Latvia's Austerity Plan Is a `Success,' Peterson Institute's Aslund Says

Latvia’s strategy to narrow its deficit while keeping the lats fixed to the euro is a “success” and may be a model for other countries, said Anders Aslund of Washington-based Peterson Institute of International Economics.

“Latvia now looks like a success model and in Washington people typically say that the Greeks should look at Latvia to learn how to handle a crisis,” Aslund said in an interview in Riga yesterday. Other countries can learn from Latvia that “you hit hard and cut hard, you face up to the major problems.”

The government cut wages and spending and raised taxes to keep its budget deficit under control and meet the terms of a 7.5 billion-euro ($9.1 billion) bailout from a group led by the European Commission and the International Monetary Fund. The measures, worth about 10 percent of gross domestic product, will be followed by more in the coming years to reduce the shortfall to 3 percent of GDP in 2012 and allow euro entry in 2014.

The economy is rebounding from last year’s 18 percent slump as manufacturing and exports advance. Output grew a 0.3 percent in the first three months, the first quarterly growth in 2 years. Industrial production rose an annual 7.4 percent, exports jumped an annual 19.7 percent in March and business confidence increased at the quickest pace in six years in the quarter.

‘No Other Choice’

European policy makers were last month forced to pledge a rescue package worth almost $1 trillion to keep Greece’s fiscal crisis from spreading to countries including Spain and Portugal. The euro has shed 15 percent against the dollar this year on concern about governments’ ability to push down budget deficits.

“The Greek situation is similar to Latvia’s in that there is no other choice but to downsize expenditures,” Latvian central bank Governor Ilmars Rimsevics said in an interview in April. Swedish central bank Governor Stefan Ingves said on April 15 that the Greek bailout may follow the Latvian path, with both EU and IMF participation

“Currency board countries should aim at getting the euro as soon as possible,” Aslund said, speaking of Estonia, Latvia, Lithuania and Bulgaria, which peg their currencies to the euro and circulation is backed by foreign currency holdings.

In the three Baltic countries, foreign-currency borrowing should have been avoided and east European governments will probably use bank regulation against “both overheating and usage of foreign currency in domestic transactions,” he said.

Avoiding a devaluation was “a more equal and equalitarian policy,” since allowing the currency to depreciate would have benefited the big exporters, he said. “Who are the big exporters? The richest men in the land.”

To contact the reporter on this story: Aaron Eglitis in Riga at aeglitis@bloomberg.net

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