Southern Europe Budgets Imperil Baltic Revival, Latvia Says

Southern European countries’ reluctance to push ahead with austerity threatens the Baltic region’s economic rebound earned through cost cuts and wage decreases, Latvian Prime Minister Valdis Dombrovskis said.

Southern European economies need austerity to avoid a downturn that would affect Latvia by dragging down its main trading partners in northern Europe such as Germany, Sweden, Denmark and Poland, Dombrovskis said yesterday in an interview in the capital, Riga.

“If we see southern European problems also starting to affect Germany, it will inevitably also affect the region,” Dombrovskis said. “When financial markets are starting to lose confidence in your country, there is no other option than to react to this situation.”

Latvia was the European Union’s fastest-growing economy last year, followed by its Baltic neighbors Estonia and Lithuania. They went through the 27-nation bloc’s deepest recessions in 2009 as the three governments cut spending and raised taxes in response to a credit-fueled housing boom turning to bust.

Latvia will continue to outpace EU economies in 2013, with a 3.8 percent expansion after last year’s 5.3 percent, the European Commission said Feb. 22.

The government forecasts 4 percent growth this year, even after accounting for the risk posed by southern Europe, Dombrovskis said.

“So far, no one has invented a better way” to restore financial stability and economic growth than the austerity used in Latvia, he said.

Italian yields surged after elections Feb. 24-25 delivered a four-way parliamentary split and cast doubt on the stability of the next government. Spain reported its economy contracted a quarterly 0.8 percent between October and December, more than previously estimated and the sixth consecutive three-month period in which output shrunk.

French government spokeswoman Najat Vallaud-Belkacem told reporters in Paris yesterday that it’s “not the right moment” to take extra steps to narrow the budget deficit. The European Commission is forecasting a gap of 3.7 percent of GDP, compared with France’s earlier target of 3 percent.

To contact the reporters on this story: Aaron Eglitis in Riga at aeglitis@bloomberg.net; Niklas Magnusson in Stockholm at nmagnusson1@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net

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