Latvia given failing grade on crisis management

  • 2011-11-10
  • From wire reports

RIGA - The European Commission said on Nov. 3 that Latvia’s three-year, 7.5-billion euro bailout program, due to wind up next month, was an example for the rest of the European Union, reports AFP. Speaking after a meeting with Latvian Prime Minister Valdis Dombrovskis (Unity), Commission representative Gabriele Giudice said that the loan package, which ends formally on Dec. 22, had proved to be “an exemplary program for the rest of Europe.”

Giudice, who was undertaking a final review of the rescue package’s results along with an International Monetary Fund delegation, said the picture was “very favorable with very little left to be done.”
The first agreements on the 2012 state budget were reached at a meeting with the international lenders’ representatives last week. In addition, the final agreement has been nailed down on the macroeconomic development scenario for next year, which projects 2.5 percent gross domestic growth, 2.4 percent inflation and a budget deficit of under 2.5 percent of GDP in 2012.
Almost all the necessary agreements have been reached regarding budget revenue, now the only question to be decided is budget revenue from speed cameras, which will be discussed separately. In the coming days, the possible budget consolidation scenarios will be considered.

IMF Mission in Latvia head Mark Griffith said that the talks had proceeded successfully.
The international lenders say that the 2.5 percent GDP growth projection for next year, although smaller than the previous forecast, could be more realistic. At the same time, the lenders insist that the government must continue social safety net measures next year, because unemployment still remains too high in Latvia.

What Latvia did to overcome the economic crisis, however, cannot be called a success story. To the contrary: this is an example of what economic policy should not have been pursued, the U.S. Center for Economic and Policy Research co-director Mark Weisbrot said in an interview with business daily Dienas Bizness, reports
The Latvian economy had shrunk 25 percent before it began recovering. Many people lost their jobs. That the economy finally started to grow is not an achievement at all, given that the fall was the most devastating in the entire world. Latvia has lost one-fourth of its economy, of which only a fraction has been recovered.

People have been lost due to emigration, employment is way below the pre-crisis indices. This is a situation that cannot be compared with anything else - no country did worse than Latvia, says Weisbrot. This cannot be considered a success story, he added, noting that he is surprised that Latvia is so often called one.
Weisbrot is ironic about the book by Prime Minister Valdis Dombrovskis (Unity) and Swedish economist Anders Aslund, which talks about how Latvia exited the crisis. The research center’s co-director says that the authors admit in the book that the Latvian economy has been slashed the most anywhere in the world, but then they go on as if this has no importance - they completely exclude it from their calculations.

Furthermore, the current economic recovery is not that rosy either, because this is not a recovery that one would normally expect after such a sharp decrease. This is not an Argentine-type recovery, where the economy after devaluation shrank for one quarter, and then growth of 8-10 percent a year continued for the next nine years, highlights Weisbrot.
He emphasizes that no other nation has been through what Latvia has. Weisbrot believes that Latvia is an example of what policy should not be pursued in such a situation, because the cost is extraordinary.

If a 25 percent fall in the economy is ignored, one might see something positive because, generally speaking, there is always a bottom to hit, below which an economy cannot fall, stresses Weisbrot. Europe must not allow any of the countries in crisis now to go through what Latvia experienced. First of all, these nations will not allow this to happen. They have not experienced half of what the people experienced in Latvia, and they have already taken to the streets.

Besides, that is cheating - to start making calculations only after the economy has begun to grow, warns Wesibrot.