The Baltics: Continuing Boomor Bursting Bubble?

A Rocky Short-Run Should Not Obscure A Promising Long-Run

By Matthias S. Fifka

Matthias S. Fifka teaches international economics and politics at the School for Business and Economics at the University Erlangen-Nuremberg, Germany, where he earned a Ph.D. He has also been working as a visiting professor at Cleveland State University and the ESC Clermont-Ferrand in France. His teaching and research focuses on the political and economic environment for business, international organizations (European Union, World Trade Organization, and the North American Treaty Organization), and business-government relations. Since 2008, he has been serving as deputy director of the German American Institute.

Since the late 1990s, the economies of Estonia, Latvia and Lithuania have experienced unprecedented economic growth, which has attracted a large number of foreign investors. American companies were among the first to seek business opportunities and have invested over $1 billion in the three countries as of 2008. However, the boom—partly financed on a loose credit policy—has recently created a fragile economic situation due to soaring wages, doubledigit inflation, and high current account deficits. The resulting economic deceleration in the first half of 2008 has led analysts to comment that the “Baltic Bubble” is about to burst, potentially leading to a long-term recession. Other experts, nevertheless, maintain that the three countries are only experiencing a natural consolidation, which does not seriously endanger business opportunities in the long run. The purpose of this paper is to analyze the current condition of the Baltic economies and the environment for businesses there in order to determine if the three countries will still be attractive destinations for foreign direct investment (FDI) in the future.

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