Introduction: Europeanization and financial crisis in the Baltic Sea region: implications, perceptions and conclusions ten years after the collapse

The year 2018 was very meaningful for the Baltic states, as it marked the centenary of their independence. Likewise, two other significant anniversaries occur in 2019 for Estonia, Latvia, and Lithuania. First, the present year marks the 15^th anniversary of their accession to the European Union (EU), crowning the efforts of more than a decade of profound transformations, expectations, and hardships. Second, 2019 marks a decade since the worst episodes of the 2008–10 economic crisis, when all three countries fell into deep recessions. It is undeniable that both events represent the most significant and influential phenomena for the Baltic countries since the restoration of their independence. Therefore, reflecting on their effects and connections is an ineluctable task to understand the current situation and the future of these countries.

The financialization of the Baltic economies that preceded the financial crisis – massive inflows of foreign direct investment (FDI), as well as the rapid increase in current account deficits and private sector indebtedness – is intimately linked with accession to the EU (e.g. Kattel and Raudla 2013; Juuse 2015; Raudla et al. 2015; Pataccini 2017). The EU not only provided structural support to these countries to the tune of 3–4% of GDP annually but also opened the Baltic markets for FDI through regulatory harmonization. The response to the crisis in the Baltics is also significantly related to the EU through its soft and hard politics of consultations, new financial and fiscal rules, and an epistemic community of austerity and stability (Dawson 2015; Dehousse 2016; Laffan and Schlosser 2016; Raudla et al. 2015).

In many respects, the global financial crisis was a turning point for the Baltic states. The economic recession, which had extraordinarily severe effect in this region, had a direct impact on these societies, forcing them to rethink the fundamental aspects of their economic models and policies, as well as the role played by the EU. Even today, when economic recovery has been fully achieved, the debates about its causes, consequences, and implications for future developments are still prominent.

Understanding the causes and effects of the global financial crisis in the Baltic countries requires understanding their recent history and their position in the European context. Since the late 1980s, the Baltic Republics, like most of the Soviet-bloc countries, have gone through dramatic social processes. Thus, the 1990s were characterized by the difficulties of transforming their political systems and restructuring their economies. In contrast, the early years of the new millennium were marked by greater institutional stability and broad optimism. The EU accession, in 2004, was regarded as a historical achievement, signifying the long-awaited (re)integration with Europe. Furthermore, this was followed by strong economic growth in all three countries, which confirmed the expectations of large portions of those societies about the positive effects of Europeanization. This expansive cycle was, however, abruptly interrupted by the crisis that erupted in 2008. The global financial crisis brutally exposed the shortcomings and imbalances of this growth and drew a cruel line between the winners and losers of the Europeanization process (see, e.g. Kattel and Raudla 2013). Consequently, for the first time since the beginning of the transition, the economic crisis of 2008–10 led to serious questioning of the policies applied and their results to that date (Raudla et al. 2018a, 2018b). Moreover, the strategies used in response to the stagnation clearly expressed the balance of power in the region, reflecting the prevailing interests, objectives, and perceptions in the Baltic Sea Region and the EU (e.g. Raudla and Kattel 2011). Therefore, analyzing the causes and effects of the crisis in this region implies analyzing the interaction between all countries and the role of Europeanization.

The contributions

The present special issue consists of six academic contributions that seek to cover in a comprehensive manner various quantitative and qualitative aspects of Europeanization and the financial, fiscal, and economic crises in the Baltic Sea region. Due to the international nature of the phenomena, the articles are not only focused on the Baltic states but also on the broader region.

First, the contribution by Egert Juuse, Ringa Raudla, Aleksandrs Cepilovs, Olga Mikheeva, and Bent Sofus Tranøy, presents a comparative analysis of the impact of Europeanization on financial regulation and supervision after the crisis in Sweden, Norway, Estonia, and Latvia to European integration in financial regulation and supervision after 2008. The research shows how the different positions of these countries in the process of Europeanization affected the perceptions of their officials and the implementation of new norms. While Sweden has had a leading and proactive position in the design of international financial policies, simplifying the transposition process and reducing the adjustments costs of harmonization, Estonian and Latvian officials expressed the feeling that norms were imposed from above and did not focus on the local context and problems. For its part, Norway represents a particular case due to a different form of affiliation with the EU and general skepticism about political integration and supranational commitments. Overall, the article contends that uniform rules for all banks and EU countries are likely to be inadequate in the long term, given the fact that national variations between countries may require specific and tailored regulations to be effective.

