Valdis Dombrovskis - Prime Minister, Latvia HARDtalk

promised to tackle what he's called the "menace of terrorism". Now on

The Baltic way out of the financial crisis has been austerity and

Latvia led the way. When the banking collapse wiped out a

quarter of the economy and unemployment hit 20%, it took

drastic action. Critics say the correction was harsher than

necessary because Latvia pegged its currency to the euro. Why does he

hope that in Brussels this month the EU will say yes to Latvia

joining the euro, when many of his own citizens want to say no? Well

they make it the 18th member of the eurozone? My guest today is Valdis

Dombrovskis, Latvia's Prime My guest today is Valdis

Dombrovskis, Latvia's Prime Minister. This month the finance

ministers will confirm you as the 18th member of the eurozone. Five

years ago the global crisis almost destroyed the economy and many

people think you would be mad to join? In fact, it was during the

crisis when we decided it would be the date for us to join the

eurozone. The currency was pegged to the euro. Not being part of the

eurozone was part of the problem not the solution. Besides doing all

of the adjustments we had to defend the currency. There were questions

about that. We were also dealing with those problems band the

budgetary problems. E-coli, because it was paid to the euro people say

your hands were tied because you could not devalued to help reduce

the pressure and you needed to go through come severe measures. One-

fifth of your economy, one quarter vanished. A third of the public

sector was fired and 30 % of people had a pay cut. Certainly, when you

are in a crisis as Latvia was in 2008 and 2009, 17.7 % recession and

we had to do the necessary adjustments. We look at the options

and clearly it was even more painful that option. We are very

small and open economy. Whatever gains we would get would disappear

quickly. And we had to consider inflation. Energy costs and so on.

You said this to the newspapers, joining was a kind of insurance?

Joining the eurozone has been a long goal of Latvia ever since we

joined. The members need to commit to that. Exactly. Our first target

was set in January 2008. We thought it was a good idea. We tried to

defend the currency. The banks within the eurozone have access to

liquidity. Allow banks did not have access to the liquidity and that

made the situation of the banking sector worse. Is it really such a

good decision for the future? Decisions in the eurozone mean that

the future bail-outs will not be available and that people will take

a hit for up to eight % if the bank goes under of the resources. They

will be the depositors and the creditors. You cannot just run to

Brussels for help. Clearly, in certain cases there will be

problems. It's often discussed and it's not the case within the

eurozone but also outside the eurozone. How to make the tax

payers pay for the bank mistakes. It should be the credit tours and

the shareholders. The say the country is committed. You will join

the eurozone and the currency. The voters are not so sure. In

September last year a 59 % were against joining the eurozone.

There's also 35 % and men would never join. Amongst the yes vote,

22 % said some time in the future but that does not seem like much

enthusiasm. What could you expect, given the situation for three years.

People have heard about the eurozone and all of the crisis. No

wonder the people don't want to be too enthusiastic. There to be cast

to explain the economic reasoning. Why is it a good idea for Latvia to

join? Helping the interest rates and the currency problems. Judge in

by these figures you are not doing a good job. Those figures were from

October last year. By now, the public support is steadily

improving. For the past six months with an information explaining that

the economic reasoning and the nature of the crisis. The currency

seems to be doing just fine. April the survey said the Yes vote

was 36 % which is a long way short. We have continued to work on that.

The final decision will be in July. Then we will launch another

campaign to explain the practicalities. Exactly what the

people can expect. Macro economic worries but mostly people worry

about practicalities. The savings. Costs going up. We need to explain

those practical reasons. The Baltic way of Economics has been posterity.

You had a lot of praise from Christine de garde saying you have

returned to strong growth with price cuts and restored confidence.

Do you have any doubts that all about the effect of austerity

within Europe? Certainly, austerity per say is not helping the economic

development It's clear but it's also clear that when you are in a

situation like we were in 2009 when the financial markets were not

trusting you, you'd better act quickly and do the necessary

adjustments in order to be able to return to a financial market.

did come as a prize with a big price for many people in your

country that have suffered as a result? Yes, but we are the

fastest-growing EU economy. By your other third poorest country. We

were poor are before. He economy is 12 % smaller than before the crisis.

