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A nation must think before it acts.
Among the EU-10 countries Latvia was the worst hit by the global economic crisis. GDP growth fell from a 10.3% average in 2005-2007 to -3.3% in 2008 and finally to –17.7% in 2009. Yet Latvia managed to return to a solid growth level in 2011, with 5.5% GDP. According to IMF predictions, Latvia will enjoy 4.5% GDP growth in 2012, but should expect rates to shrink slightly more in 2013 to 3.5%. Latvia’s successful recovery from the European economic crisis is considered unprecedented, and similar austerity measures have been suggested for other struggling EU nations.
Latvia’s journey to recovery was longer than Lithuania’s. After making enormous spending cuts, the country received financial assistance from the IMF and the EU in return for a commitment to implement a heavy fiscal policy which included further cuts in spending and a significant reduction of the budget deficit from -9.80% in 2009 to -3.50 in 2011. The role of the European Union in Latvia’s successful economic recovery was crucial as it supported the Latvian government during difficult conditionality negotiations with the IMF. Also, early on during the crisis Latvia pegged its currency to the euro, keeping the euro close to 0.7 lat. This approach was used to help keep Latvia’s plan of adopting the euro in the near future on track.
Strong political leadership also played a crucial role in successful recovery for Latvia. President Zalters demonstrated great deal of assertiveness in combating corruption and the self-serving tendencies of the Latvian politicians. Public opinion on the austerity measures, however, remains negative. The Latvian government cut public sector wages by 30% to maintain Eurozone budget deficit requirements, a move that angered many workers and citizens. Unemployment is extremely high and Latvia has high emigration rates. The Latvian government’s survival amidst such low public approval ratings seems surprising, but is at least partially attributed to the pro-Russian nature of much of the opposition.
Overall democracy scores in Latvia were virtually unaffected by the global economic crisis. The country has remained in the upper ranges within the category of “consolidated democracies”, and is on track to join the Eurozone in 2014 if growth rates are maintained. Despite the fact that the crisis is not over yet and that most EU member states continue to struggle to reach their pre-crisis growth levels, the strength of democratic institutions combined with competent leadership and proper application of external assistance has given Latvia a great advantage in combating the crisis.
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