Posted Wednesday, Jan. 2, 2013, at 10:39 AM
Latvia, reports Andrew Higgins, is the land where austerity works:
Latvia, feted by fans of austerity as the country-that-can and an example for countries like Greece that can’t, has provided a rare boost to champions of the proposition that pain pays.
Hardship has long been common here — and still is. But in just four years, the country has gone from the European Union’s worst economic disaster zone to a model of what the International Monetary Fund hails as the healing properties of deep budget cuts. Latvia’s economy, after shriveling by more than 20 percent from its peak, grew by about 5 percent last year, making it the best performer in the 27-nation European Union. Its budget deficit is down sharply and exports are soaring.
It's worth recalling the math on this. You start with $100 and then you drop 20 percent from peak to $80 and then obtain 5 percent growth and you're left with $84. That's not much of a bounceback. If Latvia can continue five percent annual growth for five more years, then by 2018 they should have re-obtained their 2007 peak output level. Which is to say they'll basically have had a lost decade, except instead of 10 years of stagnation it'll have been four years of terrifying collapse followed by six years as not-fast-enough bounceback.
I think the right way to think about Latvia is this. The Latvian government places more importance on securing independence from Russia than on the short-term trajectory of Latvian living standards. Therefore "do what EU officials want and integrate as rapidly as possible into EU institutions" is a sound strategic approach. Given that priority, Latvia genuinely had no choice but to implement a stark austerity program. And if you're going to implement an austerity program, you're better off doing it in an orderly Latvian manner than a chaotic Greek one. So I would say this is a success story—part of the ongoing success story over the past twenty years of Latvian independence. It's a reminder of what's genuinely fantastic about the European Union and its amazing success at creating a framework in which Europe's nations can live in peace, Europe's smaller nations can enjoy an unprecedented level of security, and where the lure of EU expansion has helped consolidate liberal democratic institutions in large swathes of eastern and central europe. None of that changes the fact that EU currency policy in particular has caused a lot of collateral damage and posed a lot of unforeseen risks in countries that signed on for basically geopolitical rather than economic reasons.