Article published on the ir.lv website
Recently, there have been calls to impose a new tax on banks for generating excessive profits. Alongside these criticisms, well-known public figures and opinion leaders have once again pointed out that Latvia lacks a national vision and that one should be created to reverse negative trends. These two topics are not only deeply interconnected; they are two sides of the same coin.
In Search of New Ideas for the Nation
The call to create a new national idea is quite strange and even absurd, since the central national idea seems self-evident and obvious—and there is no one who would seriously dispute it. It is liberal democracy, liberalism. In academic discourse, it can be viewed as one of several theories, but in this case—as an instrument of power. In Latvia, the ruling elite—even if not to the full extent of this theoretical concept, then at least its central elements—has been adhering to it with Latvian diligence for many years.
It would be difficult now to find any alternative “ideas of the state,” and even more difficult to find proponents who take such ideas seriously. Recently, in the West, the ruling elite has been promoting—in addition to “liberalism”—a set of “ideas” that many refer to as the ideology of progressivism, in order to “capture” additional voter groups, without, of course, fundamentally changing the structure of power.
The doctrine of liberal democracy, which our ruling political forces—consciously or unconsciously—actively defend, contains a number of elements that have been widely described. For example, it calls for the ratification of the Istanbul Convention as part of the prevailing “narrative,” as well as privatization and the primacy of foreign investment over national enterprises. Given that our political leadership consists of advocates of liberal democracy, there should be little doubt as to what decisions will be made.
In this regard, the public remark by the now-departed head of government sounds rather grotesque—how wonderful it is that Estonia’s state-owned energy company is listed on the stock exchange and, lo and behold, is actively operating in the Latvian market. If I were Estonian, I’d be happy too, because their company will make money at the expense of Latvian residents and will transfer those profits out of the country, just like foreign-owned banks do. In this way, we’ll consistently serve the interests of foreign bank capital and foreign companies.
Even if some new national vision and well-intentioned development strategies were to be created, we would still need to see concrete political action. This would require elite groups, clans of business oligarchs, and, consequently, the power to shape public policy and other supporting institutions to champion and advance these “ideas,” as well as other prerequisites that would be extremely difficult to establish.
There appears to be nothing of the sort in the structure of society at present. The existing national ideology has brought many people positive benefits and income—so it has generally served its purpose well; why change it?—and, moreover, no alternative doctrine is in sight or under discussion. The modest efforts observed before the elections were not convincing, and their proponents have already been deservedly ridiculed in public.
The elite that has ruled the Western world for decades has established this idea as one of the central instruments for maintaining power, and for now, signs of impending positive changes are too faint to be taken seriously. The same is true in Latvia—to put it simply—where the ruling elite has adopted this idea as an instrument of power, regardless of the name of the party to which specific politicians belong.
15 year Anniversery
Looking at the other side of the coin, the situation is similar. Just as with the concept of the state, changes to the banking sector are neither necessary nor even permissible.
The banking and financial sectors must not be touched, as they are one of the fundamental elements of the ruling “ideology” and even one of the cornerstones of the ruling system—which is why they are also among the biggest beneficiaries. In America, this is crystal clear.
Since we are a pro-American country, we should not attempt to impose such taxes on banks.
Zbigniew Brzezinski, a classic figure in realpolitik, posed a broad rhetorical question in his interview on January 24, 2012: “The question today is whether democracies can thrive if financial systems are out of control and capable of producing outcomes that benefit only a few in a self-serving manner, without an effective system that would give us a broader and more ambitious goal? That is the real problem.”
It is true that the banking sector in the U.S. was intensively “liberalized” over the course of a couple of decades prior to this Brzezinski interview. President Clinton, and later President Obama, were particularly active in removing regulatory constraints on the banking sector, clearly demonstrating the Democratic Party’s deep doctrinal loyalty to the financial sector. The banking sector received trillions in fresh capital, which Brzezinski refers to as “selfish windfalls.”
It was just in mid-September that 15 years had passed since the global financial crisis—on September 15, 2008, Lehman Brothers filed for bankruptcy. Financial institutions, which citizens had entrusted with managing their money, collapsed and were saved only at the last minute by government bailout measures.
Marking this anniversary, the Secretary General of the European NGO Finance Watch (Benoît Lallemand) notes that “at the time, politicians rushed to promise fundamental reforms, to put an end to reckless risk-taking, and to ensure that financial institutions would serve the real economy. They said that public money would never again be used to bail out irresponsible banks. However, the promises made to citizens have not been kept.” Both gentlemen quoted here are essentially saying that banks must not be touched or restricted—not even in the United States, let alone in Latvia.
