Latvian lessons

The Baltics are growing after austerity—and they resent Mediterranean bail-outs

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"The IMF thinks that, where possible, deficits should be cut gradually over the medium term. But Latvia believes that deep, front-loaded austerity is the best way to win back market confidence."

Latvia forgets one thing.

Births in Latvia have dropped about 20% since 2008.

Deaths now exceed births there by over 1.5 to 1.

A triumph of austerity! Business is booming!

Unless you will need a labor force in 20 years. Or customers.


The Latvian economy is growing again (this year by 3.3 percent), unemployment is falling (from 20 percent in early 2010 to 16 percent now) and the balance of payments shows a surplus. Next year the deficit falls to 2.5 percent...

If Latvia, Poland and other eastern European countries can do it, why then should southern Europe not be able to do the same? Why should Greece or Spain or ... receive special treatment?

A J Maher

Quadrupled debt, an economy that is 12% smaller than three years ago and population drain.

These are the successes we can do without......

wanderer3764 in reply to shaun39

"Yet Latvia has low debts."

Latvia's external debt is about $36 billion, serviced by a GNP of $27.8 billion.

That isn't low.

"Modest debts and booming productivity mean that Latvian living standards will continue to improve - even with a smaller population."

Then why are Latvians still fleeing those "improving living standards"?

The debts aren't modest, and Latvian living standards (as measured by dollar per capita GDP at purchasing power parity) are lower than Russia's.

Your story of "happy, shiny" Latvia isn't.


It seems that about 30k people, or 1.3% of the population, emigrated to the UK alone in 2009-2010. If you assume these are mostly workers, that would be 2-3% of the workforce. Now add the numbers for other neighboring, wealthy countries, and compare with the drop in unemployment rate.


A J Maher in reply to shaun39

@Shaun: "If you're talking about Greece, an exit from the euro (or simply a messy stopping of EU bailout aid) would reduce GDP by 30% or more."

Well that is a firm round number - as it well should be plucked as it is out of a hat.

"The best response is a managed and appropriately sized fiscal contraction"

And the 20% contraction already suffered should just be overlooked I suppose.

This crap has been tried. It failed. Only an imbecile reinforces failure. Too many livelihoods have been destroyed by the crank economics of austerity.....

-To- in reply to mashed potatoes

I was just pointing out that job creation in the Latvian economy is not as strong as unemployment figures may suggest. Maybe these people will come back, but without a strong recovery I don't see why they would. The growth figures for 2011 were typical of a country engaging in catch-up, productivity-enhancement growth. To create jobs you need much more than that.


All my friends who lost the work 2009, have found other jobs, but instead of receiving big salaries for nothing, they have to work now. The "years of illusions" 2004-2007 when complete losers for carrying bricks where getting more than actually people with qualifications was a nightmare, I hope these times are gone for good and never coming back. Now we have economy that actually knows to appreciate people who know something and have skills, where people get salaries for doing things. All the others should blame themselves.


How long are you going to add the "post-soviet" bit for these countries? Its been over 20 years. Did you still call Germany "post-nazi" in 1970?

aletia in reply to Jan Toldsepp

What keeps the PIGS from looking for trading partners that are doing well? The EU is supporting the banks in the PIGS countries. Latvia doesn't receive EU structural funds because it isn't part of the EU yet, and the PIGS countries have been receiving EU structural funds for much longer than the Baltic states.

wanderer3764 in reply to Jan Toldsepp

"These people had 50 years of low living standards and oppression under Soviet dictatorship."

This is like the Russians blaming everything on Nicky II in 1937. It's been 20 years, and for nearly all of it, The Economist has praised Latvia to the skies.

The legacy of "Soviet genocide" to Latvia was a growing population of 2.65 million and zero foreign debt.

Now, under NATO and the EU, there are 2 million Latvians, deaths exceed births by over 1.5 to 1, and foreign debt service costs are about 1/3 of Latvia's GNP.


Let's be serious here. Latvia GDP is 32 billion US dollars. Greece is around 350 billion dollars, Portugal is somewhere around that figure.
How could Latvia be relevant ? Its evolution is WAY dependant with its big northern trade partners, namely Finland, Sweden and so on, which are all growing steadily, with little to no austerity.

First it was British lessons, then Irish lessons, when those proved wrong the Economist managed to find Latvian lessons. What's next ?
Singapourian and Lichtenstein lessons ? Come on...


The idea of the euro as a haven may seem laughable

I always suspected you could never understand what's in other people minds.

