Zenonas Norkus. Nations & Nationalism. Volume 24, Issue 4. October 2018.
This paper contributes to the body of research on the monetary variety of nationalism, which conceives of national currency as an essential element of nation state and national identity (‘one nation, one money’), exploring its contribution to the successful internal devaluation in the Baltic states during the economic crisis of 2008-2010. Contrary to the predictions of renowned experts in economics and finance, Estonia, Latvia and Lithuania were able to keep the peg of their national currencies to euro. Because of peculiar features of their histories (a brief period of independence with national currencies allegedly based on a gold standard, interrupted by prolonged Soviet occupation and the despised ‘wooden rouble’) monetary nationalism was very strong in the restored independent Baltic states. Monetary nationalism predisposed their indigenous populations to embrace the neoliberal model of capitalism and to accept the welfare cost of the defence of currency pegging during the crisis. Paradoxically, the success was self‐defeating, as it enabled the Baltic states to join Eurozone, abolishing national currencies. Theorizing about this case study of Baltic monetary nationalism, this paper closes with the interpretation of the rise and demise of national currencies as the reversal of the Weberian disenchantment process. Monetary nationalism (making money a core part of national identity) is a product of this reversal.
This paper contributes to the growing body of research on the role of currencies in nation building as symbols of national identity (Dodd; Gilbert; Gilbert and Helleiner; Helleiner; Helleiner and Pickel; Kaelberer; Lauer; Meier‐Pesti and Kirchler; Müller‐Peters; Peebles; Penrose; Penrose and Cumming; Popadopoulos; Sørensen; Unwin and Hewitt; Wallach). According to my working definition of monetary nationalism, this is the variety of nationalism, which conceives of national currency as an essential element of nation state and national identity (‘one nation, one money’). Alongside the flag and other familiar symbols, territorial national currency did play an important role in nation‐building as an instrument for cultivating a sense of communal identity and loyalty to the state.
However, there is broad variation in how important national currency is for national identity. Post‐communist Estonia, Latvia and Lithuania are interesting as cases of very strongly monetized national identities. This will be demonstrated in the comparative case‐oriented study presented here, which explores the role of attachment to national currencies in the macroeconomic performance of the Baltic countries during the recent world‐wide economic crisis in 2008-10, considered as the time of glory of Baltic monetary nationalism. The research question in this study is as follows: what was the contribution of monetary nationalism to the remarkable macroeconomic resilience of Baltic states during this crisis? The resilience of Baltic countries during the recent crisis enabled them to join the Eurozone in 2011-15. The side‐effect of this ultimate triumph of Baltic monetary nationalism was the demise of the Baltic national currencies as the major anchor of the Estonian, Latvian and Lithuanian national identities, as they were shaped by the histories of the building, loss and restoration of the national states of three small Baltic peoples.
The first section presents essential facts about the crisis performance of the Baltic countries. In the second section, the critical survey of the received economic and political economic explanations follows, exposing their inability to account for these facts. The third section explicates the idea of monetary nationalism, drawing upon the work of Helleiner. It also explores the historical roots of the monetary nationalism of the Baltic nations and analyses its contribution to the choice of currency board model after the restoration of independence in 1990-91. The fourth section continues and elaborates on this analysis, focusing on the role of monetary nationalism as a contributory cause of the successful commitment to the policies of internal devaluation during the 2008-10 crisis. The fifth section discusses the paradoxical character of this success, involving self‐destruction of Baltic monetary nationalism. This section also provides an interpretation of the Baltic episode of the rise and demise of monetary nationalism in the broader long term perspective, using as the framework Max Weber’s famous analysis of rationalization and disenchantment as secular trends in the evolution of Western civilization. This interpretation directs closing exploration of the prospects of the euro as an anchor of pan‐European identity in the making. Conclusions recapitulate main points. The data used to answer the main research question include screening historical studies, published historical and statistical sources, sociological surveys and recycling social research contributions focused on related but different topics.
Baltic States in the 2008-10 Crisis: Success of Internal Devaluation against the Odds
During the recent global economic crisis, Baltic states were hit first and they suffered worst among post‐communist countries. However, they were also first to recover (by 2010), after they implemented economic and social policies of internal devaluation. Macroeconomics conceives of internal devaluation as the restoration of international competitiveness by reducing labour costs (wages and/or indirect costs of employers). Many foreign experts described these policies as ill‐considered, predicting (and advising) external devaluation of Baltic currencies including Krugman and Roubini.
Internal devaluation means the restoration of international competitiveness by cutting wages. External devaluation means downward adjustment to the value of a country’s currency relative to other currencies. External devaluation places the cost of adjustment on the creditors, savers and the population with fixed nominal income (pensioners or retirees, rentiers or money capitalists). However, it allows increased competitiveness immediately. As a result, exports grow, stimulating employment and reducing current account deficits. Besides that, imports become more expensive, making home production more competitive on the internal market too. If the workers do not have any significant savings (which is the case in post‐communist countries) but considerable bargaining power due to unionization (which is not the case with only a partial exception for public sector workers), then they can be the net winners (at least in the short run) under currency devaluation (Blanchard and Johnson: 429-31).
