The Great Debate UK

Latvia: Apocalypse (not quite) now . . .


Morten Hansen

-Morten Hansen is head of the economics department at the Stockholm School of Economics in Riga. The opinions expressed are his own.-

Latvia, with its 18 percent year-on-year economic decline, ruthless budget cuts to meet the demands stated by the IMF-EU bailout package and recurring rumours of devaluation, may be the most written about country in the world right now, at least on a per capita basis.

Yet life goes on here and journalists I speak to seem somewhat disappointed when I cannot confirm sighting starvation or death in the streets…. Admittedly, it is very hard to be optimistic but it was clearly a positive sign when the parliament approved yet another round of budget cuts including across-the-board 20 percent wage cuts in the public sector and a 10 percent cut in pensions, which should release another tranche of much-needed money from the IMF and the EU. These cuts are tough but necessary as Latvian public finances were unsustainable – even in the years of growth rates of 9, 10, 11 percent the country still ran budget deficits.

Whatever the value of the currency, the public sector needs serious reform, which is why I am somewhat annoyed by the incessant rumours of devaluation emanating from in particular Sweden and the UK. The currency and the public sector are not linked to each other and should be treated as separate issues.