Taking a leaf out of the Baltic’s books
New automation has helped this firm survive what many describe as the world’s deepest recession. About 15% of workers were fired after sales in 2009 plummeted over 30%. The remainder saw wages cut and four-day weeks. But now production at the company, which has more than 2,000 workers, exceeds pre-crisis levels, part of a cog in a Baltic economy that is now Europe’s fastest growing.
Latvia, Lithuania and Estonia, were known as “Baltic tigers” in the boom years before 2007. But housing bubbles and excessive spending saw economic collapse.
However, there was little talk here of these countries, with their currencies pegged to the euro, devaluing out of the crisis. Latvia and Lithuania kept their pegs. Estonia joined the euro in 2011, when others questioned the value of the common currency. Latvia wants to join in 2014.
Instead, some of Europe’s harshest austerity programs were an act of faith in the idea of “internal devaluation” — those countries could boost growth by cutting wages and increasing productivity rather than allowing their currencies to fall. It is a policy that the EU sees as the only way out for countries such as Greece and Spain.
It was no foregone conclusion. Some IMF officials had urged devaluation in Latvia. But with pressure from an EU worried about contagion, Swedish banks concerned about exposure and a central bank wanting euro membership, austerity was chosen. Latvia’s economy grew 5.5% in 2011. Unemployment, which reached more than 20%, has fallen to about 16%. It is a similar trend across the Baltics.
“There is this debate about growth versus austerity,” says Latvian prime minister Valdis Dombrovskis.
“Latvia is a country in the EU 27 that has done most about austerity and is currently the fastest growing EU economy. There is probably not so much a contradiction between these terms.”
The other side of the story is not far away from the factory in the housing estate, in hospitals and schools falling apart, and a fall in wages that has had thousands receiving food parcels. The Baltics have some of the highest income inequalities in Europe.
Back on the ground, Latvijas Finieris corporate development manager Gatis Kepitis poured over data showing the turnaround. He appeared uneasy mentioning 15% job cuts. He preferred to discuss a 60% rise in productivity between 2007 and 2011. This is the kind of export-dependent company that in theory would have benefited from devaluation. Kepitis is not convinced.
“Exports would have gained something from devaluation but it would have been short-term gains. The basic issue remains unsolved. You have to get more competitive. You have to be ready to adapt to new conditions. You get none of this with devaluation.”
That experience was echoed across Latvia. Unit labour costs fell 27 points from 2008-2011, according to Eurostat. That compares to a fall of four points for Spain, and a rise of seven points for Greece. Policymakers say, diplomatically, that they hold no lessons for the rest of Europe. But the temptation is occasionally too much.
“As prime minister I don’t want to use other examples,” says Estonian prime minister Andrus Ansip. “But let’s say Spain for example. They started to stimulate their economy knowing the structure of the economy was not sustainable. Now despite all those stimulus packages their unemployment rate is 25%.”
Policymakers concede there were many special cases in the Baltics that set it apart. Public debt was far lower and there was a degree of political consensus. Latvia needed a €7.5bn bailout, about one third of its GDP.
The equivalent would be unaffordable for Southern Europe. Economic statistics were accurate from the start, meaning the full extent of the crisis was evident, unlike Greece. It is not the only path. Iceland chose devaluation after the 2008 banking collapse. While Greeks are in their fifth year of a recession, Iceland has bounced back to growth after just two years with capital controls and making foreign creditors rather than domestic ones take the biggest hit.
But if there is one lesson for the Baltics, officials drill in the need of quick cuts and reforms before voter and market fatigue sets in. “It’s a very pro-austerity message,” says Estonia’s new central bank head and ECB member Ardo Hansson.
“Get ahead of the curve, and try and do it rather resolutely. The key is to reach bottom rather quickly. Yet in some other countries it is stretched out so long people are a bit exhausted. Maybe some don’t believe that a bottom exists.”
For countries where public civil servants suffered up to 30% wage cuts, the Baltics offer a degree of political consensus unseen in much of southern Europe. Dombrovskis and Ansip even got re-elected in 2011.
One international official arriving in Riga in 2009 said he was surprised there were no protests. In Estonia, the biggest protests were over the removal of a statue. Some of this was due to ethnic politics — in Estonia and Latvia the opposition, mainly parties rooted in the ethnic Russian minority, found it hard to widen their reach to protest austerity packages.
The Latvijas Finieris factory, with sales of €169m in 2011, is now looking at new export markets to make up for potential lost sales in Southern European markets.
Dombrovskis expects economic growth to be about 4% this year. But there are concerns about the impact of an extended eurozone crisis on exports. By 2014, his government will face payments on Latvia’s public debt, which increased from 10% of GDP to more than 40% during the crisis. This could act as a drag on growth. His government is now pushing for five percentage-point cuts in income tax, a move that has international officials worried Latvia is spending more than it should.
But overall there is a cautious mood of optimism. Kaspars Kasparsons was one of the thousands who left Latvia, and his family. He is back in a warehouse after a year as a carpenter in Norway. His wage is 10% down on pre-crisis salary. But his wife has found work in a pub. “Not everyone is happy. Many friends are very bitter and angry at what happened. Some had 50% cuts in wages. But things are getting a better for me.
“Well, a little better.”