Under internal devaluation, capital owners (creditors) are the winners, while workers bear the cost of adjustment, because international competitiveness of a country is restored by reducing labour costs (wages or indirect costs of employers). The cutbacks in real wages are forced upon the workers by high levels of unemployment or are negotiated (under corporatism; see below) through an organized bargaining process. Reduction of real wages usually goes together with fiscal consolidation by cutting public expenditure or increasing revenues to achieve fiscal sustainability (Blanchard and Johnson: 460-71). Internal devaluation is considered to be painful and slow. While currency devaluation can lead to an inflationary spiral, internal devaluation can end with a vicious circle too: fiscal consolidation depresses aggregate demand, and the contraction of demand decreases tax revenue, with the ensuing dilemma of whether to abandon fiscal consolidation or to introduce new austerity measures with the risk of further meltdown in the economy (Armingeon and Baccaro).
Unexpectedly, Baltic states were successful in their defence of their currency pegs to the euro. By 2010, their growth recovered (see Table 1), earning applause for the Baltic states from the headquarters of the EU and from international financial organizations. They praised the Baltic states as a ‘bouncy trio’ and recommend their policies of ‘internal devaluation’ as a useful example for the Eurozone Southern periphery countries, still struggling with the problems of macroeconomic stabilization (e.g. Åslund; Åslund and Dombrovskis; The Economist). To illustrate their economic success and model role, Table 1 provides the precrisis and postcrisis growth performance data for the Baltic states as well as for Southern European countries as contrast cases.
GDP growth (annual %) in Baltic states, EU and Southern Europe 2006-16
| 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | |
| Estonia | 10.3 | 7.7 | -5.4 | -14.7 | 2.3 | 7.6 | 4.3 | 1.4 | 2.8 | 1.4 | 1.6 |
| EU mean | 3.4 | 3.1 | 0.5 | -4.4 | 2.2 | 1.7 | -0.5 | 0.2 | 1.7 | 2.2 | 1.9 |
| Greece | 5.7 | 3.3 | -0.3 | -4.3 | -5.5 | -9.1 | -7.3 | -3.2 | 0.4 | -0.2 | 0.0 |
| Italy | 2.0 | 1.5 | -1.1 | -5.5 | 1.7 | 0.6 | -2.8 | -1.7 | 0.1 | 0.8 | 0.9 |
| Latvia | 11.9 | 9.9 | -3.6 | -14.3 | -3.8 | 6.4 | 4.0 | 2.6 | 2.1 | 2.7 | 2.0 |
| Lithuania | 7.4 | 11.1 | 2.6 | -14.8 | 1.6 | 6.0 | 3.8 | 3.5 | 3.5 | 1.8 | 2.3 |
| Portugal | 1.6 | 2.5 | 0.2 | -3.0 | 1.9 | -1.8 | -4.0 | -1.1 | 0.9 | 1.6 | 1.4 |
| Spain | 4.2 | 3.8 | 1.1 | -3.6 | 0.0 | -1.0 | -2.9 | -1.7 | 1.4 | 3.2 | 3.2 |
I will discuss the international relevance of the 2008-10 crisis experiences of the Baltic countries in the last section, answering the following policy question: do they teach useful lessons for other countries? Before that, I owe the answer to two explanatory questions: (1) why did the Baltic states choose the policy of internal devaluation and (2) why were they able to implement this policy? In the next section, I will present the conventional political economic explanations, proceeding from the ‘rational choice’ assumption that only material interests and restrictions matter. After exposing the weaknesses of the received explanations, I will proceed (in the third section) to the articulation of its sociological alternative, giving the pride of place to ideas and identities, shaped by the unique history of Baltic countries.
Explaining the Success of Internal Devaluation: Criticism of Received Explanations
According to most influential arguments (see e.g. Kuokštis), on the eve of the crisis most of the private debt in the Baltic states was denominated not in the national currencies but in euros. Therefore, there was an unusual coalition of the majority of the debtors and the creditors to defend the peg. The exporters usually win from currency devaluation, but most of them (at the very least, in Lithuania) were dependent on the import of energy and raw materials from Russia. Currency devaluation increases the competitive advantages of domestic producers over importers, which is an important argument for external devaluation adjustment in the big and therefore relatively closed economies. However, Baltic economies are small and very open, with the value of their exports and imports equal to or even exceeding their annual GDPs.
This argument may provide a compelling answer as to why internal devaluation was the first preference of the international and local elites and why governments chose these economic policies. However, this framework is not sufficient to explain the ability of the Baltic states to successfully implement policies of internal adjustment. The argument above shows why international finance, the majority of the local business community, and that part of the middle class which had debts denominated in hard currency were interested in the internal devaluation. While modern macroeconomic theory assumes aggregate monetary neutrality, meaning ‘that monetary phenomena do not affect the overall performance of the real economy in the long run’ (Kirshner: 425), political economists add that choice between external and internal devaluation has distributional consequences, as described in the previous section. Given the underdevelopment of the middle class in the Baltic states, the stakeholders of internal devaluation were the minority among their populations. Under conditions of liberal democracy, the success of internal devaluation is conditional on the silent submission and suffering of the majority of the population, which must pay the price of unemployment or decrease of real income.