Economic Planning and Support for the Green Transition
First, commercial banks largely fulfill what might be called an economic planning function, as they decide which sectors and companies to lend to. In contrast to the government, which, busily wading through the legislative quagmire, attempts to create a framework for the economy—albeit in a rather transcendental dimension—with its flood of guidelines, regulations, and laws, banks either lend money to companies or they do not, and this is quite concrete.
The commercial banking sector fulfills this function in countless other countries as well, particularly in the U.S., where, thanks to the presence of banks and other financial institutions on the stock market, certain sectors are promoted while others experience a decline.
Second, by imposing new taxes on banks, how will we answer the question of who will finance the transition to the so-called Green Deal and the transformation of companies so that they can meet emissions reduction and climate goals?
The question is not whether these goals are good or bad, but rather that Latvian companies—and exporters in particular—must invest in order to demonstrate results in emissions reduction and sustainability that, just a few years ago, no one even needed to achieve. European Union funding alone will not be enough for companies to reorganize their operations and adapt them to the ambitious goals of climate policy. And here, support from commercial banks—acting in good faith—is absolutely essential.
Third, it is worth noting the rise in bankruptcies among “zombie companies”. Over the past year, a wave of loan defaults has swept through the EU and Latvia, leading to a wave of business closures.
For example, the German Federal Statistical Office reported that the number of corporate insolvencies in Germany rose significantly in July—the number of applications filed by companies was nearly a quarter higher than in the same month of the previous year. In the second quarter of this year, compared to the same period last year, the number of corporate bankruptcies in France rose by as much as 35%, putting 55,000 jobs at risk. The number of business closures there reached 13,226 in the second quarter of this year, an increase compared to the 9,826 cases recorded during the same period last year, and reached a new, unprecedented level since the start of the Covid-19 crisis in March 2020.
Over the past decade, zombie companies have managed to stay afloat because they were able to take advantage of cheap, zero-interest loans. Now that loans are becoming more expensive, these companies are no longer able to meet their obligations and are going bankrupt, as it is no longer possible to artificially keep them afloat. This is yet another
Furthermore, the U.S. Federal Reserve System is proposing to increase banks’ capital requirements, and—as far as can be told—the European Central Bank is also discussing this. On the one hand, this does not seem like a bad thing, but on the other hand, it will make access to credit more difficult, as banks will have to set aside larger amounts in reserves.
Fourth, lending conditions are tightening across the eurozone, a trend the ECB has noted repeatedly in its reports this year. As recently as this spring, the ECB noted that net demand for loans from eurozone companies, for example, declined significantly in the first quarter of 2023. The decline in net demand was steeper than banks had anticipated in the previous quarter and was the sharpest since the global financial crisis.
With what are we earning tomorrow?
On the question of whether to impose an additional tax on banks, there was no real dispute—just a seemingly half-hearted imitation typical of Latvia. The moment commercial banks signaled that they would agree to a small advance tax, the grounds for any other opinion vanished, and no other proposals are being considered. It is clear that it is purely by coincidence that the interests of commercial banks are being defended by the finance minister, who is also the leader of the ruling party. It is no coincidence that the tallest building in Latvia is not that of a dairy farmer, a plywood manufacturer, a metallurgist, or any other company—not even a church—but rather the headquarters of a single bank.
However, the issue of a bank tax misses the mark, as it fails to address the serious question: how will we earn a living today, tomorrow, and the day after tomorrow, since the economic crisis is more likely just beginning than ending? We see how foreign capital holders make their money—and they make a decent profit, which they transfer abroad—but how will we make money ourselves?
If the opportunity exists, why shouldn’t the banks make a profit? Where are the countries from which we will bring money into our own country in such large amounts that we can at least balance the national budget, which would be deeply in the red without European Union funds?
The question of what needs to be done to boost Latvia’s competitiveness and halt its lag behind Lithuania and Estonia was raised this year, but it’s too complex to have a simple “throw it in and let it run” solution.
The issue becomes even more complicated when we factor in the fact that Latvia will now truly be on the periphery of Western capitalism. Beyond the fence—if one is ever built—will lie Russia, which many in the West perceive as a threat and whose economic ties with the EU could suddenly be severed entirely.