Baltic states hail austerity as route to recovery

Political leaders of the three Baltic states that embarked on drastic austerity measures in the wake of the 2008 crisis have said their recovery shows that the controversial policy was the right response to the debt crisis gripping the rest of Europe.

Estonia, Latvia and Lithuania insisted there was no doubt that the medicine of austerity was required no matter how bitter the taste.

This week the Latvian parliament approved the European Union’s Fiscal Consolidation Pact that demands a fiscal adjustment of 17% of GDP.

Speaking after the vote, prime minister Valdis Dombrovskis told Emerging Markets: “We have done a fiscal adjustment which is more than any EU country has done so far and yet we are now the fastest growing EU economy. If you stabilize your finances you can return to economic growth.”

At the conclusion of the IMF’s first monitoring mission to Latvia since a three-year, E7.5 billion bailout programme ended in December 2011, the fund’s Latvian mission chief Mark Griffiths said it was more than doubling its GDP growth forecast from 1.5% to 3.5%.

“I think it could go higher provided there are no external shocks,” he said. First quarter growth was 6.8% year-on-year, the highest level in the European Union, according to preliminary data released on 11 May.

Lithuanian finance minister Ingrida Simonyte acknowledged that voters had not been “at all happy” about austerity measures being implemented, especially taking into account that Baltic countries had to implement them when most other countries were still on the path of stimulus.

“But it is the extreme flexibility of labour force and business that helped to cope with the challenges as well as strong ownership of consolidation programme by the respective governments,” she said.

”But one thing is obvious - growth built on the back of huge deficits and accumulation of debt is not a sustainable answer.”

Estonian finance minister Jürgen Ligi, said: “The share of rationality in our people and political culture is high and the government has put a growth friendly austerity model into practice without excessive delay.

“The positive results for the economy were quick as well. For Greece I could suggest the same, even more - there is no alternative to austerity, rationality and decisiveness.”

The timing of the Baltic turnaround could not be better. On 5 June the IMF is holding a high-profile conference in the Latvian capital that will examine whether the adjustment in Latvia and the Baltics can be seen as “a model for countries in the eurozone”.

Among the attendees will be IMF Managing Director Christine Lagarde who gave a flavour of what to expect, saying: “The most important element is to lay out a credible medium-term plan to lower debt. Without such a plan, countries will be forced to make an even bigger adjustment sooner.

“The right mix between cutting spending and raising revenue is also critical. Some countries under severe market pressure have no choice but to move faster. On the whole, however, adjustment should be gradual and steady.”