Now, I'm sure.

aletia in reply to Jan Toldsepp

In Central and Eastern Europe voters support prudent economic policies. Populists who promised more money from the treasury (read: more borrowing), were punished in recent years. Parties that announced AUSTERITY and cutbacks however won in Slovakia, Estonia, Latvia, Czech Republic and Poland.

And as I already told you, the Latvian economy is growing again, this year by 3.3 percent (not many countries in Europe have such growth), unemployment is falling (from 20 percent in early 2010 to 16 percent now) and very importantly, the balance of payments shows a surplus. Next year the deficit falls to 2.5 percent, so that Latvia, in imitation of Estonia can join the Eurozone.

Concerning “context”, you could perhaps read the latest report from the international corruption watchdog “Transparency International”. Corruption costs the EU at least € 120 billion per year. The report cites Greece, Italy, Portugal and Spain as countries with the most deep-rooted corruption problems in their public administration... "The link between corruption and the debt crisis can no longer be ignored," says Transparency International in its report.

Jan Toldsepp in reply to wanderer3764

You don't understand, it is not about blaming, you shouldn't politicize everything, this is about a psychological reality. I live myself in Estonia (but I'am an immigrant) and I have experienced how people responded to wage and other cuts. Many didn't care so much, as their purchasing power and standards of life stayed very high compared with only ten or twenty years ago. Life in the Soviet Union was not easy, and what came immediately after it was even less easy.


There is a lot of misinformation in this article.

First, Latvian GDP decreased by 20%. But you have to remember what the base of that is. In 2007 imports surpassed exports by $4 billion, for an economy this size that is a huge HUGE credit based boom where people with no skills were making huge amounts of money. We even have a joke - a rich guy in a BMW X5 stops by a roadside prostitute, and asks her "what will you do for a hundred bucks?" The prostitute replies "Everything you want!", the guy says "Get in, you're tiling my bathroom floor!" Apartments in the old town of Riga carried price tags of 4000 euros per square meter! This was madness and it was going to end badly even if the rest of the planet was booming.

Secondly, emigration apparently has been huge in Latvia since 2009? Could you twist that even more? Emigration has been huge since 2004, when Latvia joined the EU. You make it seem like it all started during the austerity times of 2009, that's simply a gross misrepresentation of facts. In reality there is no discernable difference in emigration between 2004-2005 (boom years) and 2009-2010 (austerity years).

Thirdly, saying that Latvia benefited from foreign-owned banks is true, BUT, the whole reason Latvia even needed the IMF bailout was because its locally owned Parex bank went bankrupt. This article makes it seem like the country was sheltered by some big neighbour when in reality that isn't even close.


Isit not clear that most of Europe is living beyond its means and not competative in the world?
If the income were cut by two thirds, progressively for those earning more,tive again. And do not believe that everyone would die of hunger etc. people - all Europeans live beyond means.
This is the lesson of Latvia - even when their income was low, it can be cut and things improve in a year
So cut, cut, cut. But are the politicians ready for it.
I think it is much to late to save Europe - neither politicians nor majorities will be ready to accept it...

aletia in reply to Jan Toldsepp

All in all, Eastern Europe is handling its problems better than southern Europe... It's not eastern Europe but southern Europe that is causing the problems, and maybe even the disintegration of the EU and the Eurozone...

Perhaps you prefer the south European way, I prefer the east European way.

A J Maher in reply to shaun39

Look at the proportion of GDP growth generated within Greece's own borders in the same report. If you further contract Greek demand (at the bottom of a crisis) then you will shatter Greek GDP. Savings are not being invested. They are not being invested because demand has been killed.

This illiterate pro cyclical pap has laid waste the Greek economy.

I do wish austerians would show some interest in the results that have flowed from their failed experiments in faith healing...

Jan Toldsepp in reply to aletia

Why they are not able to do the same? Read the article again, Charlemagne provided some answers:
"As small and open trading economies with flexible labour markets, the Baltics were able to push down wages faster than more rigid and closed Mediterranean countries. The Balts’ main trading partners are northern countries that are doing well. And for all their suspicion of Keynesianism, they were helped by the stimulus policies around them. Now Mediterranean countries must try to recover at a time when most others are tightening their belts as well. Moreover Baltic states benefited by having friendly foreign-owned banks that did not pull out of the region; although Latvia’s Parex bank went bust, Sweden provided a vital backstop to most Baltic banks."
To this I would like to add something that is often 'forgotten': the Baltics receive a much higher amount of EU structural funds (as a % of GDP) than the PIIGS: (data from a paper by Kattel and Raudla that still has to appear)



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