LEX Nowhere is the economic pain of “emerging” Europe more acute than in Latvia – output declined 10.5 per cent year-on-year in the fourth quarter. So, perhaps unsurprisingly, Latvia’s prime minister late on Friday became the first government head to resign since crisis struck the region. Latvia is becoming a test case not just among Baltic neighbours Estonia and Lithuania, but other emerging Europe states with fixed exchange rates.
Huge borrowing, financed mostly by Nordic banks, funded consumer and property booms in the Baltics, leading to yawning current account deficits – Latvia’s was 14 per cent of gross domestic product in 2008. Their difficulties in correcting those imbalances are compounded by the fact their currencies are pegged to the euro – removing devaluation as an option. Instead, Latvia has been forced into a real economic adjustment, reducing wages and prices. After a €7.5bn bail-out led by the International Monetary Fund in December that retained the currency peg, Latvia adopted austerity measures including a 15 per cent cut in public sector wages.
