Pain tolerance praised

RIGA - After suffering through the worst drop in economic output in the world, the Baltic countries have been growing on a quarterly basis since the beginning of 2010, reports Bloomberg. The three survived, even as people’s earnings plunged in part because of government austerity measures.
The Baltics’ ability to tolerate economic pain has been praised in recent months by German Chancellor Angela Merkel and Klaus Regling, chief of the European Financial Stability Facility.

Analysts believe that the austerity measures taken by Latvia, Lithuania and Estonia should be used as an example by Greece, Portugal, Ireland and Spain; however, they doubt that these countries would be able to implement such measures. “I would be very surprised if the southern European countries would be able to go through with necessary measures on their own,” managing partner of Estonian private equity company MTVP, Allan Martinson, said in a phone interview from Tallinn. “I think it will take very strong coercion to get them to do that. Perhaps Europe needs financial police.”

A key difference between the Baltics and southern Europe, though, may lie in the recent history of the Baltics, said Hardo Pajula, an economist with SEB in Tallinn. Latvia, Lithuania and Estonia, occupied by the Soviet Union for almost 50 years, lived through its collapse. The last few years before independence in 1991 brought hyperinflation, food and fuel shortages and a wipeout of savings. “It is rather hard to envisage a pampered citizen of a mature Western welfare state accepting the pay cuts that were pushed through in this part of the woods in the last couple of years,” Pajula said. “A great fuss has been made about the Baltic GDPs having fallen by 16 percent or 17 percent in 2009, but you have to see these things in context. Aggregate output fell perhaps by 70 percent at the beginning of the 1990s.”

The shortages at that time were so severe that coupons for staples like food and soap and alcohol had to be used. Inflation reached about 1,000 percent in the region in 1992 and savings were wiped out. EU membership in 2004 led to a fall in interest rates, a boom in lending and rising housing prices and wages. Then the global credit crisis hit, just as the regional expansion was running out of steam.

Latvia’s credit rating was raised to the lowest investment grade from junk status by Fitch Ratings on March 15; the country also has investment-grade ratings from Moody’s Investor’s Service. Standard & Poor’s rates Latvia BB+, its highest speculative grade, with a positive outlook.