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Latvian report
by Euro Reporter
2012-05-28 08:01:47
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Latvia offers Europe a guiding light

Which was Europe's fastest-growing economy in the first quarter of 2012? The answer, surprisingly, was Latvia, the Baltic nation of just 2.2 million people, which grew by 5.5%. Yet just two years ago, Latvia was on its knees: Its overheated economy contracted by 17.7% in 2009, making it one of the financial crisis's biggest victims. Stranger still, Latvia remains determined to join the euro zone: Its recent recovery makes euro accession by 2014 more likely. So how has it achieved the turnaround? The process hasn't been pain-free. Latvia's leaders have stayed committed to pegging its currency, the lat, to the euro. Instead of devaluing the currency amid the financial crisis, Latvia embarked on a rapid economic rebalancing. After a fiscal consolidation now worth 15% of GDP, its government deficit could fall to 2.5% of GDP this year, from 9.7% in 2009.

The price has been a roughly 20% fall in public-sector wages, leading overall average earnings in Latvia to fall 14.3% from their peak, according to Royal Bank of Scotland. Public-sector cuts have fuelled unemployment, which peaked over 20% in 2010 and is still around 15%. But falling wages have helped make Latvia more competitive. Its inflation-adjusted exchange rate has fallen 9% since its February 2009 peak; annual exports are up nearly 40% since then. Latvia's current-account deficit, running at around 25% of GDP before 2008, dwindled to 1.2% of GDP last year.

Latvia is hardly risk free. Its higher reliance on exports makes it vulnerable to an external shock. Domestic credit has contracted for the past three years as banks deleverage. And while social unrest has been relatively restrained, about 200,000 people have emigrated from Latvia in the last decade. Popular support for joining the euro is down to 30%. But the government can push through euro adoption thanks to the terms of Latvia's original EU membership. Having that goal has helped Latvia on the road to recovery, just as others find the short-term pain of membership too much to bear. Those teetering on euro exit should look to Europe's outer limits for inspiration.


Latvia eyeing euro entry despite crisis

In an interview with AFP ahead of a meeting of EU leaders to thrash out possible ways to bolster growth in the debt-mired eurozone, Dombrovskis said Latvia was "on track" to meet the entry requirements to adopt the euro. "We set this target several years ago and ... the intention is still to join the eurozone on January 1, 2014," he said. He conceded that reservations had been raised, given the debt woes that have pitched the 17-nation zone into the most serious crisis in the bloc's history and said Latvia had studied the euro entry experience of neighbour, Estonia. "Despite the crisis, it also served as a positive signal of financial and economic stability in Estonia, and we expect a similar effect in Latvia," he said. Estonia became the 17th and latest member of the eurozone when it gave up the kroon on January 1, 2011. Dombrovskis said he did not expect a negative impact on Latvia's small economy. Rather he said it would "help attract investments, and actually reduce various transaction costs on currency exchanges."

"Our currency is already fixed to the euro anyway, so why not join?" he said. Latvia will have to meet stringent entry criteria -- for example keeping public deficits below the EU target of three percent of gross domestic product -- and Dombrovskis said it was flaunting such rules that had sparked the crisis. "Eurozone countries have also to follow their own rules," he insisted. "Currently countries outside of the euro have to fulfil the Maastricht criteria otherwise they are not allowed in," he said, referring to the strict conditions laid down for entering the club.

"But ... we know that eurozone countries have extensively abused the rules and not followed the Maastricht criteria themselves, which has led to this crisis," he added. Turning to the summit, likely to be dominated by fears over Greece leaving the eurozone and a clash over the best medicine for the crisis, Dombrovskis appealed to Athens to stick to its promises. "Greece has to play by the rules of the game and has to deliver on its commitments. If you say no to austerity, the question is who is going to finance your budget?" he stressed. "By just denouncing the bailout package, you just make the financial markets even more scared and you just worsen the situation," he warned, referring to 237-billion-euros ($303 billion) of aid for the recession-wracked country.


Latvia struggles with 'demographic disaster'

A running joke in Latvia pokes fun at the exodus of young talent from the ex-Soviet Baltic state, but experts insist it is no laughing matter as the tiny EU newcomer struggles with ‘demographic disaster’. "We have a joke that in 2030 the last Latvian can switch off the lights at Riga airport," Aldis Austers, chairman of the European Latvians' Association, told AFP recently. The figures are daunting. A 2011 survey revealed the Latvian population shrank from 2.2 million in 2000 to just 2.0 million as of last year -- plunging 13.0 percent in little more than a decade. Worse still, if nothing is done to tackle the exodus, the population could drop to 1.6 million by 2030, according to a recent economy ministry study. Migration studies by University of Latvia Professor Mihails Hazans show the country is becoming demographically top-heavy.

"Most emigrants are young -- about 80 percent of recent emigrants are under 35 -- hence the remaining population is ageing faster," said Hazans, whose studies have referred to the trend as a "demographic disaster". "Do we have some hope that they will come back? Unfortunately not very much. After three years the number who is planning to come back in the short run drops from ten to three percent." Britain and Ireland became popular destinations following Latvia's accession to the European Union in 2004. The exodus peaked after the country was hit by 20 percent joblessness as it suffered the world's deepest recession when its economy shrank by 25 percent over two years during the 2008-2009 global crisis. Inna Steinbuka, the European Commission's representative in Latvia and a former employee of EU statistics body Eurostat, is convinced Latvia's brain drain is "no longer a risk, it is a reality."

The country's Economy Minister Daniels Pavluts is also worried. "In 2020 we are facing a 15-percent decrease in the working-age population and a 10-percent increase in economic demand," he told AFP. Pavluts terms stopping emigration a "priority" and says trying to draw back the diaspora is a "second stage". Attracting skilled labour from abroad should be "a labour supply of last resort," he says. Initial suggestions by a special task force on demography set up by centrist Prime Minister Valdis Dombrovskis are aimed at boosting the birth rate and coaxing scientists to come home. Improving access to kindergartens and reviving fertility programme funding that was slashed during the crisis top the task force's list of priorities.

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