Sat, Jun 30, 2012 - Page 9 News List

Baltic countries’ austerity lesson for struggling Europe: Just do it

When the ‘Baltic tigers’ faced economic collapse, they made a leap of faith with a policy that the EU now sees as the only way out for countries like Greece and Spain

By Alistair Scrutton  /  Reuters, RIGA

Near a former Soviet naval base and dilapidated Cold War-era housing estate, this 84-year-old Latvian plywood factory is the kind of success story of which EU policymakers dream as they struggle with the economic meltdown in southern Europe.

Workers in yellow and blue uniforms eye digital camera readings of an endless stream of plywood on conveyers, new automation that has helped this firm survive what many describe as the world’s deepest recession. Steam hisses nearby, part of a novel water recycling scheme that has cut energy costs.

HUMMING MACHINES

About 15 percent of workers were fired after sales in 2009 plummeted by a third. The remainder saw wages cut and four-day weeks. However, production at the company, with more than 2,000 workers, now exceeds pre-crisis levels, part of a cog in a Baltic economy that is now Europe’s fastest-growing.

“Things were very difficult here,” Latvijas Finieris manager Arvis Svanks said over the din of hot, humming machines in a factory the size of several soccer pitches. “But you can say with some reason that the crisis made us stronger.”

Three small states, Latvia, Lithuania and Estonia, were known as “Baltic tigers” in the boom years before 2007, but housing bubbles and excessive spending led to an economic collapse. Latvia’s economy plummeted 18 percent in 2009.

However, there was little talk of these countries, with their currencies pegged to the euro, devaluing out of the crisis. Latvia and Lithuania kept their pegs. Estonia joined the euro last year, when others questioned the value of the common currency. Latvia wants to join in 2014.

Instead, some of Europe’s harshest austerity programs were an act of faith in the idea of “internal devaluation” — those countries could boost growth by cutting wages and increasing productivity rather than allowing their currencies to fall. It is a policy that the EU sees as the only way out for countries like Greece and Spain.

It was no foregone conclusion. Some IMF officials had urged devaluation in Latvia. However, with pressure from an EU worried about contagion, Swedish banks concerned about exposure and a central bank wanting euro membership, austerity was chosen.

Latvia’s economy grew 5.5 percent last year and 6.9 percent in the first quarter of the year. Unemployment, which reached more than 20 percent, has fallen to about 16 percent. It is a similar trend across the Baltics.

“There is this debate about growth versus austerity,” Latvian Prime Minister Valdis Dombrovskis said at his government palace. “Latvia is a country in the EU 27 that has done most about austerity and is currently the fastest-growing EU economy. There is probably not so much a contradiction between these terms.”

The other side of the story is not far away from the factory, in the housing estate surrounded by overgrown vegetation, in hospitals and schools falling apart, and a fall in wages that has had thousands, including middle class professionals, receiving food parcels from charity. The Baltics have some of the highest income inequalities in Europe.

BALTIC MODEL

The “Baltic model” has become part of a debate about how Europe can survive. It has spilled over into social media.

When Nobel laureate Paul Krugman questioned Estonia’s model this month, Estonian President Toomas Hendrik Ilves called the economist “smug, overbearing and patronizing.”

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