Austere Latvia cited as model for disgruntled Greeks


DEVALUATION DEBATE:LATVIA HAS undergone one of the world’s harshest austerity programmes – and deepest recessions – without devaluing its currency, mostly without riots, and has already returned to growth. The country’s fortitude has been cited as a model for disgruntled Greeks.

But this former Soviet republic on the Baltic Sea is only now understanding the long-term costs: 10 per cent of Latvians have left the country since 2000, half of those during the three years of austerity.

Provisional census figures this year counted only 1.9 million people in a country that officially thought it had 2.2 million citizens. After further refinements, the final total is not expected to top much more than 2 million. Nils Muiznieks, a University of Latvia social scientist, says the country largely escaped protests, even as its economy slumped faster than in America during the Depression, thanks to “weak unions and emigration”.

“The most recent estimates of migration are really mind-blowing,” he says.

Martins Bondars, a former bank chief executive, jokes that “Greeks demonstrate on the streets. Latvians buy a one-way ticket on Air Baltic”.

After it joined the EU in 2004, Latvia was one of the world’s fastest-growing – and most overheated – economies. Then Lehman Brothers’ collapse in 2008 choked off the cheap credit that had financed the boom.

In return for an international bailout worth one-third of gross domestic product, Latvia pioneered the kind of “internal” devaluation Greece is now attempting. It doggedly kept its currency, the lats, pegged to the euro to preserve hopes of eventually joining. It slashed wages and public spending to regain competitiveness.

By next month Latvia will have achieved a fiscal adjustment of 16 per cent of gross domestic product in three years, the same now demanded of Greece.

Statistics scarcely capture the human scale of what has resulted. With austerity launched during the 2009 global recession, Latvia’s economy shrank by a quarter. Unemployment more than tripled in the period from 2007 to 2010, hitting 21 per cent.

The number of civil servants was cut by 30 per cent; public sector salaries fell 40 per cent. Consumption collapsed.

“When we heard of Greeks protesting when salary cuts there were far less than in Latvia, many people said: ‘They don’t know what hardship means’,” says Janis Veckracis, who lost his job as a civil service translator in 2009.

The Latvian and Greek experiences are very different, however. Latvia’s austerity effort followed an exceptional boom in which the economy grew by a third in three years, and salaries doubled. The economic crash essentially took the country back to economic levels seen in 2005.

Most Latvians seem to accept the argument of prime minister Valdis Dombrovskis and the Latvian central bank that internal devaluation has been the only option. To devalue the lats, they say, would have provided only a limited boost to exports, since to manufacture them Latvia must import energy and materials – the prices for which would have risen.

Drowning in debt, probably just as many Latvians would have emigrated after a currency devaluation. But the exodus that did occur raises fears for the future. “I’m afraid Latvia could become a kind of hospital for old people, where all the young try to leave,” says Ivars Indans, a doctoral student. “I can see this emigration culture developing. People leave school and can’t see any prospects.” – (Copyright The Financial Times Limited 2011)