As a matter of fact, ‘hard times’ repeatedly happen in the world economy. Before the recent world‐wide crisis, the capitalist world economy was hit hardest during the ‘stagflation era’ in the 1970s and early 1980s. Comparing the performance of the different advanced national economies during this time, the leading American expert in International Political Economy (IPE), Katzenstein, concluded that small states (Norway, Denmark, the Netherlands, Belgium, Austria and Switzerland) are more open, more vulnerable to crisis shocks than bigger states (U.S., Germany, Japan and France) and, at the same time, more flexible and resilient. Why? According to Katzenstein, the source of comparative institutional advantages of small states is the democratic corporatist system, involving main interest groups in economic policy making. In small countries, it is much easier to establish a corporatist system of interest representation than in the big states with relatively closed and self‐sufficient economies.
Similarly to Katzenstein’s cases, the Baltic states are the most open and vulnerable among new post‐communist capitalist states. That is why they were hit by the global economic crisis first and suffered the most in terms of the contraction of their economies. However, Katzenstein’s classical explanation of why small is so beautiful (when a crisis comes) cannot be applied to them because their political economies are not corporatist. According to a broad research consensus, Slovenia is the only corporatist post‐communist country, while the Baltic states represent the opposite (neoliberal) variety of post‐communist capitalism, and Central European countries are located in‐between (Bohle and Greskovits; Drahokoupil; Feldmann; Hübner; Myant and Drahokoupil; Norkus).
Given the differences between small but beautiful democratic corporatist democracies and small (but maybe not so beautiful because of their exclusionary citizenship laws) neoliberal Baltic states, why was their adjustment capacity to the crisis shock not so much different? Why did the working classes of the neo‐liberal Baltic states in 2008-10 behave in the same patient way as their ‘class sisters’ in the neo‐corporatist Nordic and West‐European states in 1970‐early 1980s? The absence of strong leftist political parties (in Estonia and Latvia) or their opportunism (in Lithuania) as well as the low level of unionization may seem to be the answer. However, it only begs the further question, why were leftist democratic class politics up to now not successful in the Baltic states? I will argue that monetary nationalism provides the answer to these questions.
Monetary Nationalism and Its Making in the Baltic Countries
By monetary nationalism, I mean the variety of nationalism in which national currency comprises an essential element of nation state and national identity (‘one nation, one money’). Canadian political economist, Helleiner, provided an influential analysis of this phenomenon. He points out that before modern times European rulers could not and did not attempt to establish a single legal tender in the territories under their control. Many monetary means of payment freely co‐circulated, with their exchange rate established by the market. The emergence of fiat money, the rise of territories and then nation states and nation‐making were intertwined processes. In introducing territorial money, governments aimed to reduce transaction costs, collect seigniorage and acquire the power to augment public spending in emergencies by an inflation tax, even if under the gold standard this power could not be used.
Then nationalist policymakers throughout the nineteenth and twentieth century recognized that exclusive and standardized coins or banknotes might provide an effective vehicle for their project of constructing and bolstering a sense of collective tradition and memory. Alongside the flag and other familiar symbols, territorial national currency played an important role in nation‐building as an instrument for cultivating a sense of communal identity and loyalty to the state. National currency serves as a daily reminder to citizens of their connection to the nation state like a single national language, which ‘young’ national states usually promote for nationalist reasons.
Money, while it circulates in the hands of all as a sign and equivalent of every kind of value, is likewise the most popular, the most constant and most universal monument that can represent the unity of the nation.
Following the main thrust of Helleiner’s analysis, I would like to add the twist that the role of money as sacred symbol of national unity widely varies among nations. This is a conclusion of the researchers searching for causes of different attitudes to the euro among member nations of the EU. ‘It has become almost commonplace to “read” attitude surveys towards the euro and the ECB in terms of the monetary past or “collective memory” of the various member states’ (Dodd: 35). The entrenchment of national currency in the national identity depends on the collective experience and collective memory of its use, which may attest to or undermine the trustworthiness of the national state.
The use of common fiat money makes co‐nationals a community of fate, travelling in the same monetary boat. If its performance is punctuated by frequent defaults and devaluations, the national currency remains only a peripheral symbol of national identity. In this case, national currency fails as a means for the cultivation and reinforcing of national identity. Actually, monetization of national identity has many exceptions.
One of the most powerful symbols of Britain’s great past as a world power is the pound sterling, the former world reserve currency. While the German Deutsche Mark stands for German post‐World War II prosperity, the British pound serves as a strong reminder of a glorious past. (Risse et al: 162)
I would argue that along with the British pound and Deutsche Mark (DM) in 1948-2001, the currencies of the Baltic states are among those relatively few examples where money became one of the central symbols of national identity. The Deutsche Mark was quasi‐sacralized because of its role as the symbol for the German ‘economic miracle’ (Wirtschaftswunder) after World War II, which was part of the living experience for most of the German population.
Low inflation became part of German identity in a double meaning: first in contrast to Germany’s own troubled history—a theme, of course, that is familiar from other aspects of German historical discontinuities—and, second, in contrast to the inflationary performance of other Western economies. (Kaelberer: 292)
In the Baltic countries, national currencies could be elevated to such role because post‐communist transformation was framed here as the restoration or resurrection of national states.