The second article by Petra Dünhaupt and Eckhard Hein, focuses on the links between finance-dominated capitalism (or financialization), macroeconomic regimes, and income distribution in the Baltic Sea region. In doing so, the research compares the cases of Denmark, Estonia and Latvia from a post-Keynesian perspective, shedding light on the developments of these countries before and after the crisis. In Denmark, for example, it was observed that in the period prior to the crisis adjusted wages increased and the economy was characterized as a weakly export-led. Meanwhile, Estonia and Latvia were characterized by economies of booming private demand driven by debt, which compensated the decline in labor share. Nevertheless, in the period after the crisis, the regressive effects of financialization on income distribution was seen also in Denmark, while for Estonia and Latvia the general trend for the labor share is stagnation. Thus, the article not only shows the consolidation of the macroeconomics features of financialization after the crisis but also that all the three countries moved to a mercantilist economy led by exports, although with different levels of success. Accordingly, the authors argue that this movement represents a global trend that can entail serious risks for the future of the world economy.

The global financial crisis triggered a broad academic and political debate regarding the causes and best strategies to overcome the recession. Thereby, the contribution by Leonardo Pataccini and Raul Eamets herein aims to assess these narratives through a comparative analysis of the economic policies that Latvia and Poland applied during the global financial crisis, as well as their results a decade later. The authors contend that Latvia and Poland represent two opposite extremes in terms of practical and theoretical approaches to the economic crisis. The Polish government followed a ‘pragmatic’ approach to fighting the recession, based on expansive fiscal policies and currency devaluation, being the only EU economy to avoid recession in 2009. Conversely, the Latvian administration opted for an austerity and internal devaluation strategy, in line with the policies applied in the other Baltic states. Subsequently, while Poland’s economy continued to grow, the Latvian economy only managed to recover to pre-crisis levels by the end of 2017. Thus, the article finds empirical evidence supporting the heterodox interpretations of the crisis and it demonstrates that while economic policies played a key role, structural and institutional features are also fundamental factors to explain the economic performance of both countries before and after the crisis.

The article by Egert Juuse, Aleksandrs Cepilovs, and Ringa Raudla aims to address one of the main gaps in academic discussions about the effects of crises. Namely, the question of whether, after its severe effects, the crisis of 2008–10 has led to policy learning in financial regulation and supervision in the Baltic Sea region. Therefore, the research explores the cases of Estonia, Latvia, and Sweden from a comparative perspective, examining the main factors that can influence policy learning. Interestingly, it shows that although experiences and perceptions of the crisis varied significantly between the three countries, the lessons drawn are very similar in all the cases. This phenomenon is explained by the external influence of the European Union as the main source of policy learning in these countries. The article shows, however, that the transposition of EU legislation has asymmetric implications. Therefore, while Sweden has performed as a policy-maker, Estonia and Latvia have been mainly limited to the role of policy-takers. The authors point out two major issues arising from such an approach. First, the local regulations in Estonia and Latvia may not be sufficiently tailored to local particularities. Second, the existing measures may not be enough to prevent the next crisis from happening, since the risks in the post-crisis financial system may still remain hidden.

Liene Ozoliņa contributes to the multidisciplinary nature of the special issue with an ethnographic research article aimed at understanding why public resistance to radical austerity policies in Latvia was so limited and sporadic. While many researchers and officials, both at the local and the EU level, have regarded Latvian austerity following the 2008 economic crisis as a success story, some others have criticized it, alleging that it was a costly and harmful social experiment. To date, however, qualitative academic research addressing the sociological nature of this phenomenon has been extremely limited and it has remained a puzzle how such harsh socioeconomic policies were possible without sustained popular protests. To answer these questions, the author analyzes the political and moral dimensions of post-2008 policies. The article argues that welfare policies played an important role in disciplining the parts of the population most adversely affected by the crisis by framing post-crisis precariousness as a matter of individual responsibility. Thus, it shows how a historically and culturally-shaped moral economy, underpinned by a particular moral discourse, can play a key role in sustaining and legitimizing the implementation of severe socioeconomic policies, even as harsh as those applied in Latvia during the crisis.

The last contribution to this special issue, by Arunas Juska and Romas Lazutka, addresses the consolidation of the neo-liberal paradigm in the Lithuanian political economy after the 2008–9 recession there. This phenomenon is analyzed through the political decision of the Prime Minister Algirdas Butkevičius, member of the Lithuanian Social Democratic Party (LSDP), to embrace policies of labor market liberalization. Despite being initially opposed to these reforms, after taking office, following the 2012 elections, Butkevičius decided to promote a pro-business political project even at the cost of alienating his main constituencies. Yet, the paper shows that the emergence of a ‘neoliberal post-crisis consensus,’ which was related to a combination of local and international factors, also implied a process of contestation, led by labor unions and discontented factions within the Prime Minister’s own party. Eventually, the unpopularity of these measures led to the defeat of the LSDP in the 2016 elections. The new party in office, however, the Lithuanian Farmers’ and Greens’ Union, did not undertake a reversal of these policies, which led the authors to express their concern regarding the possibility of finding a sustainable and inclusive economic model in Lithuania to fight the persistent poverty, inequality, and emigration that followed the economic crisis.

