Leading figures in the three Baltic states insisted on Saturday that the pain their countries went through to avert a financial crisis had been the right strategy and was now paying dividends.
Ministers in the Estonian, Lithuanian and Latvian governments said the prices of their sovereign bonds showed that they were in a much better position than eurozone countries such as Greece, Portugal and Ireland.
In an era dominated by talk of austerity across Europe, the case of the Baltic states stands out. Latvia pushed through emergency spending cuts of 4% in 2008, followed by 18% in 2009. Elsewhere in the Baltics, spending cuts were rammed through on a similar scale.
In all three countries, consolidation was driven primarily by spending cuts, with tax cuts playing a lesser role. But the success of the consolidation has been dramatic, with investor confidence returning far more quickly than in the case of the eurozone’s periphery.
“If you look at the progress of credit default swap spreads for Latvia, Lithuania or Estonia, the lines are completely different than those for Greece, Portugal or Ireland,” says Andris Vilks, Latvia’s minister of finance.
Part of the explanation for this was the fiscal consolidation drive, although Vilks also stressed the importance of communicating with international lenders at all stages. “We were able to explain exactly what we were doing to the international lenders at all times,” he said.
But what has provoked protest and even disorder in Greece, Ireland or Spain was received with a degree of quiescence, even consent, in all three Baltic states.
“This was a question that many people have been asking in Lithuania,” said Rolandas Krisciunas, Lithuania’s deputy finance minister. “Why are the Lithuanians passive? Shouldn’t we be more like the Greeks?”
He attributes surprise at the speed with which the Baltics have returned to growth partly to investors’ reluctance to believe that such a degree of consolidation would be accepted by an electorate. “The total consolidation in Lithuania was 12% from 2009 onwards. Everyone was hesitant to believe it was possible.”
Part of the explanation for why such austerity could be pushed through without greater protest is that citizens of all three countries had known much worse in the recent past.
“We’ve been through a worse crisis in the early 1990s when we were deprived of our markets in the Soviet Union overnight,” said Krisciunas. “I remember what it was like being a student just 20 years ago, with shortages of hot water some days.”
Tanel Ross, deputy secretary general at Estonia’s finance ministry, agreed. “The austerity came after sharp and continuous GDP growth in previous years. If you take a 20% cut after several years of fast growth, you’re only going back a few years, not to medieval times.”
In Lithuania, Krisciunas said, the opportunity was seized to carry out structural reform. “People were urging devaluation on us, but devaluation doesn’t solve structural problems, and we needed structural reform.”
Some economists have praised the Baltics’ efforts. Lars Christensen, chief analyst at Danske Bank, told Emerging Markets that while it couldn’t be called a success, they had performed well.
“What you can be impressed with is the fiscal consolidation and to what extent it was possible politically.”