Between austerity and devaluation - The Baltic States' unusual path to European Monetary Union

After the collapse of the Soviet Union in 1991 and the regaining of independence, the three Baltic states pursued a similar monetary policy with the short-term goal of economic stabilization and the long-term perspective of joining the EU and the monetary union. Thus, all three states introduced national currencies with fixed exchange rates as successors to the Soviet ruble. However, international organizations and experts recommended that the Baltic states abandon their fixed exchange rates in view of the imminent collapse of their economies during the financial crisis from 2007. This paper analyzes the circumstances surrounding the monetary integration of the Baltic states into the EU. In particular, it addresses the monetary policy dilemma between external devaluation, as recommended by economists, and internal devaluation during the financial crisis. It examines why, against the advice of experts, the countries on the road to the euro opted for internal devaluation and pegged their national currencies to the euro, which ultimately led to the Baltic states joining the monetary union.