Austerity's Pain Heals Latvia ; Proponents See a Model for Europe; Others Point to a History of Suffering

By Higgins, Andrew | International Herald Tribune, January 2, 2013 | Go to article overview

Austerity's Pain Heals Latvia ; Proponents See a Model for Europe; Others Point to a History of Suffering


Higgins, Andrew, International Herald Tribune


While they have brought unrest in other European countries, tough economic measures appear to have revived Latvia's economy.

When a credit-fueled economic boom turned to bust in Latvia in 2008, Didzis Krumins, the head of a small architectural company, fired his staff one by one and then shut down the business. He watched in dismay as Latvia's misery deepened under the impact of a harsh austerity drive that scythed wages, jobs and state financing for schools and hospitals.

But instead of taking to the streets to protest the cuts, Mr. Krumins, whose wife in the meantime gave birth to a handicapped baby girl, bought a tractor and began hauling wood to heating plants that needed fuel. Then, as Latvia's economy began to pull out of its nosedive, he returned to architecture and today employs 15 people, five more than he had before. "We have a different mentality here," he said.

Latvia, celebrated by fans of austerity as the country-that-can and an example for countries like Greece that can't, has provided a rare lift to champions of the proposition that pain pays.

In just four years, it has gone from the European Union's worst economic basket case to a showcase for what the International Monetary Fund hails as the healing properties of deep budget cuts. Latvia's economy, after shriveling by more than 20 percent from its peak, grew last year by around 5 percent, making it the best performer in the 27-nation European Union. Its budget deficit is down sharply and exports are soaring.

"We are here to celebrate your achievements," Christine Lagarde, the chief of the International Monetary Fund, said at a conference last summer in Riga, the capital. The fund, which along with the European Union financed a $7.5 billion bailout at the end of 2008, is "proud to have been part of Latvia's success story," she said.

When Latvia's economy first crumbled, it wrestled with many of the same problems since faced by other European nations: a growing hole in government finances, a banking crisis, falling competitiveness and big debts, though most of the debts were private, rather than public as in Greece.

Its abrupt turn for the better, however, has put a spotlight on a ticklish question for those who look to orthodox economics for a solution to Europe's woes: instead of obeying any universal laws of economic gravity, do different people respond differently to the same forces?

Latvian business people, their wage costs sharply reduced and exports now surging, applaud the government's approach but express doubt that it would work elsewhere. "Economics is not a science; most of it is in people's heads," said Normunds Bergs, the chief executive of SAF Tehnika, a producer of wireless communication gear that cut management salaries by 30 percent. "Science says that water starts to boil at 100 degrees Celsius, but there is no such predictability in economics."

In Greece and Spain, cuts in salaries, jobs and state services have pushed tempers beyond the boiling point, with angry citizens staging frequent protests and strikes. Britain, Italy, Lithuania, and Portugal have bubbled with discontent over austerity.

But in Latvia, where the government laid off a third of its civil servants and slashed wages for the rest, citizens mostly accepted the sour medicine. Prime Minister Valdis Dombrovskis, who presided over the austerity program, was re-elected, not thrown out of office like some of his counterparts elsewhere.

All this is despite the fact that impressive economic gains have still left 30.9 percent of Latvia's population "severely materially deprived," according to 2011 data released this month by Eurostat, the European Union's statistics agency, second only to Bulgaria. Unemployment has fallen from a peak of over 20 percent in early 2010 but was still 14.2 percent in the third quarter of 2012, according to the latest data from Eurostat, and is closer to 17 percent if "discouraged workers" are included. …

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