Baltic States' sacrifices pave way for recovery

VILNIUS - The worst is over for the Baltic States, says rating agency Moody’s, as it raises its outlook for the three countries for the first time since the beginning of the financial crisis, reports news agency LETA. The improved outlook is a sign that the three republics will soon be able to join the eurozone, say analysts.

“The economic and financial situation in these countries has stabilized quicker than expected,” explains London based Moody’s analyst Kenneth Orchard. Among the member states of the European Union that were worst hit by the recession, the Baltic States saw their economies contract by 14 to 18 percent in 2009. However, results for this year will likely halt the decline in the GDP of Lithuania and Latvia, while Estonia expects to register a return to modest economic growth.
Analysts were particularly impressed by the rapidity with which Estonia succeeded in cleaning up its debt situation. Notwithstanding a falloff in tax revenues, the government effectively managed to cut the public spending deficit to 1.7 percent of GDP, and it now aims to generate a budget surplus by 2012 - a remarkable performance in comparison with its European neighbors, they say.

“Estonia is almost certain to enter the eurozone on Jan. 1, 2011,” says Hugo Brady, a specialist working for the Center for European Reform (CER) think tank in London. The European Commission and the European Central Bank are expected to announce a decision on Estonian membership of the eurozone by May 1.

At the same time, analysts believe that Lithuania’s and Latvia’s plan to join the eurozone in 2014 is wholly feasible.
Notwithstanding a public spending deficit that will reach 8 percent of GDP this year, Lithuania remains in better financial health than Greece, Portugal and even the United Kingdom. “Greece, Spain and Portugal have been accumulating public debt over several years, whereas we entered the recession with a much lower level of borrowing [20 percent of GDP]. That allowed us much greater freedom for maneuver and we were able to borrow more during the crisis,” explains Vytautas Zakauskas, an analysts at the Lithuanian Free Market Institute in Vilnius.
Zakauskas also highlights the relative willingness of the Lithuanian population to accept the necessary sacrifices forced by the economic downturn.

“Public and private companies considerably reduced salaries, which enabled us to boost the competitiveness of our exports. No one protested in the streets: the unions are relatively weak, and people still remember much more difficult times before the collapse of the Soviet Union. On the other hand, in Southern Europe, people believe they have a right to their privileges,” explains Zakauskas.

Within the framework of a deal with the IMF for a loan package of 7.5 billion euros, the Latvian government agreed to adopt a particularly stringent package of austerity measures, which even included cuts in pension payments. Although this initiative was greeted with skepticism by many, it enabled the government in Riga to maintain a stable exchange rate with the euro. In contrast, the Greek government did everything it could to avoid requesting assistance from the IMF, because it believed IMF involvement would be conditional on an excessively strict austerity package.