In most of the former communist countries, post‐communist transformation was a transition to a market economy and liberal democracy (however, it was not equally successful everywhere). In some of them, it also included nation‐state building. In Central Europe, communism did not interrupt the tradition of national statehood. In some former Communist countries (mostly former Soviet and some Yugoslav republics), there were no memories of national statehood before the time of communism. However, in the Baltic states the post‐communist transformation was first of all about the restoration of independent national states, erased in 1940 by Soviet occupation.
Because of the trauma of Soviet occupation in 1940, the indigenous populations remembered the antecedent interwar time (1918-40) as a ‘golden age’. In many Western European countries, the interwar time left mixed or sombre memories because of the great world economic crisis of 1929-33 and the rise of fascism, leading to WWII and the Holocaust. In contrast, the memories of indigenous Baltic peoples remain very positive about this period, because only in 1918-40 could all three Baltic nations use the institutions of the modern state to foster the development of national ‘high cultures’ in the vernacular languages. The assumption of legal continuity grounds the much disputed citizenship laws in Estonia and Latvia, which granted citizenship rights only for people who had such rights by 1940 and their descendants (Lauristin and Vihalemm; Norkus: 67-69; 201-32).
However, this ‘golden age’ was also the gold standard time in world financial history, although the gold standard was in terminal crisis exactly at this time (Eichengreen). Remembered as an integral part of the interwar ‘golden age’, the gold standard based hard national currency (‘that good old Litas, Lats or Kroon‘) became one of the symbols of national identity along with the national flag, anthem and coat of arms during the short period of ‘national revival’ in 1988-90 before the dissolution of the Soviet Union in 1990-91. Tellingly among all former Soviet republics, Estonia, Latvia and Lithuania were the first to introduce a national currency. Estonia did this in June 1992 against the advice of the International Monetary Fund, which considered it economically more rational to remain for the time being in the rouble zone together with other former Soviet republics. Why the rush? The restoration of independence was simply perceived as incomplete without one’s ‘own money’. So central banks, entrusted with the task of introducing the national currency, as ‘hard’ as it was in the interwar time, assumed the unusual role of ‘nation builders’ (Greskovits: 211).
Restoring their independences and national currencies, the Baltic states looked for the monetary system that would approximate the gold standard system in the interwar time as close as possible. Actually, according to sources reporting the motives for the establishment of the currency board system in Estonia, the first preference of the Estonian reformers Siim Kallas (governor of the Bank of Estonia in 1991-95) and Mart Laar (Prime Minister since autumn 1992) in 1992 was the gold standard. ‘In practice, the idea was to return to a modified version of gold standard’ (Laar: 118).
However, the Estonian government recognized that returning to the gold standard in post‐communist Estonia was not practically possible, because the international environment had radically changed since the interwar time after the UK got off the gold standard in 1931 and the U.S. followed in 1934. The Bretton Woods Agreements in 1944 established a system similar to a gold standard, where the currencies of participating countries were pegged to US dollars, and their central banks (but not individuals or firms) could exchange dollar holdings for gold at the official exchange rate of $35 per ounce. Since 1971, the free floating exchange rate became the standard monetary system (Eichengreen).
Therefore, the governments of restored Baltic states opted for a currency board as its closest substitute (Bohle and Greskovits: 104-12; Knöbl et al). While currency boards had once been common in the colonies of the XIXth century colonial empires, they vanished with decolonization. In the early 1990s, this arrangement was considered by financial experts as an outdated relic of the distant past. However, for the governments of the restored Baltic states, it was the most attractive option, because they believed that ‘a currency board should work very much like the pre‐World War I gold standard’ (Korhonen: 27). Under this system, the national central bank does not attempt to influence interest rates by establishing a discount rate. The central bank’s foreign currency reserves must be sufficient to ensure that all holders of its notes and coins can convert them into the reserve currency. It does not act as a lender of last resort to commercial banks and cannot lend to the government. So, the government can only tax or borrow on financial markets for its spending commitments and cannot use monetary policy as an instrument of macroeconomic management (Blanchard and Johnson: 482-86).
To demonstrate how deadly serious restored independent Latvia is about its national currency, the Bank of Latvia in restoring Lats in 1993 opted for the highest possible nominal exchange rate with other European currencies. So with 1 Lats~2 USD, Latvian money became one of the most expensive or ‘powerful’ (of course, only symbolically) legal tenders in the world. The first releases of national currency in all three Baltic states were hedged by gold funds from the interwar period deposited in foreign banks. After 1940, they were frozen in foreign banks or given over to the USSR, but after 1991, they returned to the restored Baltic states. Therefore, the continuity between the interwar and post‐communist currencies was not only symbolic.
The tales of hard, freely convertible, gold‐hedged Kroon, Lats and Litas before the catastrophe of 1940 mix facts and fiction like all stories about good old golden times. So Mart Laar, who (by the way) is a professional historian, writes:
The economic turnaround occurred with the introduction of currency reform in 1928. The Estonian national currency, the kroon, was established with the aid of a loan from Great Britain and for the next 10 years the value of the kroon remained stable. (Laar: 33)
In these two sentences, he commits at least three factual errors: the gold standard based kroon was introduced in 1924, and the loan was provided not by Great Britain, but by the League of Nations (cf. Valge: 191-205). More importantly, the kroon was devalued in 1933, with devaluation of the Latvian Lats following in 1936 (Kasekamp). Only the Lithuanian Litas remained one of the few currencies of interwar Europe which was not devalued in the wake of the world economic crisis in 1929-33. However, after 1935 the Litas was no longer freely convertible, like other Baltic currencies. So the tales about the ‘hard national currency’ during interwar times, which are backing contemporary currency board systems, are to a significant degree just a myth.
