Latvia's 'up front' austerity wins praise from Lagarde
by Daniel Mason
Latvia's economy recovered from deep recession because tough austerity measures were implemented "up front" instead of "spreading the pain over many years", International Monetary Fund chief Christine Lagarde has said.
In a speech in Riga yesterday, Lagarde said that the structural reform programme undertaken by the Latvian government, in conjunction with €7.5bn of loans from the IMF and European Union, had been "the right combination of policies, the right degree of support, and the right level of determination".
Latvia's gross domestic product grew by 5.5 per cent in the first quarter of this year, compared with the same period of 2011, statistics published today by Eurostat confirmed.
She said the "clear end goal" of joining the euro meant that "everybody knew where they were going", with "incredibly impressive" results – even though keeping the peg to the single currency meant Latvia, like eurozone countries such as Greece, did not have the option of devaluing its way to competitiveness.
Noting that the country had lost a fifth of its GDP during the recession in 2008 and 2009, and that unemployment rose above 20 per cent in that period, Lagarde said Latvia had "understood that the huge spike in spending in the years leading up to the crisis could not be sustained".
"Latvia decided to bite the bullet. Instead of spreading the pain over many years, the country stood together and did what needed to be done up front," she said, adding that the country's budget adjustment amounted to 15 per cent of GDP over the course of the three year programme.
Meanwhile Lagarde praised Latvia decision to expand and improve assistance for the unemployed "even in an atmosphere of major budget cuts", and said it was important to "keep the social safety net protection in place as long as the unemployment rate remains so high and poverty remains a problem". In March this year the jobless rate in Latvia remained stubbornly high at 15.2 per cent.
"All three Baltic countries need to continue to implement the reforms necessary to make sure that they can thrive under a fixed exchange rate," Lagarde said. "These reforms include raising labour productivity and boosting competitiveness to put them on a permanent path of higher growth and more exclusive growth."
Austerity: the damage is already done
The experts who advocated austerity may finally be realising the true effects of their policy – but acknowledging past error is not something that politicians are prone to do, writes our secret columnist in Brussels