RIGA — As Greece’s anguish spills into the streets, three small Baltic countries may offer an example, if not a model, of how to survive an economic crisis through austerity measures.
After suffering the deepest recession in Europe during the global financial crisis, Latvia, Lithuania and Estonia swallowed the bitter medicine that Greece is now being asked to take.
They slashed pensions, welfare benefits and public sector salaries while raising taxes. Latvia, which came dangerously close to bankruptcy, had to fire thousands of public servants and close schools and hospitals.
It was painful, but the cure worked. Battered and bruised, the three former Soviet republics are now on a path to recovery. Latvia’s budget-cutting government even won re-election last year.
“Latvia has a lot of lessons for Greece, but they are all coming too late,” said Morten Hansen, head of the economics department at the Stockholm School of Economics in Riga.
The main lesson: Push through austerity measures quickly before public support ebbs out.
“You can have that support for some time, but not three-four years,” he said. “Now people are starting to get more unhappy (in Latvia), but now the worst is over.”
Protests in Greece, where anti-government demonstrations are more common than in Northern European countries, have taken on new momentum. There is a constant sit-in in the central square in Athens and violent clashes with police have become a regular occurrence.
In the Baltic countries, which for decades suffered under a brutal Soviet occupation, the fiery Greek protests have been met with some bemusement. Besides a couple of clashes in Riga and the Lithuanian capital, Vilnius, in 2009, the Baltic countries didn’t see any street violence.
“For me it comes down to some cultural differences — we just understand the world differently. We accept the cuts, are not happy with them, especially those who suffer from it directly, but we understand why we have to do that,” said Marge Tubalkain-Trell from Estonia, who lost her job and had trouble getting the medical care she needed because of crisis-related social cuts.
Deimante Doksaite from Lithuania, which narrowly avoided having to take its own bailout during the crisis, agreed.
“Greeks are spoiled. Being quiet helped us to deal with the crisis,” said Doksaite, who lost her job as a media relations officer when the crisis struck.
Greece has already implemented austerity measures to meet the conditions of a €110 billion ($158 billion) bailout from Europe and the International Monetary Fund. But it has struggled to meet many of its targets, and is now in negotiations for a second bailout. The government faces a crucial vote next week for a new round of austerity measures.
The parallels with Latvia are striking.
In 2009 Latvia was nearing default, with over 300 percent more maturing foreign debt than reserves. Many speculated it would have to abandon its currency peg to the euro.
According to the IMF, Latvia was the hardest hit country in the world by the economic crisis, with an overall decline in gross domestic product of around 25 percent. Unemployment reached nearly 23 percent while foreign investment dropped to almost zero.
To meet the conditions of a €7.5 billion bailout from the IMF, the EU and the Nordic countries, the government implemented drastic cuts to social programs across the board.
Three-quarters of workers suffered wage cuts as the country implemented an “internal devaluation” to avoid dropping the currency peg.
Now the graphs are finally pointing in the right direction. GDP was up 3.5 percent year-on-year in the first quarter and unemployment is down to around 14 percent. The budget deficit has dropped from 9.6 percent of GDP in 2009 to 7.6 percent last year. The government expects a 4.2 percent deficit this year. Greece’s deficit was 10.5 percent in 2010.
Karlis Bukovskis from the Latvian Institute for International Affairs said Greece can learn a number of lessons from Latvia’s crisis management.
These include ensuring that there is a concrete goal to the austerity program, making it clear that the cuts are temporary, and more technical measures such as diversifying the tax base and slashing bureaucracy.
However, a key difference is that Latvia’s center-right government didn’t have to deal with any coherent opposition from the country’s weak labor movement.
“Greek socialist and social-democratic ideas and political parties as well as trade unions ... clearly appear stronger and more capable of mobilizing public support than the Latvian labor organizations have been,” Bukovskis said.
Greece’s financial past — it has been in default for much of the time since independence in 1829 — has also worked against it. Investors are more cautious of lending money to countries with poor records, which pushes borrowing rates higher.
That means that even before Greece embarked on its austerity measures, international investors were skeptical they would work, keeping pressure on the country.
Credibility with the markets is hard to underestimate. Britain’s debt as a percentage of the economy was even larger than Greece’s last year, when Athens was bailed out. But investors’ confidence in the country meant its borrowing rates never rose much.
While Greece saw low growth and high debt even before the crisis, Estonia, Latvia and Lithuania were booming in the years leading up to the financial collapse. Credit was pouring in, particularly from the neighboring Nordic countries, resulting in a bubble that burst just before the global recession.
There are some flaws in the Baltic success story. All three countries have experienced a “brain drain” that Greece so far has avoided. The westward migration from the Baltics has been significant ever since they joined the European Union in 2004, but accelerated after the recession.
As a result all three are faced with declining populations, which could yet lead to economic stagnation.
And not everyone here is stoic — there is a growing undercurrent of anger in the Baltic states as well.
Dita Gaugere, a Latvian who travels frequently to Greece, said there was probably a lesson for Latvia in how Greeks have responded to their crisis.
“We are too patient,” she said. “Greeks are not spoiled, they just know their rights more than we do. We are followers, we are sheep, we just trust ... our political leaders.”
Copyright 2011 The Associated Press