In this, they do not differ from historical memories of other peoples about other times, when they for various reasons become singled out as ‘golden ages’ (Connerton; Heinberg). Typically, times of a great imperial past or military valour are represented as such time periods. This is just a peculiar fact about Baltic countries that historical memories of indigenous Baltic peoples in the late Soviet and early post‐communist time focused on their real or alleged economic achievements in the interwar period as a matter of national pride. For an economist, accustomed to working with only quantitative or ‘hard’ data and assuming that rational actors just let bygones be bygones, historical memories may appear as too nebulous stuff which ought to be neglected when discussing the reasons for adoption of economic policies or causes of their success.
However, in sociology and cultural studies, research on collective memories and nostalgias and their impact on actual behaviour is a well‐established research area, using both quantitative (e.g. Schuman and Scott; Griffin) and qualitative (e.g. Assmann; Olick and Robbins; Pickering and Keightley) data. The exclusive place of the interwar independence time is documented in the available research on late Soviet (Rieger) and post‐communist Baltic historical memories and nostalgias (Aarelaid‐Tart; Assmann; Klumbytė; Nikžentaitis; Pettai; etc.). Testimony about the inspirational role of examples from the interwar period (not only in monetary matters) during the early restored independence time is provided not only in the recollections of key Baltic reform politicians, but also by well‐informed foreign observers (e.g. first German ambassador in the restored independent Estonia Hermann von Wistinghausen).
The Trial and Glory of Baltic Monetary Nationalism
The establishment of the currency boards, exploiting nostalgic memories of the hard currencies of the interwar time, precommitted the Baltic nations wittingly or unwittingly to an internal devaluation policy as the means for macroeconomic stabilization during the futures crises. For two decades following the early 1990s, devaluation of Lats, Litas or Kroon became tantamount to the desecration of a national symbol. Therefore, the ‘monetization’ of Baltic national identities could make critical contributions to the willingness of their bearers to suffer the cost of internal adjustment during the crisis of 2008-10.
The prospect of the devaluation of Lats, Litas or Kroon and the ensuing inflationary spiral ignited fears that valued national currencies will become like of Russian rouble, mocked as ‘wooden money’ since the Soviet time in Baltic countries. Instructively, Benjamin Cohen distinguishes seven kinds of currencies in the contemporary world according to their international status: (1) top currency (USD), (2) patrician currencies (with the Deutsche Mark and euro as the most representative examples), (3) elite currencies, (4) plebeian currencies, (5) permeated currencies, (6) quasi‐currencies and (7) pseudo‐currencies (Cohen: 14-15). This stratification is specific to the post‐gold‐standard era, because under the gold standard there was dichotomic division of paper currencies into those ‘on gold’ and those ‘not on gold’.
In the contemporary world, top and patrician currencies are hard currencies which are broadly used in international trade, while plebeian currencies are used only internally and are reputed as not so ‘hard’. Elite currencies (e.g. the Swiss franc) are ‘currencies of sufficient attractiveness to qualify for some degree of international use but of insufficient weight to carry much direct influence beyond their own national frontiers’ (Cohen: 15). Permeated currencies, quasi‐currencies and pseudo‐currencies are soft currencies, which are not trusted by the populations of the countries where they are used and therefore are outcompeted by top and elite currencies even in internal use. As a result, the economies of the respective countries are dollarized or euroized. The population of Russia is accustomed to keeping their savings in USD, not in roubles. The same applies to all other former Soviet republics, with Baltic states representing the only exception until the joining the Eurozone in 2011-15.
Obviously, only the top, elite, patrician and sometimes plebeian currencies are fit for the role of national symbols, invested with feelings of pride and superiority. Indigenous populations of Baltic countries perceived pegging their national currencies to the top (in Lithuania) or selected patrician currency as the way to elevate their national currencies to the status of elite currency. Perceived as elite currencies, Lats, Litas and Kroon could serve to invest them with feelings of national pride and serve as a means of distancing themselves from people in other former Soviet republics and especially Russia with their reputedly pseudo‐ or quasi‐currencies. Imminent devaluation or taking these currencies off the peg was perceived as their degradation to the inferior status of other post‐Soviet republics, painfully hitting national self‐esteem.
As the crisis struck Estonia in 2008, one local businessman bitterly complained:
We can’t get our export on feet while our currency is more expensive than that of our neighbours. The Estonian kroon must be untied from the national flag, the national anthem and the coat of arms, and it should be viewed as a financial instrument—or we will end with bankruptcy. (Tere)
Such complaints fell on deaf ears. Even the people who were just publicly discussing devaluation as an option of policy were exposed to harsh attacks, while the recommendation of such policy was considered as an outright crime. In fact, Latvian counterespionage agency questioned Dmitrijs Smirnovs, a 32‐year‐old university lecturer in economics, was suspected of such a crime (Higgins). The devaluation proposal was perceived in the Baltic states as ‘treason’ against the nation, because the preservation of the peg was not just a matter of instrumentally rational cost-benefit calculation, but rather value‐rational or identity‐driven action in the Weberian sense.
