Students giving teacher lessons

  • 2011-01-27

RIGA - European governments must enact planned budget cuts before austerity fatigue sets in, the prime ministers of Latvia and Lithuania said, reports Bloomberg. The Baltics, including Estonia, pushed through Europe’s toughest deficit-cutting measures to cope with the global financial crisis. Each of the governments implemented austerity measures equal to at least 10 percent of GDP, which resulted in the world’s deepest recessions, with economic output shrinking as much as a quarter before growth resumed last year.

“It is important to do fiscal consolidation fast, not to extend it too long, because the longer you extend it, consolidation fatigue starts and the sense of urgency is lost,” Latvian Prime Minister Valdis Dombrovskis said in an interview with Bloomberg Television in London.

The three countries started budget cuts in 2008, before the eurozone’s sovereign debt crisis prompted governments from Greece to Ireland to step up efforts to cut spending and increase revenue. European governments shouldn’t “be afraid,” Lithuanian Prime Minister Andrius Kubilius said in a separate Bloomberg Television interview. Lithuania has increased taxes, cut state wages and reduced pensions.

Making the adjustments early “is the best way to avoid reform fatigue, but also to avoid populism,” added Morten Hansen, head of the economics department at the Stockholm School of Economics in Riga in an e-mail. “The only problem is that hasty budget cuts might tend to be too much ‘across the board.’”

The Baltic nations opted for a strategy of bolstering competitiveness by forcing prices and wages to fall, instead of devaluing their currencies. Countries must “do the bulk of adjustment” early on, Dombrovskis stressed.
“We made a good decision from the very beginning that we needed to go as quickly and as effectively as possible with austerity measures,” Kubilius said. “We weren’t looking for possibilities to suspend ourselves from recession.”

After three years of budget cuts, Baltic governments are “more and more faced with consolidation fatigue,” which is now their biggest challenge, Latvian Finance Minister Andris Vilks said at a Euromoney conference in Vienna on Jan. 19. The country’s government is debating 50 million lats (71.4 million euros) of additional savings demanded by the European Union and the IMF.
Spending cuts also helped Estonia adopt the euro on Jan. 1 and to keep the budget deficit and debt at the lowest level among the 17 members of the currency bloc last year.

Government debt was 8 percent of GDP last year, compared with the EU’s 79 percent average, the European Commission estimated in November. The shortfall was about 1 percent last year, below the government’s forecast, Finance Minister Jurgen Ligi said on Jan. 19.

Latvia and Lithuania aim to join the euro region in 2014. To qualify for the currency switch, the two countries need to cut their budget deficits to less than 3 percent of GDP in 2012 from about 8 percent last year.
Dombrovskis and Kubilius said their governments will focus on overhauling health care, education and social benefits and will crack down on the illegal economy to bring the deficits down further.

The Baltic region’s credit-default swaps, which investors use to protect against default or speculate on a borrower’s credit worthiness, fell below the costs for Greece, Ireland, and Portugal.