Bruegel economist: Latvia’s “success story” was very expensive

  • 2013-04-03

RIGA - Although Latvia has overcome the financial crisis and is now the fastest-growing economy in the European Union, the price that the country has paid for its success story is very high, the Brussels-based think tank "Bruegel" analyst Zsolt Darvas said in an interview with LETA.

Given that Latvia is currently the fastest-growing economy in the EU, the country may indeed be considered a success story - however, the price that Latvia paid for it may have been too high: enormous recession, unemployment, and the fact that a large number of residents has left the country will have a very negative effect on Latvia's growth potential in the long term, notes the economist.

Commenting differences between Latvia’s and Iceland’s strategies for existing the crisis, Darvas says he believes that Iceland's story is "more successful," and the social cost thereof - much lower.

The Icelandic krona was devalued by about 50 percent in 2008 and 2009, and the country saw hyperinflation. But in economic terms, Iceland endured the crisis much better. Iceland's gross domestic product shrank by about 10 percent, while Latvia's GDP fell 25 percent. In Iceland, unemployment did not exceed 10 percent, whereas in Latvia it was over 20 percent. Even with the collapse of Iceland's financial system, the country's real economy suffered less than Latvia's, explains Darvas.

Paradoxically, Iceland's was "lucky" to have no other choice but devalue its currency. Latvia did have a choice, and it chose to follow a different path, emphasizes Darvas.