an but they say the
:09:54. > :09:58.reliance on non-resident deposits as a source of funding is on the
:09:58. > :10:05.rise representing an important risk to financial stability. Are you
:10:05. > :10:11.worried by that? Certainly, we will closely follow this development.
:10:11. > :10:17.We're doing that with those deposits for those banks primarily
:10:17. > :10:23.engaged in this activity facing much stricter liquidity
:10:23. > :10:33.requirements. He or are discouraging them? It is already
:10:33. > :10:33.
:10:33. > :10:43.happening. It's in the policy. As a result of this policy the banking
:10:43. > :10:44.
:10:44. > :10:49.sector is above the average. It's a small banking sector. The ECB has
:10:49. > :10:56.observed these foreign deposits. It's half of all of your deposit in
:10:56. > :11:01.the banks about 10 billion euros. Many people say it's higher than
:11:01. > :11:11.other countries. The dependence on money from Russia is also an issue
:11:11. > :11:11.
:11:11. > :11:21.in her Latvia. You are not entirely comfortable? Quite a few factors
:11:21. > :11:22.
:11:22. > :11:30.about the situation is different. Cyprus had a banking sector about
:11:30. > :11:40.700 % of GDP before their crisis. That EU average is about 360 % of
:11:40. > :11:44.GDP. We are below 130 %. It's a small banking sector. In terms of
:11:44. > :11:51.capitalisation before the crisis, in Cyprus they had a worse
:11:51. > :11:58.capitalisation. Ours was well above that EU average. People are worried
:11:58. > :12:08.about the pressure and economic exuberance which is code word for
:12:08. > :12:08.
:12:08. > :12:14.the Broom. That's something about the credit development. There are
:12:14. > :12:20.some banks have too much credit and its tight. It's a worry not just
:12:20. > :12:24.for Latvia for the whole of that key you and what we need to follow
:12:24. > :12:33.through is the competitiveness and insure that development is in line
:12:33. > :12:40.with productivity development and ensuring that the results with the
:12:40. > :12:45.support and many things we need to do which we need to monitor to make
:12:45. > :12:49.sure we develop. What if the Russians were to pull their money
:12:49. > :12:56.out? They have plenty of reasons to feel uncomfortable with what is
:12:56. > :13:02.happening in Latvia with the beat NATO exercise. And also about what
:13:02. > :13:07.happens if a foreign power was to occupy some of your territory. You
:13:07. > :13:13.are meeting the Russian Prime Minister and he is worried about
:13:13. > :13:17.the closeness to his border and they will take that into account.
:13:17. > :13:22.Then the business of the Latvian parliament saying that people can
:13:22. > :13:29.have dual nationality but not if they are Russian. You understand
:13:29. > :13:34.why the Russians Kara little uneasy? Is the question about money
:13:34. > :13:39.or the relationship with Russia? The relationship with Russia.
:13:40. > :13:45.answer that first part of the question about the money. We did a
:13:45. > :13:51.stress test within the banking system assuming that half the non-
:13:51. > :13:56.resident deposits would disappear. The banking sector would still be
:13:56. > :14:00.under stress test and there was a much worse scenario than what was
:14:00. > :14:06.happening during the crisis. You're making your case saying you could
:14:06. > :14:12.survive? How about the relationship with Russia? As regards to the
:14:12. > :14:16.relationship with Russia we feel that there's a general tendency to
:14:16. > :14:21.see developments between Russia and the West in general but economic
:14:21. > :14:26.clear I would say the relationship is developing well for example last
:14:26. > :14:32.year the trade turnover between the two countries increased 25 %. The
:14:32. > :14:39.number of Russian tourist visiting Latvia increased 30 %. The cargo
:14:39. > :14:47.through the ports increased 9%. Russian cargo. But EU is delighted
:14:47. > :14:54.with that. Economic leap we are delighted. Latvia is very close to
:14:54. > :14:59.Russia. It's a good place to invest for Trade and Industry because of
:14:59. > :15:04.its proximity but why the provocation in terms of politics?
:15:04. > :15:14.Why can people be dual citizens of Brazil or New Zealand or other NATO
:15:14. > :15:22.
