Latvia — Europe’s Poster Boy

By Shlomo Maital   


   Name Europe’s fastest-growing economy in the first quarter of 2012, a time in which Europe and the euro sank into deep crisis. 

   If you got Latvia – you are a genius.  Tiny Latvia, with only 2.2 m. people (a fifth the population of Greece) grew by 5.5 per cent (annual GDP growth).   There are  two reasons this is astonishing. First, Latvia was a total basket case two years ago, when its economy contracted by 17.7% (in 2009), one of the largest contractions in Europe.  Second, Latvia has been imposing austerity.

   Austerity??  This blog has blasted austerity policies, like Cato the Elder calling for the destruction of Carthage in the Roman Senate. 

   Here is what Latvia’s tough courageous political leaders have done.  Cut public wages by 20%.  Slashed the budget deficit from 10% of GDP to 2.5%.   Slashed Latvia’s import surplus from 25% of GDP (!) to 1.2% last year. 

    How did they do this?  And why?

    Latvia is utterly determined to dump its weak unstable currency, the ‘lat’, and adopt the euro.  Its terms of membership in the EU enable it to do this, provided it meets tough conditions.  One of those conditions is to keep the ‘lat’ fixed relative to the euro for the pre-euro period.  That means that none of Latvia’s recovery has been helped by a currency devaluation (an ‘easy’ policy). 

   Why has austerity worked in Latvia, and failed elsewhere? First, Latvia had no choice; it was going down the tubes. Second, Latvia has very strong tough political leadership.  Third, the people of Latvia understand the reason for austerity – enabling Latvia to switch to the euro, and benefit from foreign investment and EU funds.

    The picture is not all rosy.  Some 200,000 Latvians emigrated abroad in the past decade. And the austerity program is eroding support for the euro, as is the crumbling euro itself.

    But despite this, we should ask:  Are other European nations asked to impose severe austerity for a decade, just so they can pay back wealthy European banks, able to meet the conditions Latvia meets?  If not, they won’t be able to sustain austerity.  And of course, the answer is:  Greece is not Latvia. Not even close. 

 * source: Wall Street Journal, Heard on the Street:  May 23.