Discursive political communication, characteristic of so‐called ‘compound polities’ (Schmidt) with an important role for corporatist structures and social partnerships role in decision‐making, was not a part of political life of Baltic states during the crisis. The Baltic states are ‘simple polities’ (Reinert and Kattel: 74), where political communication is not discursive but persuasive (Thorhallsson and Kattel). It does not involve the broader citizenry in decision‐making but works to persuade them to accept the decisions made by the political top elite and to silence or to marginalize dissenters. The austerity discourse dominated mainstream media. The external devaluation did not enter this discourse, with its agenda limited to the issues of how to implement internal devaluation policies in the best way. Remarkably, its field of vision remained inward‐looking, remaining limited to the discussion of the policy differences between Baltic states themselves.
The basic issue in this discussion was the permissibility of asking the International Monetary Fund (IMF) for financial assistance (preferential loans) in exchange for accepting the control of its experts over economic policies. This was the ‘Latvian way’ out of crisis. In the wake of the decision to bail out the second largest bank (Parex) of the country in November 2008, the Latvian government simply had no alternatives to the acceptance of IMF tutelage. This outcome was abhorred by the monetary nationalists in Estonia and Lithuania, who argued in favour of radical austerity to avoid to the loss of the sovereignty to IMF and save national dignity. So argued former Estonian Prime Minister Laar: ‘If we do not cut the budget, Estonia would become the “serf” of the IMF’ (Eesti Ekspress 2009; cited according Raudla and Kattel: 175). Estonia managed to escape the IMF not only by harsher than necessary (if IMF loans were accepted) budget cuts and fiscal consolidation, but also drawing upon considerable reserve funds, accumulated before the crisis. Lithuania had no such funds. So the Lithuanian government ‘saved’ its country from the ‘disgrace’ of the conditional IMF loans by borrowing funds in the international markets and paying higher interest than the IMF would ask, providing ultimate proof of the power of monetary nationalist feelings.
Few but telling exceptions from the unconditional commitment to the preservation of the peg were media outlets or political forces (e.g. Saskaņas Centrs [Harmony Centre] party in Latvia) associated with Russian‐speaking minorities or reputed as pro‐Russian (Kuokštis: 296). They could openly suggest the devaluation of national currencies as the way out of the crisis, because they did not perceived them as quasi‐sacred national symbols.
The 2010 election in Latvia was not a referendum on economic policy but on ethnic issues, with ethnic Latvians voting for mostly neoliberal Latvian parties, and the 30% Russian speaking minority voting with similar consistency for their (loosely Keynesian) party. (Sippola: 462)
However, these dissenting views could be ignored by the governments, because they were based on coalitions which did not include the parties representing ethnic minorities.
Discussing the performance of Baltic states during recent crisis, Finnish political scientist Henry Vogt argues (2012) that its neighbour Estonia’s policies during the crisis were not just neoliberal, but ‘nation liberal’. In broad popular opinion, neoliberalism is considered as equivalent or synonymous with cosmopolitanism. Keeping in step with some other researchers (e.g. Kangas), Vogt makes the important observation that there can be a (holy or unholy) alliance of neoliberalism and nationalism, reminiscent of the older alliance between economic liberalism and nationalism in the XIX century that made possible the gold standard regime (Helleiner). In the new globalization era, under some particular conditions monetary nationalism can work as a substitute for neocorporatism. Unlike classical democratic corporatist countries, in Estonia
all acts societal thus include a national dimension; people’s daily work efforts are not only meant to advance the wellbeing of the individual but also that of the entire nation—in spite of the individualistic tendencies that one can also easily observe in the country. In Scandinavia, by comparison, such mechanisms are much weaker. (Vogt: 109)
Vogt refers to Estonian nationalism, but his argument mutatis mutandis applies to other Baltic nations (see Lauristin).
The Paradoxical Demise of Baltic Monetary Nationalism and Its Theoretical Relevance
The success of the internal devaluation policy enabled Estonia to already meet euro convergence criteria by 2010 and to introduce the euro on 1 January 2011. Latvia followed on 1 January 2014 and Lithuania on 1 January 2015. In all three countries, joining the Eurozone was celebrated as one of the greatest achievements of restored independence time, second only to accession to the EU and NATO in 2004. However, this success has an air of paradox, because it abolished its own cause—national currency as the inspiring national symbol, able to provide the suffering in order to safeguard its ‘elite status’ of hard and stable money during an economic crisis with deeper meaning.
In fact, the populations of the Baltic states were not enthusiastic about the introduction of the euro. In April 2012, the populations of Latvia and Lithuania were nearly evenly divided between those who were ‘very much’ or ‘rather in favour’ and those who were ‘very much’ or ‘rather against’ euro adoption, while elites favoured the euro nearly unanimously. Asked about the timeframe of euro adoption, only fourteen per cent of Lithuanians and nine per cent of Latvians wanted to adopt the euro ‘as soon as possible’ (Markevičiūtė and Kuokštis: 15). These figures are not surprising, because indigenous Baltic populations accepted hardships of internal devaluation not to accelerate the adoption of euro but to save their national currencies from degradation to the likes of rouble. Nevertheless, the elites of Baltic countries with currency pegs were able to exploit monetary nationalist feelings of their populations to adopt the euro ‘as soon as possible’ despite the considerable scepticism of their voters about transnational currency. In contrast, the elites of several Central European countries with freely floating exchange rates failed to persuade their populations to accept hardships and restrictions to satisfy Maastricht criteria for Euro introduction (cf. Johnson).
