The Baltics: Three Countries, One Economy?

The Baltic countries - Estonia, Latvia and Lithuania - share common features and a similar history. These three countries at the EU border with Russia regained their independence from the Soviet Union in the early nineties before joining the EU in 2004 and more recently, the euro area. They display major similarities in terms of their geography, size, economic structure, development and demography; but also some differences, particularly with respect to Estonia, which is often considered ahead of its peers in some ways. So, do the Baltics form an integrated economic area, or are they just neighbours? The present analysis takes a quantitative look at the question. In attempting to quantify the degree of economic integration between the three countries, this paper looks at the correlation of their main macroeconomic variables and a model for the joint dynamics of GDP growth in the area identifies the common shocks faced by the three Baltics and the linkages among them. There indeed seems to be an integrated Baltic economy, i.e. an area driven for a sizeable part by common factors and economic links. Yet, there are also asymmetries, with Estonia being the most exposed to international developments, Latvia being less influenced by regional spillovers and Lithuania being a much less influential driver. However, even if the three Baltic countries can be understood as a single economic area, that does not mean that there are "one size fits all” solutions to their respective challenges. For policy purposes, country specificities and interlinkages should always be borne in mind.