The Baltics have carried out painful austerity measures and their economies are growing, while Mediterranean countries keep accepting bailouts, although they should take some austerity lessons from Latvia, according to Economist.
It is hard to believe that Latvia was in an as deep crisis as Greece is facing today. Latvia’s boom was cut short by the global financial crisis back in 2008. It brought along a banking crash, a huge budget deficit, a bailout by the European Union and IMF and one of the most severe austerity regimes in Europe.
Unlike Greece, Latvia carried out austerity measures with striking speed, so it has already returned to robust growth. Besides, the man who orchestrated budget cuts – Prime Minister Valdis Dombrovskis even managed to be re-elected.
Latvia’s neighbours Estonia and Lithuania are also recovering. In addition, the Baltic trio managed to tackle the crisis while keeping fixed exchange rates. They offer an example to troubled euro countries of how to carry out an “internal devaluation”. Where Greece may soon have to leave the euro, Latvia wants to join in 2014.
The news portal also singles out difficulties that Latvia experiences during the recession. It lost more than a fifth of its GDP in two years. Unemployment spiked to 20%. Emigration has risen in a country already struggling with a declining population. Still, the Baltic states are growing faster than any other part of the EU, more than can be said for the severely indebted Mediterranean.
“We have shown the world there are better solutions than devaluation,” says Ilmars Rimsevics, Bank of Latvia President. Rather than making adjustment harder, he says, the currency peg was essential for credibility.
It is also pointed out that Greeks blame the EU and IMF for making them slash expenses, while it is on the contrary in Latvia – international lenders warn against too much austerity.
There are some valuable lessons from the Baltic exprience. First, low debt helps. Latvia’s contraction more than quadrupled its debt burden to about 45% of GDP, but that is still less than half the debt ratio of Italy and Greece before the crisis.
Second, international lenders need to act decisively – if they see that a country cannot repay its debts, they must be restructured early.
Lastly, the Latvians claim that the promise of euro membership was vital to keep them on course. The idea may seem laughable for some countries. Yet voters really do need a promise of a better future to underpin austerity.
For euro members, this can come only from some future promise — such as joint-liability bonds.