You have 4% growth but it's from a low base. Certainly, we could not

continue with development as before that crisis because it was not

sustainable and we ran 20 % of GDP with a current account deficit with

double-digit economic growth and the budget was not balanced and the

real-estate bubble and the consumption boom and the amount of

credit in the economy in four years' time has increased about

four times. You cannot sustain that. According to the IMF before the

crisis, the Latvia economy was overheated about 10 % above the

potential. Over the past few years would add growth of about 5.6 %

meaning that currently the economy has returned to a potential and now

we can grow the economy and we don't have a bubble any more.

advantage you have enjoyed is an open economy for a long time. Has

had the advantage of foreign investment. Many of the banks, that

was part of the problem before the financial crisis with some of those

Danish and Swedish banks with cheap credit and money available. The

second largest bank collapsed and that was the catalyst for the

crisis. The bank has signed off on joining an but they say the

reliance on non-resident deposits as a source of funding is on the

rise representing an important risk to financial stability. Are you

worried by that? Certainly, we will closely follow this development.

We're doing that with those deposits for those banks primarily

engaged in this activity facing much stricter liquidity

requirements. He or are discouraging them? It is already

happening. It's in the policy. As a result of this policy the banking

sector is above the average. It's a small banking sector. The ECB has

observed these foreign deposits. It's half of all of your deposit in

the banks about 10 billion euros. Many people say it's higher than

other countries. The dependence on money from Russia is also an issue

in her Latvia. You are not entirely comfortable? Quite a few factors

about the situation is different. Cyprus had a banking sector about

700 % of GDP before their crisis. That EU average is about 360 % of

GDP. We are below 130 %. It's a small banking sector. In terms of

capitalisation before the crisis, in Cyprus they had a worse

capitalisation. Ours was well above that EU average. People are worried

about the pressure and economic exuberance which is code word for

the Broom. That's something about the credit development. There are

some banks have too much credit and its tight. It's a worry not just

for Latvia for the whole of that key you and what we need to follow

through is the competitiveness and insure that development is in line

with productivity development and ensuring that the results with the

support and many things we need to do which we need to monitor to make

sure we develop. What if the Russians were to pull their money

out? They have plenty of reasons to feel uncomfortable with what is

happening in Latvia with the beat NATO exercise. And also about what

happens if a foreign power was to occupy some of your territory. You

are meeting the Russian Prime Minister and he is worried about

the closeness to his border and they will take that into account.

Then the business of the Latvian parliament saying that people can

have dual nationality but not if they are Russian. You understand

why the Russians Kara little uneasy? Is the question about money

or the relationship with Russia? The relationship with Russia.

answer that first part of the question about the money. We did a

stress test within the banking system assuming that half the non-

resident deposits would disappear. The banking sector would still be

under stress test and there was a much worse scenario than what was

happening during the crisis. You're making your case saying you could

survive? How about the relationship with Russia? As regards to the

relationship with Russia we feel that there's a general tendency to

see developments between Russia and the West in general but economic

clear I would say the relationship is developing well for example last

year the trade turnover between the two countries increased 25 %. The

number of Russian tourist visiting Latvia increased 30 %. The cargo

through the ports increased 9%. Russian cargo. But EU is delighted

with that. Economic leap we are delighted. Latvia is very close to

Russia. It's a good place to invest for Trade and Industry because of

its proximity but why the provocation in terms of politics?

Why can people be dual citizens of Brazil or New Zealand or other NATO

We're part of the EU and NATO. Yes, citizens of the EU and NATO can

have the dual citizenship with Latvia. So can Brazil and Newcastle

and Australia. Yes, there are some reasons why it also includes

countries like Australia and Brazil because most have significant

Latvian populations. In Brazil, dating back from the 19th century.

I understand that, but I don't understand the link. Let me put to

you what your deputy chief of citizenship and immigration said on

Latvian radio for lifting the ban on dual citizenship. He said, "It's

believed the country are close to us and there's no possibility me

might break a military conflict." Does that mean that you might end

up fighting with Russia and you don't think that you can trust

them? You're worried that dual citizenship is denied because

people can not serve two masters in the event of armed conflict?

Certainly, we do expect peaceful development and indeed, we expect

engagement with Russia, as I was saying, economically. And certainly,

we hope for good neighbourly relations between Latvia and Russia

and the west and Russia. Not all developments in Russia are entirely

encouraging as we see with the crackdown on the position taking

place. We see that not all developments are exactly going the

direction that we would like to. Vladimir Putin wrote earlier this

year, "We can not tolerate the shameful status of non-citizens.