:15:22. > :15:26.We're part of the EU and NATO. Yes, citizens of the EU and NATO can
:15:26. > :15:31.have the dual citizenship with Latvia. So can Brazil and Newcastle
:15:31. > :15:37.and Australia. Yes, there are some reasons why it also includes
:15:37. > :15:43.countries like Australia and Brazil because most have significant
:15:43. > :15:48.Latvian populations. In Brazil, dating back from the 19th century.
:15:48. > :15:52.I understand that, but I don't understand the link. Let me put to
:15:52. > :15:58.you what your deputy chief of citizenship and immigration said on
:15:58. > :16:03.Latvian radio for lifting the ban on dual citizenship. He said, "It's
:16:03. > :16:06.believed the country are close to us and there's no possibility me
:16:06. > :16:09.might break a military conflict." Does that mean that you might end
:16:09. > :16:12.up fighting with Russia and you don't think that you can trust
:16:12. > :16:17.them? You're worried that dual citizenship is denied because
:16:17. > :16:23.people can not serve two masters in the event of armed conflict?
:16:23. > :16:28.Certainly, we do expect peaceful development and indeed, we expect
:16:28. > :16:34.engagement with Russia, as I was saying, economically. And certainly,
:16:34. > :16:39.we hope for good neighbourly relations between Latvia and Russia
:16:39. > :16:42.and the west and Russia. Not all developments in Russia are entirely
:16:42. > :16:46.encouraging as we see with the crackdown on the position taking
:16:46. > :16:49.place. We see that not all developments are exactly going the
:16:49. > :16:55.direction that we would like to. Vladimir Putin wrote earlier this
:16:55. > :17:02.year, "We can not tolerate the shameful status of non-citizens.
:17:02. > :17:06.How can we accept that non-citizens, one in six Latvian residents are
:17:06. > :17:10.denied their fundamental political and social economic rights." So he
:17:10. > :17:15.could be cracking down on the opposition. You're cracking down on
:17:15. > :17:20.your own citizens. Not necessarily. What we're having is very open and
:17:20. > :17:27.transparent integration and naturalisation process. Meaning
:17:27. > :17:34.that any permanent resident of Latvia, including non-citizens, can
:17:34. > :17:38.pass a relatively simple naturalisation exam and become a
:17:38. > :17:42.Latvian citizen. But only if they're prepared to speak Latvian?
:17:42. > :17:47.I think it is relatively obvious. And we know that many countries in
:17:47. > :17:50.the EU and also Russia is requiring corresponding State language
:17:50. > :17:57.knowledge. They require it for immigrants. They don't require it
:17:57. > :18:03.for people who were born and grew up there. That's the difference.
:18:03. > :18:08.couldn't agree with that because again, for those children of
:18:08. > :18:15.Latvian non-citizens, if the parents wish for them to become
:18:15. > :18:17.citizens, they can automatically become citizens and there are no
:18:17. > :18:22.additional procedures. People would not understand elsewhere in the EU
:18:22. > :18:27.how they could be non-citizens if they were born there. That's
:18:27. > :18:32.confusing. According to our citizenship laws, those people who
:18:32. > :18:37.were citizens of the Republic of Latvia in 1940 when it was occupied
:18:37. > :18:44.by the Soviet Union and their dependants are the citizens of the
:18:44. > :18:49.Republic of Latvia. What about somebody whose parents came in in
:18:50. > :18:54.1941 or 1950 when you were part of the Soviet block. So they are
:18:54. > :18:59.forced World war two immigrants and that is how it is in the EU. Yes,
:18:59. > :19:02.they have the option to pass the naturalisation process and to
:19:02. > :19:10.become citizens, and that's what is actually happening. Many of the
:19:10. > :19:14.non-citizens are passing this exam and becoming citizens. Vladimir
:19:14. > :19:20.Lindemann on the time on whether Russian should be a second language,
:19:20. > :19:23.which was defeated heavily said, "I think in the past 20 years, people
:19:23. > :19:28.have been humiliated by the authorities making them second
:19:28. > :19:32.class citizens." I can not absolutely agree with this. In this
:19:32. > :19:35.sense, our system of human rights, on the treatment of minorities and
:19:35. > :19:40.so on has been checked and double checked by the number of
:19:40. > :19:44.institutions, including during our EU accession. It was scrutinised
:19:44. > :19:47.very closely and found in to be in full compliance with the European
:19:47. > :19:54.standards. So it's not going to change? No.Do you think that might
:19:55. > :20:00.be one of the reasons why so many Latvians have emigrated recently?
