European governments must enact planned budget cuts before austerity fatigue sets in, the prime ministers of Latvia and Lithuania said.
The Baltic nations, which also include Estonia, pushed through Europe’s toughest deficit-cutting measures to cope with the global financial crisis. Each of the governments implemented austerity measures equal to at least 10 percent of GDP, which resulted in the world’s deepest recessions, with economic output shrinking as much as a quarter before growth resumed last year.
“It is important to do fiscal consolidation fast, not to extend it too long, because the longer you extend it, consolidation fatigue starts and the sense of urgency is lost,” Latvian Prime Minister Valdis Dombrovskis said in an interview with Bloomberg Television in London.
The three countries started budget cuts in 2008, before the euro-area’s sovereign debt crisis prompted governments from Greece to Ireland to step up efforts to cut spending and increase revenue. European governments shouldn’t “be afraid,” Lithuanian Premier Andrius Kubilius said in a separate Bloomberg Television interview. Lithuania has increased taxes, cut state wages and reduced pensions.
Making the adjustments early “is the best way to avoid reform fatigue, but also to avoid populism,” said Morten Hansen, head of the economics department at the Stockholm School of Economics in Riga in an e-mail. “The only problem is that hasty budget cuts might tend to be too much ‘across the board.”
The Baltic nations opted for a strategy of bolstering competitiveness by forcing prices and wages to fall instead of devaluing their currencies. Countries must “do the bulk of adjustment” early on, Dombrovskis said.
“We made a good decision from the very beginning that we needed to go as quickly and as effectively as possible with austerity measures,” Kubilius said. “We weren’t looking for possibilities to suspend ourselves from recession.”
After three years of budget cuts, Baltic governments are “more and more faced with consolidation fatigue,” which is now their biggest challenge, Latvian Finance Minister Andris Vilks said at a Euromoney conference in Vienna yesterday. The country’s government is debating 50 million lati ($95.4 million) of additional savings demanded by the European Union and the Internatonal Monetary Fund.
Spending cuts also helped Estonia adopt the euro on Jan. 1 and to keep budget deficit and debt at the lowest level among the 17 member of the currency bloc last year.
Government debt was 8 percent of GDP last year, compared with the EU’s 79 percent average, the European Commission estimated in November. The shortfall was about 1 percent last year, below the government’s forecast, Finance Minister Jurgen Ligi said yesterday.
Latvia and Lithuania aim to join the euro region in 2014. To qualify for the currency switch, the two countries need to cut their budget deficits to less than 3 percent of GDP in 2012 from about 8 percent last year.
Dombrovskis and Kubilius said their governments will focus on overhauling health care, education and social benefits and will crack down on the illegal economy to bring the deficits down further.
The Baltic region’s credit-default swaps, which investors use to protect against default or speculate on a borrower’s credit worthiness, fell below the costs for Greece, Ireland, and Portugal.
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