Austerity measures remain despite hardships

RIGA - The Baltic states have pursued closer integration with Europe with enormous zeal. But the price of monetary union may be giving them pause, writes The New York Times. Economists and ordinary citizens alike watched the protests rumbling through the streets of Athens and the slow response to Greece’s problems which came out of Brussels. “Countries like Estonia and Latvia were once desperate to get in,” said Alf Vanags, director of the Baltic International Center for Economic Policy Studies in Riga. “The euro is not looking so attractive now.”

Latvia has been on track to adopt the euro in 2014, as has Lithuania, with Estonia joining the European common currency in 2011. These governments have reason to fear that, like Athens, they will be caught in a vise: unable to pay for expensive social programs demanded by citizens while staying within the euro zone’s debt limits.

Enthusiastic for years about adopting the euro, Latvia has undertaken painful austerity measures. Even as the global economy contracted, the government slashed spending. The program included cuts of 50 percent or more in the salaries of public-sector employees and a 40 percent reduction in hospital budgets.

The result, many economists say, has been deepening unemployment and the worst recession of any country in the 27-nation European Union. Latvia’s gross domestic product has declined by an estimated 24 percent since the recession began - a steeper drop than America’s during the Great Depression.

To keep a faltering country’s economy in line with the euro “is a tall and very unpleasant order,” says Vanags.
One of the constraints of joining the euro zone would be that Latvia would be unable to devalue its currency by printing more money. The current members of the eurozone that are weaker, like Spain and Portugal, have also felt increasing constraints.

Despite some negative effects, devaluations have helped many countries over the years, giving a lift to their economies by making foreign goods more expensive and domestic goods more attractive.

Latvia has already taken some steps that limit its ability to bolster its economy. Since 2004, the Latvian central bank has pegged its currency, the lat, to the euro, to prepare for adhering to the common currency. Andris Liepins, deputy minister of economy in Latvia, said in an interview that Latvia remained committed to a currency peg and to adopting the euro. “Greece’s problems are temporary,” he said. “Greece needs the same reforms as Latvia.”

The austerity programs imposed by the I.M.F., Liepins said, would help Latvia’s economy restructure over the long term, by cutting health care outlays and encouraging companies to become more efficient. Devaluing the currency would help only in the short term, he said. It would also push more homeowners to default on their mortgages, which are often denominated in foreign currencies. “We would lose competitiveness as an economy,” he said.

The policies should be judged three or four years from now, he says, when policies like encouraging outsourcing has made companies more competitive while creating opportunity for new small businesses.
Latvia’s economy contracted an extraordinary 18 percent in 2009. This drop would mark the sharpest contraction in the world, though it followed what was widely regarded as an unsustainable burst of growth just before the global crisis.
Casting about for ways to raise cash during the crisis, the Latvian government grasped at times at unconventional methods. The economy began growing slowly in the fourth quarter of last year. Rating agencies also noted an improved outlook on the country’s creditworthiness.

Still, the government’s reliance on layoffs and deep wage cuts has not been popular. But the response has been more measured in the Baltic countries so far than in Greece, which has struggled with public employee strikes and protests.
Slava Usakovs, who had a small business, sympathizes with the employees of the Greek government. When his business failed in the recession this winter, Usakovs took a job chipping ice from city sidewalks under a government work program. When he slipped and broke a rib, his already meager pay was docked for the days that he had missed. So instead, he just came to work injured.

The work program, designed by the World Bank and partly financed by the European Union, paid Usakov 100 lats (142 euros) a month. Still, the jobs are coveted, in a sign of the depth of troubles in Europe’s most recession-plagued economy. “I am still working every day,” Ushakovs said. He added that these days in Latvia, “if you want to buy a chicken, you have to think pretty highly of yourself.”