After bailouts and austerity, Latvia calls for European fiscal discipline

Update 25 Nov 2010: See Michael Hudson’s take. He is not positive on the implications of Latvian austerity for ordinary Latvian citizens.

I think this trio of videos from Latvia really puts the whole Irish crisis in perspective. After a spectacular property bubble, Latvia imploded in 2008. I was calling the Baltics the next Argentina.  Indeed, by early 2009 we eventually saw Argentine-style riots on the streets of Vilnius.  Nouriel Roubini’s group talked about an "Asia-style crisis." Latvia got a bailout though and went into a deep depression, the deepest in the euro zone, due in part to its refusal to devalue and the harsh austerity measures the bailout mandated.

Now Latvia appears to be on the mend – and it has advice for the rest of Europe. Take a look. Valdis Dombrovskis, Latvian Prime Minister joined CNBC to discuss the county’s growth and its intent to join the euro zone by 2014. He sees a double standard at work for those inside the euro zone and those outside it.

(video embedded below)

At a minimum, the Latvian experience does highlight that a country can overcome a massive property bubble and austerity if the global economy is in recovery and it is willing to do the internal devaluation and suffer the depression this entails. The key difference is that the Latvian banks were foreign-owned and the sovereign was not on the hook for socializing its losses onto taxpayers. That could be the difference between liquidity and solvency.

"We must all hang together. or assuredly we shall all hang separately"

Benjamin Franklin (hat tip MJJP)

The Latvians would agree with this point. Here’s more from the Latvians below. Valdis Zatlers, president of the Republic of Latvia, told CNBC Wednesday that "Europe has learned that solidarity is the only answer". Really?  That’s not my takeaway from the bickering between the Austrians, the Finns and the Germans.  Zalters does say that Latvia is willing to contribute to support Ireland despite its own problems. I reckon Latvia’s desire to join the euro zone makes it more of a team player. But the sentiment is probably still appreciated.  My key takeaway from his comments was that the IMF’s acting quickly was important in stabilising the situation.

(video below)

In this last video, Ilmars Rimsevics, Governor of the central bank of Latvia told CNBC, “as a small and open economy, devaluation would be tremendously detrimental”. So, Latvia is going to push ahead with austerity and internal devaluation. Rimsevics is very negative on pro-stimulus approaches to recovery, saying that money printing doesn’t create jobs as the money just sits in bank accounts. He believes fiscal discipline comes first.

Are the Latvians a model for Ireland?

(video below)

  1. Daniel says

    wow, I never thought that Latvia would make it. I don’t think that you could enforce such austerity in “real” western economies, they closed schools, hospitals, cut pensions, cut really everything…and raised taxes. Latvias economy imploded after the fall of the soviet union, so they know how tough times feel. I seriously think that such an implosion makes the people more “flexible”, the people I know from the baltics mainly have a pretty impressive CV (especially when you consider that they couldn’t even speak a word german a decade ago).

    Latvia was really a crazy place:

    Cars of Latvia

    Latvia: Living in the Land of Extremes

    1. Edward Harrison says

      I am not giving the all clear on Latvia until we get through this crisis. They have toughed it out though and are looking much improved. Estonia too is looking great – better than Latvia. But it’s still early days. Unless the EU deals with the euro zone periphery in a good way, you are going to see some major economic problems coming – both in the periphery and elsewhere (including Germany).

      At a minimum, though, Latvia shows you that austerity can work in Europe if you are willing to take unbelievable hardship. I would think the Irish more likely to do this than the Greeks.

  2. Matt Stiles says

    Creative Destruction heals.

    1. Spc says

      What they did is they removed both feet and plucked out right eye in order to appease the banks.
      This policy cost them future of their kids, education ( but children don’t like schools anyway…), total destruction of living standard and moutain of debt to be repaid….. For them, last 19 years never happened.
      How one can call such thing a succsess?? Default and ditching peg was the way to go.

      Now leaders of Latvia are BS their way throught interviews in praise of austerity – how lovely, good men.
      Ahem… Why ??
      Well, because of length they went early on to sell this misconception to Latvians. Try to say anything else …
      What’s more, they are willing to saw off their right hand and three fingers of left just to enter EMU. Yes, that EMU. Hehe..
      And that’s beyond insenity….

      This whole austerity religion reduced Latvia into nation of peons and sex turism hub for Scandinavins. Job well done. Keep it up.

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