Lagarde Advices Greece to Take an Austerity Example at Latvia, Although Not Euro-Zone Member

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I think head of IMF Christine Lagarde is confused. Totally confused. While a couple of months ago, she seriously proposed wages in Greece should reach the level of Croatia [too lazy to search the link], now she made a turn up to the North. No, she didn’t propose that wages in Greece reach the level of Sweden or Finland. Lagarde praised … Latvia’s austerity policies and adviced indebted European countries to follow Latvia’s example. Especially Greece!

IMF hails Latvia’s austerity drive as eurozone model

IMF Chief Christine Lagarde believes Latvia should serve as an inspiration for European leaders struggling to get on top of the debt crisis. She’s praised the Baltic state’s unwavering austerity course.

The head of the International Monetary Fund (IMF), Christine Lagarde, on Tuesday hailed Latvia’s cost-cutting efforts as a model for indebted eurozone states like Greece which are resisting austerity as a way of averting economic meltdown.

Addressing delegates to an IMF conference in the Latvian capital, Riga, Lagarde said Latvia’s recent development and its spectacular recovery from depression were a demonstration of the lessons of the current debt crisis.

“Latvia decided to bite the bullet, and instead of spreading the pain over a number of years, it decided to go hard and go quickly,” Lagarde commented.

When the global economic crisis culminated in 2009, Latvia’s economy shrank by 18 percent year-on-year. It fell altogether 25 percent from the start of the crisis in 2008, marking the deepest plunge recorded worldwide. (Deutsche Welle)

I am afraid nobody, neither Lagarde and her IMF friends could go far or ever succeed with their austerity measures if they stick their noses in different countries and different realities and try to implement a one-size tailored programme.

Cartoon: Lagarde bites Greece (medium) by rodrigo tagged imf,christine,lagarde,greece,crisis,recession,financial,help

Lagarde Bites Greeks – Caricature by Rodrigo

An analysis saying that Latvia’s austerity programme is not applicable to other euro zone countries:

One advantage was a very low level of government debt going into the crisis. In 2007, Latvia’s gross government debt was only 9 percent of GDP, lower even than Ireland’s 25 percent, and far better than Portugal (68 percent) or Greece (105 percent). The severe recession sent Latvia’s debt soaring, of course, and it is expected to top out at 50 percent of GDP next year. Still, that is far better than the other three countries that are receiving EU and IMF emergency aid, all of which will soon see debt rise above 100 percent of GDP. Very few countries in history have recovered from government debt ratios over 100 percent without default.

A second advantage was that Latvia had little by way of a domestic banking sector. Banks based in neighboring Scandinavia dominate the Latvian market. All of them took hits from the collapse of the Latvian property bubble, but none failed. More importantly, few banking losses showed up on the balance sheet of the Latvian government. Parex, the country’s one large domestic bank, was the exception. Parex failed and was nationalized in 2009, but its market share going into the crisis was only 14%. By contrast, the government of Ireland assumed losses from the failure of its big banks that ended up dwarfing the modest national debt with which it entered the crisis.

A third plus for Latvia has been a fairly stable political situation. It would be an exaggeration to say that austerity has uniformly been welcomed by Latvian voters. Nonetheless, they reelected their government in October 2010, a fact cited positively by credit rating agencies. Violent demonstrations have been a rarity. In contrast, austerity programs brought down the governments of Ireland and Portugal, adding to uncertainty. National elections in Greece are not scheduled until 2013 and the government has so far resisted calls for early elections, but its political position has been weakened by threatened defections, strikes, and frequent demonstrations.

Taken together, do all of these considerations mean that austerity was the right path for Latvia? Not necessarily. Latvia differs from Greece, Ireland, and Portugal in yet another important respect: It is not a member of the euro area. Although its currency has been pegged to the euro since 2005, the link is purely voluntary. While there is no easy way for a member of the euro area to return to its own currency, Latvia could end its fixed exchange rate policy at any time.

We all wish Madame Lagarde had read this analysis posted on 27 May 2011 by Seeking Alpha :)

 What? Greece is not Latvia?