Fitch Ratings most recent report entitled ‘The Euro Zone Crisis: Lessons from the Baltic States’ states that Greece, Portugal and Ireland could gain valuable lessons to improving their current economic problems by looking to the Baltic States.
Fitch Ratings detailed that during 2008-09 Estonia, Latvia and Lithuania’s GDP contracted by 18%, but due to these countries willingness to reduce inflation, curtail wage growth and a continued strong export performance they have restored external confidence in their solvency and are consequently recording rapid rates of GDP growth.
The Baltic States have shown through example that increasing competitiveness by internal devaluation is painful but possible; by reducing wages and prices to create competitiveness, economic growth and improve their current account balance. These changes were made possible by a willing citizenship, agreeing to be flexible in the labour market reducing labour costs and lowering prices. Resources were shifted to the export market encouraging export-led growth.
Fitch Ratings reported that the recent global crisis left to the Baltic States with large budget deficits which could only be tackled through aggressive austerity measures to stabilise public finances. Much support was provided to the Baltic States by Nordic banks and Latvia received financial support from IMF/EU. The European Central Bank is providing similar support to Greece, Portugal and Ireland, Ireland is utilising a similar flexible labour market as the Baltic’s, encouraging competitive price and wage drops. More importantly, in the Baltic State’s clear government communications of policy directives and a public stoicism born out of earlier financial hardships experienced during the 1990s and a willingness to allow harsh austerity measures to be implemented without incurring social unrest.