How can we accept that non-citizens, one in six Latvian residents are

denied their fundamental political and social economic rights." So he

could be cracking down on the opposition. You're cracking down on

your own citizens. Not necessarily. What we're having is very open and

transparent integration and naturalisation process. Meaning

that any permanent resident of Latvia, including non-citizens, can

pass a relatively simple naturalisation exam and become a

Latvian citizen. But only if they're prepared to speak Latvian?

I think it is relatively obvious. And we know that many countries in

the EU and also Russia is requiring corresponding State language

knowledge. They require it for immigrants. They don't require it

for people who were born and grew up there. That's the difference.

couldn't agree with that because again, for those children of

Latvian non-citizens, if the parents wish for them to become

citizens, they can automatically become citizens and there are no

additional procedures. People would not understand elsewhere in the EU

how they could be non-citizens if they were born there. That's

confusing. According to our citizenship laws, those people who

were citizens of the Republic of Latvia in 1940 when it was occupied

by the Soviet Union and their dependants are the citizens of the

Republic of Latvia. What about somebody whose parents came in in

1941 or 1950 when you were part of the Soviet block. So they are

forced World war two immigrants and that is how it is in the EU. Yes,

they have the option to pass the naturalisation process and to

become citizens, and that's what is actually happening. Many of the

non-citizens are passing this exam and becoming citizens. Vladimir

Lindemann on the time on whether Russian should be a second language,

which was defeated heavily said, "I think in the past 20 years, people

have been humiliated by the authorities making them second

class citizens." I can not absolutely agree with this. In this

sense, our system of human rights, on the treatment of minorities and

so on has been checked and double checked by the number of

institutions, including during our EU accession. It was scrutinised

very closely and found in to be in full compliance with the European

standards. So it's not going to change? No.Do you think that might

be one of the reasons why so many Latvians have emigrated recently?

This is something that we saw once Latvia joins the EU that with free

movement of labour, at that time, already in 2004 and 2005, tens of

thousands of people were leaving, at that time, mainly to the UK and

Ireland. It's a big drop. Between 2011 and 2012, it is a 14% fall in

your population. A large part of it, maybe 300,000 people leaving?

the immigration, that's what we saw when we joined the EU was the free

movement of labour. Now what we also saw is that with the economic

development, with job opportunities and so on in 2006, 2007, this

process slowed and even reverted. People started to return which

showed that it's the economy which is at the heart of the problem. Now

with the economic crisis, unfortunately we have the problem

again. They went again.This is one of the biggest concerns here.

a long-term concern. Absolutely. Because if you can't reverse that,

and there are those who wonder if you can... I notice that Martin

Kazaks was saying, "If you define the tipping point to the point of

no return, in some respect we passed it. Pensions and welfare and

the growth rate of the economy will be lower." There are some

statistics suggesting that by 2060 on current trends, for every four

Latvians of working age, there will be three over 65. That's not

sustainable. That is certainly one of the biggest concerns now - what

to do with immigration? And for this, the best answer we can

provide is economic development and job creation. Because when people

see prospective in Latvia, they don't need to go back. How much do

you want back? I would not name some figures now of exactly how

much we want back because you really need the economic basis for

this. So that's why we're now working on the re-immigration plan

suggesting incentives for people to return. But it is clear that the

best incentive is to have a well- paid job back home. That's the best

incentive you can have and then set up a social system and so on. And

that's why, by the way, we're also providing the double citizenship,

providing some support for Latvian people in other EU countries to

ensure that we stay connected with those people who have immigrated

and through this connection that's where we're advertising job

opportunities in Latvia and ensuring that we will gradually be

getting at least part of the people back. Professor Michael Hazans, a

distinguished professor said that the sense of bitterness is still

there. Why? "A feeling that everyone is leaving the boat. The

boat must be sinking. Or if the boat is floating and others are

leaving, why am I staying?" Well, this is something that you really

begin need to correct through economic development. But you would

accept that there are people who feel that? Certainly. With this

crisis which we had back in 2008/2009... He was saying it this

year? Latvia was an economy in the deepest trouble in the European

Union, it was creating huge problems for people. So now, with

economic development and with job creation, we can actually gradually

correct this situation. So it is really mainly about the economy and

what we need to do to address this problem and to stay engaged with

the people right now and to stay engaged with our people abroad and

then provide the immigration plan ensuring that the people would

return. But indeed, it is a huge concern and we need to act mostly

on immigration and also in this year's Budget, we provided