While the whole Europe admires Baltic people and politicians for their patient and focused approach to the economic crisis, which has started to reflect in real figures, the Nobel Prize winner Paul Krugman says Latvia is not a success story at all.
In The New York Times article Krugman has included several charts which, in his opinion, illustrate the fact that Latvia’s success is just an illusion. He believes that Latvia’s willingness to endure extreme austerity is politically impressive, however its economic data don’t support any of the claims being made about its economic lessons.
The small Baltic state suffered the worst recession in Europe, with a 24% drop in GDP between 2007 and 2009. Two years later its economy was the fastest growing in the EU, putting Latvia in a position possibly to join the euro. Estonia, meanwhile, grew by 7.6% last year, five times the eurozone average, The Guardian writes.
Both Latvia and Estonia are praised as austerity model countries where people barely raised a whisper of complaint. Still the austerity was extremely harsh: both countries raised taxes, reduced wages and social benefits, dismissed thousands of people in the public and private sector.
Both Latvians and Estonians even re-elected the politicians that brought in the stringent measures.
Voters, it seems, had lived through worse. Lars Christensen, chief analyst at Danske Bank, said: “I think that most people in the Baltic states know real hardship, queuing for toilet paper, living in Soviet times.”
But before George Osborne goes trumpeting the Baltics as a shining example, he may want to look at the social cost of these austerity measures. The Centre for Economic and Policy Research estimates that unemployment in Latvia rocketed to 30% in 2010, taking into account people forced into part-time work and those who had given up looking. It has since fallen back, but is still high at 15%.
What’s more, the recoveries should be seen in the context of their previous collapse. Both economies are growing fast but neither has got back up to pre-crisis levels.
The economist also points at the geographic location. The Baltic states are near the wealthy Scandinavian countries, while Bulgaria sits next to Greece. Latvia does almost 70% of its foreign trade with the Nordics, Germany, Poland and Russia, which have all returned to growth.
Christensen said: “I am quite sceptical about the idea that [the Baltics] can serve as some kind of model. Luck played quite a big role in this; the fact that these countries have a close financial connection to Scandinavia.”
BNN already reported that Paul Krugman’s 67-word entry, entitled “Estonian Rhapsody,” last week questioned the merits of using Estonia as a “poster child for austerity defenders.” He included a chart that, in his words, showed “significant but still incomplete recovery” after a deep economic slump. President Toomas Hendrik Ilves responded to Krugman in a series of outraged tweets, taking offence to Krugman’s tone and writing that Krugman didn’t know what he was talking about.