After joining the European Economic and Monetary Union (EMU), monetary issues ceased to be a part of nationalist identity politics (but not necessarily of the identity politics as such—see below). So the success of the internal devaluation, paradoxically culminating in the saving and abolishing of cherished national currency at the same time, made itself unique. When the next crisis hits the Baltic countries, there will be no value‐rational and affective motives to stand and suffer for ‘our own’ currency, provided by monetary nationalism. This observation has important implications for the much debated question of whether Baltic success with internal devaluation has any lessons to teach for so called PIGS (Portugal, Italy, Greece, Spain) countries (see e.g. Åslund; Åslund and Dombrovskis; Kattel and Raudla; Raudla and Kattel; Weisbrot; Woolfson and Sommers).
Actually, it is difficult to find any useful lessons. At the time of the outbreak of the recent crisis in 2008, the Southern European countries in question already were members of the EMU. And for those countries which already are members of the EMU, there is no alternative to internal devaluation (TINA) except leaving the EMU. So there are no real ‘Baltic lessons’ for Southern European countries, because they no longer have the choice between external and internal devaluation. Of course, the Baltic experience of successful internal devaluation is of interest for countries with national currencies protected by currency board regimes. But this experience provides no recipe if monetary issues are not part of nationalist identity politics or cannot be made part of it. In the Baltic states, this was the case because of peculiarities of their history mythologized in their historical memory.
Importantly, one can speak about the ‘success’ of internal devaluation in the Baltic states only in quotation marks, because there was improvement only in the short run—restoration of macroeconomic equilibrium. In fact, restoring macroeconomic equilibrium by painful means of internal devaluations may have long‐time side effects, undermining the capacity for qualitative development of Baltic economies. I mean their transformation into true ‘knowledge economies’ on the technological frontier. Given the scarcity of natural resources, the main wealth of the Baltic states is human capital, embodied in their working age populations. Meanwhile, up to seven-eight per cent of the population of Latvia and Lithuania emigrated in 2008-11 (because of the geographical location of their country, Estonians have the opportunity to commute to nearby Finland). Younger, educated people prevail among emigrants, withdrawing from Baltic economies their most precious resource.
Given declining birth rates, some one-two more internal devaluations after the booms and busts to come can make true the worst fears animating Baltic nationalism. Most probably, the overwhelming majority of émigrés will never return. With economies recovering, they will be replaced by a foreign workforce. ‘Ironically, the most available source of emigrants to make up shortfalls would be from Ukraine, Moldova, Bulgaria, and Belarus’ (Woolfson and Sommers: 140). The fears to become a minority in one’s ‘own country’ because of the mass immigration of Russian speakers were the strongest power behind the ethno‐nationalist mobilization of indigenous populations to struggle for the restoration of independence in 1988-91. Therefore, the ‘Slavic solution’ for the imminent replacement workforce problem after some three decades of restored independence would become the ultimate irony of the Baltic internal devaluation’s ‘success’.
The paradoxical self‐destruction of Baltic monetary nationalism by its own success exemplifies the causal pattern whose perhaps most famous instance was disclosed by Max Weber’s analysis of the role of Protestant ethic in the making of modern Western capitalism. According to this famous argument of Weber’s, the economic success of the Calvinists and other representatives of ‘ascetic Protestantism’ undermined its own cause, diluting and then destroying the Protestant ethic of ‘innerworldy asceticism’, which was replaced by downright consumerism under advanced capitalism, populated by ‘specialists without spirit, sensualists without heart’ (Weber: 124). In a similar vein, Baltic monetary nationalism contributed to the success of internal devaluation policies during the 2008-10 crisis, enabling them join the Eurozone in 2011-15. However, the side effect of this ultimate triumph of Baltic monetary nationalism was the demise of the Baltic national currencies as the major anchor of the Estonian, Latvian and Lithuanian national identities, as they were shaped by the histories of the building, loss and restoration of the national states of three small Baltic peoples.
Weber’s analysis of the role of the Protestant ethic in the rise of modern capitalism is celebrated as empirical refutation of historical materialism in the methodology of social and historical analysis, demonstrating that ‘ideas matter’ even in the explanation of ‘hard’ or ‘material’ economic phenomena. The discussion of the role of monetary nationalism in the Baltic model of neoliberal capitalism may provide another case study of such a kind, contributing to the expanding body of literature in ‘constructivist’ economic sociology and political economy along with ‘discursive institutionalist’ work in the political science. This research focuses on the role of beliefs, ideas, identities and even emotions in the choice of the exchange rate regimes and other economic policies (see e.g. Blyth; Epstein; Finnemore and Sikkink; Kirshner; Konings; Ravi et al.; Schmidt; Widmaier).
