Capital Markets and Financial Intermediation in the Baltics

In only a decade after independence, the three Baltic states?Estonia, Latvia, and Lithuania'have transformed themselves into fully functioning, small open market economies that are on the verge of joining the European Union. The three Baltic states, jointly with the other seven accession countries of the first wave, will join the European Union in May 2004 and are expected to seek membership in the European Exchange Rate System (ERM2) shortly thereafter. Over the past decade, economic policies and developments in the three countries have been similar in many respects. All three have used the exchange rate as a nominal anchor to stabilize the economy and to impose fiscal discipline. Estonia and Lithuania chose a hard peg in the form of a currency board, while Latvia pegged its currency to a basket of currencies through an SDR peg. Although considered to be temporary arrangements until adoption of the euro, the respective exchange rate systems have served the countries well and withstood a number of shocks, the most extreme of which was the 1998 financial crisis in Russia.With the exception of a contraction in output at the very beginning of the transition period and a slowdown in economic activity in the aftermath of the Russian crisis'which led to a decline in output in Estonia and Lithuania'overall the Baltic states have experienced strong economic growth since independence. This strong performance has resulted from several factors: substantial increases in efficiency due to restructuring of the economy, including privatization; the attraction of foreign capital; and a stable macroeconomic environment.Schipke, Alfred is the author of 'Capital Markets and Financial Intermediation in the Baltics', published 2004 under ISBN 9781589062726 and ISBN 1589062728.