Inna Šteinbuka, a professor at the University of Latvia and vice-chairwoman of the Fiscal Discipline Council of Latvia, warned Montenegro against easing fiscal policy after joining the European Union. Speaking on the sidelines of the Montenegro in EU conference in Podgorica, she said accession could bring investment and greater confidence, but would not guarantee economic success.
“Do not think that after joining the European Union everything will automatically go right,” Šteinbuka said. She identified as a risk the belief that economic problems would be resolved simply by entering the bloc, and urged Montenegro to maintain fiscal discipline.
After Latvia joined the EU, its politicians considered the country’s economic position secure and believed they could adopt a less restrictive fiscal policy. In the years before the 2008 global financial crisis, the neglect of macroeconomic stability contributed to serious problems in the Latvian economy.
Immediately before the crisis, Latvia had a poor fiscal environment, a budget deficit larger than it should have been, rising public debt, accelerating inflation and an overheating economy. The International Monetary Fund and the European Commission had warned the country to be cautious and avoid expansionary fiscal policy. Those warnings were not accepted, and Latvia entered the crisis in an extremely difficult situation because of its fiscal policy. “That is exactly what Montenegro must avoid,” Šteinbuka said.
Investment depends on reforms and stability
Latvia’s recovery under former prime minister Valdis Dombrovskis provided an example of reforms carried out in difficult economic circumstances. He made joining the euro zone a strategic goal, which required very low inflation, low public debt and responsible fiscal policy. His government sharply reduced public spending and increased revenues, including taxes.
The measures were highly unpopular, but Dombrovskis secured voter support because people trusted him. “He was an honest, direct and competent politician,” Šteinbuka said. Latvia joined the euro zone in 2014. The experience showed that reforms could be implemented even in the most difficult economic circumstances with political determination and public trust.
EU members can use European structural funds, provided their use follows the bloc’s rules and priorities and serves both the beneficiary country and the EU as a whole. In Latvia, these funds were the dominant source of investment, with volumes considerably larger than the sums the state could finance from its own budget and inflows of foreign investment.
Montenegro could see a more substantial inflow of investment capital after accession. Membership can increase the confidence of international financial institutions and investors, strengthen the credibility of economic policy and contribute to more foreign investment. It is not an automatic guarantee of success: lenders and investors continue to assess each country’s economic development, reforms and stability of public finances.
