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
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
Unions 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
At the conclusion of the IMFs first monitoring mission
to Latvia since a three-year, E7.5 billion bailout programme
ended in December 2011, the funds 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
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
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.