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Austerity Poster Child Finally Sees Economy Hit Pre-Crisis Level

After painful cuts to public wages and services, data suggest Latvian GDP has finally recovered

Held up as a beacon of successful austerity policies in the wake of the 2008 crisis, Latvia’s economy has only just recovered to the size it was a decade ago.

Preliminary fourth-quarter data suggest the Baltic nation’s gross domestic product finally edged past the inflation-adjusted level it reached in 2007. Seven straight years of growth have followed painful cuts in public wages and services that were inflicted by a 7.5 billion-euro ($9.3 billion) bailout and later rolled out in places such as Greece.

“The contractionary policies needed to get the loan probably didn’t do anything good to the economy,” said Karsten Staehr, a professor of international and public finance at the Tallinn University of Technology. “On the one hand, it’s very worrying to say it takes 10 years to come back. But on the other, where the Latvian economy was 10 years ago was an unsustainable peak – it was overheating.”

At Last!

Latvian economy regains pre-crisis footing after a decade

Source: Central Statistical Bureau of Latvia

Latvia faced obstacles even after it exited austerity and returned to growth. An even-slower recovery in the euro region, the country’s main trading partner, weighed on exports; the conflict in Ukraine and the European Union sanctions that followed curbed business with Russia.

And some challenge the validity of comparing Latvia to its pre-crisis self. The years running up to the crash were characterized by breakneck growth based on unsustainable gains in property prices, wages and consumer spending.

“I don’t think 2007 or 2008 was a good benchmark – it was like someone being on drugs, whereas now the economy is growing without doping,” Martins Kazaks, chief Latvia economist at Swedbank AB, said by phone.

One lingering side-effect that’s not in dispute concerns Latvia’s population. Already shrinking since regaining independence from the Soviet Union and joining the EU, the crisis – and accompanying austerity – drove people away in greater numbers.

The population plunged by almost 12 percent between 2007 and 2017, with fatter salaries still tempting Latvians to the EU’s richer west. That’s left a shortage of workers similar to other parts of ex-communist Europe.

With opposition to immigration still strong, the dearth of labor may now weigh on an economy that’s demonstrating healthier growth than in the past. GDP jumped an annual 4.2 percent last quarter, with industries such as technology starting to join traditional sectors including banking and transport in driving expansion.

“Ten years later, it would be nice to have those people here because we have jobs,” Martins Abolins, an economist at Citadele Banka AS, said by phone.

(For more economic analysis, see Benchmark)
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