Baltic countries' austerity lesson for Europe: Just do it

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 European Union 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. But 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 in 2011, and 6.9 percent in the first quarter of the year. Unemployment, which reached more than 20 percent, has fallen to around 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.”

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