Latvia accepts austerity — and its economic pain eases
Hardship has long been common here — and still is. But in just four years, the country has gone from the European Union’s worst economic disaster zone to a model of what the International Monetary Fund hails as the healing properties of deep budget cuts. Latvia’s economy, after shriveling by more than 20 percent from its peak, grew by about 5 percent last year, making it the best performer in the 27-nation European Union. Its budget deficit is down sharply and exports are soaring.
“We are here to celebrate your achievements,” Christine Lagarde, the chief of the International Monetary Fund, told a conference in Riga, the capital, this past summer. The fund, which along with the European Union financed a bailout of 7.5 billion euros for the country at the end of 2008, is “proud to have been part of Latvia’s success story,” she said.
When Latvia’s economy first crumbled, it wrestled with many of the same problems faced since by other troubled European nations: a growing hole in government finances, a banking crisis, falling competitiveness and big debts — though most of these were private rather than public as in Greece.
Now its abrupt turn for the better has put a spotlight on a ticklish question for those who look to orthodox economics for a solution to Europe’s wider economic woes: Instead of obeying any universal laws of economic gravity, do different people respond differently to the same forces?
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*awaits arrogant non-sequitor excuse from hack Krugman*
thurman on January 2, 2013 at 1:24 PM
The NYT should take some time and do a study of Sweden. Since they threw out their “progressives”, cut government spending and reduced taxes, their economy is doing well, too.
crosspatch on January 2, 2013 at 1:27 PM
It is very encouraging to read that the entire world has not gone insane.
rhombus on January 2, 2013 at 1:30 PM
Unmentioned in the article – unexpectedly - is Latvia’s flat tax.
Rebar on January 2, 2013 at 1:31 PM
Is Sweden also the place that tried legalizing pot, found out how rotten an idea it was, and went back? Or was that Holland and I have my nations mixed up?
MelonCollie on January 2, 2013 at 1:33 PM
I am a proponent of the austerity, and it does work.
However, here are some numbers to put things in perspective:
Latvia is a country of 2.2 million with a GDP of $32.5 billion. Government spending is almost 44% of GDP. If you translate their bailout as a percentage of GDP to US, it would equate to a $3.4 trillion bailout for US. Would that infusion move US economy?
mikhail1973 on January 2, 2013 at 1:34 PM
“We can’t cut our way to prosperity.”
-President Barack Hussein Øbama.
Odysseus on January 2, 2013 at 1:36 PM
Only a few sane lands in the world…
Schadenfreude on January 2, 2013 at 1:36 PM
Also unmentioned went 22% VAT.
mikhail1973 on January 2, 2013 at 1:37 PM
Good catch…
right2bright on January 2, 2013 at 1:38 PM
Was’t their prime mister on twitter a couple of months ago telling everyone to stuff it?
Blake on January 2, 2013 at 1:38 PM
How often those eastern European/western (ex-)Soviet bloc countries get it right…
Jeddite on January 2, 2013 at 1:52 PM
I believe the government of Suriname has also been taking advantage of the price of gold and commodities to pay down its national debt. The country is currently enjoying an economic boom, and is one of only three countries in the CARICOM trading bloc which is expected to grow next year (the other two being neighboring Guyana, and Trinidad which has oil).
Doomberg on January 2, 2013 at 2:06 PM
The relative metric is Taxation & Govt Spending as a % of GDP.
Latvia does far better (lower) than the US i both categories.
Norwegian on January 2, 2013 at 2:06 PM
Austerity is coming here. The choices are controlled austerity measures, or forced from bankruptcy and collapse.
I’m afraid people here are too stupid and selfish for the controlled austerity … no doubt in part to the media and the constant barrage of lies from democrats.
I’d hate to be a politician when the crap hits the fan.
darwin on January 2, 2013 at 2:07 PM
No, just Krugman and his pals.
RickB on January 2, 2013 at 2:08 PM
Under Obama, federal spending for 2011 alone was $3.6 trillion. Did that move the US economy?
/Rhetorical question
ShainS on January 2, 2013 at 2:12 PM
Trust me, I am with you on this. Bailout money would be on the top of that. And it is more of a generic thought as we know that whatever funds are available would be poured down the same rathole where the rest of federal spending went.
mikhail1973 on January 2, 2013 at 2:18 PM
This is why Jim DeMint left the Senate. I don’t think he sees any hope for the situation and doesn’t want to be there when the situation falls apart. To be quite honest, if I was a politician, I’d take my ill-gotten gains and run. Probably the reason government’s been so bad in the past few years is that the smart ones are seeing what’s coming and fleeing to some place like Panama or the Caribbean, leaving only the idiots in charge.
Doomberg on January 2, 2013 at 2:22 PM
Controlled austerity measures here? Not a chance … it will be either collapse from recognition by creditors that we are already totally insolvent (especially considering unfunded liabilities) or hyperinflation that destroys all but the very wealthy.
Politicians won’t fare so badly — in fact, they’ll have tremendous leverage in their bribability power as well as participating in authoritarian statutes/crackdowns.
It’ll be businessmen and businesses that’ll be scapegoated, bear the brunt of the anger and (on the Left) faux outrage, and harmed or destroyed …
“Every movement that seeks to enslave a country, every dictatorship or potential dictatorship, needs some minority group as a scapegoat which it can blame for the nation’s troubles and use as a justification of its own demands for dictatorial powers. In Soviet Russia, the scapegoat was the bourgeoisie; in Nazi Germany, it was the Jewish people; in America, it is the businessmen.”
– Ayn Rand
ShainS on January 2, 2013 at 2:23 PM
Good point. On tax rates I can argue as Latvian taxes are not low: 25% income tax, 15% capital gains, 35.09% social security tax of which 24.09% is the employer’s rate and 11% is the employee’s rate, property taxes are 1.5%. Corporate tax is 15% and that is lower. However, everyone pays and that is what matters.
mikhail1973 on January 2, 2013 at 2:23 PM
Yep, you are correct, sir!
ShainS on January 2, 2013 at 2:25 PM
Disagree.
It will be white people:
http://www.youtube.com/watch?v=UEqa90XpPw0
http://www.youtube.com/watch?v=mnCBNho9Kak
http://www.youtube.com/watch?v=Popzl9_DAq0
Also the popularity of the “knockout game”, as the popularity of government mandated discrimination against whites, especially males.
Rebar on January 2, 2013 at 2:44 PM