Latvia uses police to quash talk of economic collapse
EU leaders met in Brussels for a two-day summit on how to help struggling Eastern European economies, such as Latvia.
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But public anger over the government's handling of the economic crisis has been steadily mounting. Late last year, the country's biggest national bank, Parex, was nationalized and the government reached out to the IMF – a gesture that carried with it deeply unpopular cuts in social spending, including salary reductions of 15 percent across many services, and hastened the resignation of Prime Minister Ivars Godmanis last month.Skip to next paragraph
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There has been unrest: A 10,000-strong rally in the capital, Riga, turned violent in January. Last month, farmers blocked the main road to the capital to protest agriculture policy.
In Riga, the trendy cafes, multistory shopping malls, and sleek sushi restaurants belie what the ordinary Latvians say about the declining state of things. Two years ago Mikhail Arutjunov moved to the capital from the coast, where he worked in the shipping industry. He drives buses and taxis, but is thinking of going back. "Life isn't so good here anymore," Mr. Arutjunov says. "Money was good back then, but now salaries are too low."
Latvia's problems are mirrored elsewhere in Eastern Europe. The region is foundering not because of toxic mortgages, but because of huge account debts following years during which governments borrowed too much in an attempt to improve institutions and infrastructure ahead of EU membership.
Then, governments cashed in after joining the EU. Foreign investment poured in, property values soared, housing markets boomed, and ordinary consumers found themselves with access to credit that was unthinkable during the dark days of communism.
"The government just went wild," says Mr. Raudseps. "They just went on a spending spree."
The Baltic countries borrowed heavily in foreign currencies, mostly in the euro, which has devalued significantly since the start of the financial crisis. And they kept their three currencies at a fixed exchange rate with the European single currency, eliminating the option of devaluing those currencies to help drive up exports.
"That was the one substantial flaw" in the fiscal policies of Latvia and the other Baltic countries, says Anders Aslund, a senior fellow at the Petersen Institute for International Economics. "During their boom times, they imported inflation, imported too much short-term capital, and it has caused overheating in their economy," he says.
Some of Latvia's leading economists, particularly those who came of age in the early days of capitalism, are saying the only solution for Latvia is to let it collapse like Iceland and start over again when the IMF loan runs out this fall. That may sound like risky advice, but Smirnovs says: "We need to change from wild capitalism to simple capitalism."
Raudseps says the Latvian people are ready for a new government to lead the country through the crisis, and are resigned to some cutbacks.
"When does it end? That is creating a lot of tension. People don't really know how they are going to deal with it," he says.