:20:00. > :20:07.This is something that we saw once Latvia joins the EU that with free
:20:07. > :20:12.movement of labour, at that time, already in 2004 and 2005, tens of
:20:12. > :20:18.thousands of people were leaving, at that time, mainly to the UK and
:20:18. > :20:22.Ireland. It's a big drop. Between 2011 and 2012, it is a 14% fall in
:20:22. > :20:29.your population. A large part of it, maybe 300,000 people leaving?
:20:29. > :20:34.the immigration, that's what we saw when we joined the EU was the free
:20:34. > :20:39.movement of labour. Now what we also saw is that with the economic
:20:39. > :20:43.development, with job opportunities and so on in 2006, 2007, this
:20:43. > :20:50.process slowed and even reverted. People started to return which
:20:50. > :20:52.showed that it's the economy which is at the heart of the problem. Now
:20:52. > :20:56.with the economic crisis, unfortunately we have the problem
:20:56. > :21:01.again. They went again.This is one of the biggest concerns here.
:21:01. > :21:07.a long-term concern. Absolutely. Because if you can't reverse that,
:21:07. > :21:11.and there are those who wonder if you can... I notice that Martin
:21:11. > :21:14.Kazaks was saying, "If you define the tipping point to the point of
:21:14. > :21:19.no return, in some respect we passed it. Pensions and welfare and
:21:19. > :21:23.the growth rate of the economy will be lower." There are some
:21:23. > :21:27.statistics suggesting that by 2060 on current trends, for every four
:21:27. > :21:33.Latvians of working age, there will be three over 65. That's not
:21:33. > :21:37.sustainable. That is certainly one of the biggest concerns now - what
:21:37. > :21:45.to do with immigration? And for this, the best answer we can
:21:45. > :21:51.provide is economic development and job creation. Because when people
:21:51. > :21:56.see prospective in Latvia, they don't need to go back. How much do
:21:57. > :22:01.you want back? I would not name some figures now of exactly how
:22:01. > :22:08.much we want back because you really need the economic basis for
:22:08. > :22:12.this. So that's why we're now working on the re-immigration plan
:22:12. > :22:16.suggesting incentives for people to return. But it is clear that the
:22:16. > :22:20.best incentive is to have a well- paid job back home. That's the best
:22:20. > :22:27.incentive you can have and then set up a social system and so on. And
:22:27. > :22:33.that's why, by the way, we're also providing the double citizenship,
:22:33. > :22:37.providing some support for Latvian people in other EU countries to
:22:37. > :22:43.ensure that we stay connected with those people who have immigrated
:22:43. > :22:45.and through this connection that's where we're advertising job
:22:45. > :22:54.opportunities in Latvia and ensuring that we will gradually be
:22:54. > :22:57.getting at least part of the people back. Professor Michael Hazans, a
:22:57. > :23:01.distinguished professor said that the sense of bitterness is still
:23:01. > :23:04.there. Why? "A feeling that everyone is leaving the boat. The
:23:04. > :23:10.boat must be sinking. Or if the boat is floating and others are
:23:10. > :23:13.leaving, why am I staying?" Well, this is something that you really
:23:13. > :23:18.begin need to correct through economic development. But you would
:23:18. > :23:25.accept that there are people who feel that? Certainly. With this
:23:25. > :23:30.crisis which we had back in 2008/2009... He was saying it this
:23:30. > :23:35.year? Latvia was an economy in the deepest trouble in the European
:23:35. > :23:39.Union, it was creating huge problems for people. So now, with
:23:39. > :23:44.economic development and with job creation, we can actually gradually
:23:44. > :23:48.correct this situation. So it is really mainly about the economy and
:23:48. > :23:54.what we need to do to address this problem and to stay engaged with
:23:54. > :23:57.the people right now and to stay engaged with our people abroad and
:23:57. > :24:04.then provide the immigration plan ensuring that the people would
:24:04. > :24:09.return. But indeed, it is a huge concern and we need to act mostly
:24:10. > :24:12.on immigration and also in this year's Budget, we provided