Drawing conclusions for the future

Undoubtedly, Europeanization and the financial crisis have been the most influential phenomena in the Baltic countries since the beginning of the transition, and understanding their effects and implications is essential to draw conclusions for the future. Thus, the contributions of this special issue serve to raise awareness of the main challenges and pending issues for the Baltic states. In terms of policy learning, it has been observed that after the crisis new regulations were adopted to address the identified risks. Yet, one of the main current challenges for the financial stability policy is that responsibilities have been divided between so many different actors, both within and across countries, that coordination has become a crucial issue in order to address financial fragility. Although several coordination issues have been improved after the crisis, the research in this special issue (Juuse et al.; Juuse, Cepilovs, and Raudla) suggests that more coordination between the supervisors across borders and also between the authorities within a country is needed. Indeed, we can call the learning that has taken place after the financial crisis more of a ‘mirage of learning.’ Given that some of the countries are in the Eurozone while others are non-Eurozone members, EU-level coordination attempts may undermine regionally-oriented coordination. Furthermore, the lack of clear signs of willingness to engage in more extensive fiscal action from the EU side may see the financial risks turning into social costs.

Another important aspect that has been highlighted in the special issue is the asymmetric roles and costs of policymaking in the field of financial regulation in the EU. On the one hand, as it was shown, the countries that occupy a higher rank in the European financial hierarchy have more capacity to influence the development of regulatory frameworks. Therefore, to a large extent, the new post-crisis regulations tended to reproduce these hierarchies, prioritizing the interests of the most active and developed countries to the detriment of the countries that occupy a lower rank in the European financial hierarchy and that are the most vulnerable. On the other hand, the transposition of a large volume of EU directives after the crisis consumed the attention and resources of national policymakers in the Baltic region, which has left a diminshed capacity to address more specific local issues that are equally relevant for the proper functioning of the local and European financial system. This was demonstrated by the recent money laundering scandals in Estonia and Latvia. In particular, these were serious domestic issues that deserved greater attention from national policymakers and regulators. Given the need to focus on the implementation of EU-level regulations during the time of fiscal consolidation, which curtailed resources for supervisory tasks, the bureaucratic capacities required to deal with these internal problems may have been severely underdeveloped to perform such tasks. Accordingly, we can argue that financial regulators seem to have failed to take into the account one of Hyman Minsky’s main arguments (Minsky 2008): the nature of systemic risks in the financial sector are constantly changing and thus regulators often play catch-up with risks created by financial innovations.

In terms of economic dynamics, it has been observed that the crisis has not triggered substantial structural changes in these countries. Instead, many of the previous trends have continued. The articles that focus on macroeconomic aspects (Dünhaupt and Hein; Pataccini and Eamets) show that the logic of financialization, a key feature of the pre-crisis years, has not been challenged, while sensitive social indicators, such as income distribution and wage share, have not significantly improved after the recession. As the Latvian example shows, the strategy of austerity and internal devaluation consolidated many structural patterns of these economies, characterized by their dependence on external capital flows for investment and consumption. While some sources of financial instability were addressed, no new genuine drivers of growth have been developed, which led to slow and weak recovery after the crisis. Additionally, the articles by Ozoliņa, and Juska and Lazutka show that, to a large extent, the economic discourses, values, and paradigms that led to the crisis have been reinforced after it. Thereby, the years of recovery were characterized by the consolidation of a neoliberal moral economy, with a return to ‘business as usual’ and a focus on individual responsibilities instead of pointing to the systemic causes. The lack of alternative discourses and the stigmatization of progressive approaches has steered the dissatisfaction and disappointment of citizens in the aftermath of the crisis toward increasingly conservative forces, as shown by the rise of far-right Conservative People’s Party of Estonia (EKRE) and other radical right-wing demagogues in the Baltic countries.

Finally, looking toward the future, it is important to mention that the fast development of the financial technology (fintech) sector and the general unpredictability and inherent instability of the financial system may bring new risks that policymakers in the region may not be aware of yet. Indeed, in some ways, these financial developments may be even riskier than those of 10 years ago, due to phenomena such as algorithmic trading and herding behavior (MacKenzie 2018). Due to the speed of these innovations, regulatory actions may continue to be reactive rather than actively preventive, casting serious doubts on the real capacity of authorities to prevent another episode of financial instability. To come back to Hyman Minsky: financial regulations usually attempt to avoid the repetition of the last crisis and thus often fail to address the next one.

In sum, as our special issue suggests, the process of Europeanization and the global financial crisis have prompted a series of changes in the Baltic countries as well as consolidating some preexisting trends. The main conclusion is that despite the reforms and the efforts to prevent exposure to financial shocks, some significant challenges remain. In this sense, it is undeniable that the financial regulation of contemporary capitalism is a moving target. Although some problems have been addressed, there are some unresolved issues, and new threats have arisen, which may raise concerns about how well prepared the financial system is to face the new risks and an eventual new crisis. Above all, becoming aware of these factors is essential to achieve a future of sustainable and inclusive development. If scholars and policymakers at the local and the EU level ignore the potential risks in the financial sector, the next crisis could be just around the corner and the painful experience of the great recession will have been in vain.