In the very long‐run (Braudelian longue durée) perspective, the phenomenon of monetary nationalism can be considered a partial and temporary reversal of disenchantment (Entzauberung), analysed by Weber as a master secular process in the making of modern societies (Weber: 350-58). This process involves cultural rationalization, devaluation of mysticism, desacralization and profanization. Marketization and commercialization are important aspects of disenchantment. However, the uses of national currency as a political tool of nation building can be illuminatingly described as an enchantment of formerly value‐neutral or indifferent (adiaphoric) social media. With nationalism working as a secular substitute for religion (a kind of Ersatzreligion), national currency becomes a symbol of faith in one’s nation (cf. Lauer: 127). This is what enchantment or sacralization of money means, being a specifically modern phenomenon, characteristic of the age of nationalism.
In this long‐run perspective, the recent replacement of national currencies by the euro in the member countries of the EMU may appear as the ultimate realization of Weberian disenchantment. However, the euro was not only an economic project: ‘the euro is about European union and political order rather than only lowering transaction costs or creating exchange‐rate stability’ (Risse et al: 148). This makes the EMU different from other contemporary (e.g. CFA franc in Western and Central Africa) and now defunct currency unions of modern times (e.g. Latin Monetary Union 1865-1927). In fact, the euro was designed as a symbol of the supranational European collective identity in the making: although the euro coins display national symbols alongside European imagery, the structures and buildings on the Euro banknotes do not refer to specific countries or regions. Instead, they feature typical but fictional European architecture to signal and suggest adherence to a supranational community.
Two Eurozone decades are too short a time perspective for conclusions about the success of the euro as a symbol of collective identity. Attitudes towards the euro correlate positively with pro‐EU attitudes, and negatively with nationalist and euro‐sceptical attitudes (see e.g. Meier‐Pesti and Kirchler; Müller‐Peters; Pepermans and Verleye; Risse et al.), which broadly vary between different EU countries. To recall (see the third section above), the use of common fiat money makes co‐nationals a community of fate, travelling in the same monetary boat, while collective experience and collective memory of using common currency attest to or undermine the trustworthiness of the national state.
Extending these lessons to the euro, a conditional forecast can be made that prospects of its enchantment as a symbol of strong supranational collective identity depend on the EUs economic success in world‐wide competition along with the efficacy of EU cohesion policies to decrease the disparities between its member countries and regions. At this time, expert opinions remain deeply divided on these issues (see e.g. Brunnermeier et al.; Stiglitz; Varoufakis), while there are some countries (first of all in Southern Europe, including Greece as most notable case), where negative experiences prevail over positive experiences.
Conclusions
In modern national states, national territorial currencies may become a symbol of faith in one’s nation, begetting monetary nationalism as a variety of economic nationalism. Monetary nationalism is not a necessary side‐effect of using national currencies, because perceived or remembered contributions of such currencies to the international success of a national community as an independent state widely varies. Therefore, in some countries, national currencies are only peripheral anchors of national identity.
However, because of the foreign occupation (in 1940-90) of the newly established (in 1918) national Baltic states, their indigenous populations perceived national currencies as the most visible embodiments of the continuity of their modern national statehood and elevated them to the central symbols of national identity under post‐communism. In the post‐communist countries with state and national currency continuity (e.g. Poland or Hungary) and in those with no national state and currency before communism (e.g. Belarus or Kazakhstan), national currency was not a national symbol lost and then recovered. Therefore, the issue of its stability did not became imbued with such strong nationalist feelings in the wake of the market reforms of the early 1990s.
During the recent world‐wide economic crisis, starting with the Lehman Brothers bank collapse in 2008, the Baltic states were hit most severely and recovered most rapidly, successfully defending (against the advice and forecast of most experts) their currency pegs. Although the over‐performance of the Baltic states may be compared with that of smaller Western European states during the ‘stagflation era’ in the 1970s, it cannot be explained by established economic wisdom. According to Katzenstein’s famous argument, the source of comparative institutional advantages of small states is the democratic corporatist system. However, there are no corporatist institutions in the neoliberal Baltic model with a currency board as the pivotal institution.
In the neoliberal Baltic model, neo‐corporatist institutions were substituted by monetary nationalism, inducing non‐elite parts of their indigenous population to accept and endure hardships of internal devaluation (wage cuts and unemployment). While the role of Kroon, Litas and Lats as national symbols was an important contributing cause for the success of internal devaluation, this success ironically did undermine its own cause, enabling Baltic states to adopt the euro as their currency. The Baltic success of internal devaluation has no policy lessons for Southern Europeans, because they already belong to the eurozone and are in a different geopolitical situation.
Sacralization or enchantment of money in monetary nationalism may serve as an example of partial and temporary reversal of disenchantment (Entzauberung), described by Weber as a master secular process of cultural modernization. Demise of national currencies as a side‐effect of the emergence of the currency of unions does not exclude the recurrence of further episodes of such kinds, because common currency can be used for the building of supra‐national communities. The attempt to anchor European identity in the euro is the most conspicuous recent example.
This case study of the uses of monetary nationalism in the building of the Baltic model of neoliberal capitalism provides another contribution to the expanding library of case studies on the economic relevance of ‘soft’ or cultural phenomena, launched by the famous study of Max Weber of the role of the Protestant ethic in the making of modern Western capitalism.