I think this trio of videos from Latvia really puts the whole Irish crisis in perspective. After a spectacular property bubble, Latvia imploded in 2008. I was calling the Baltics the next Argentina. Indeed, by early 2009 we eventually saw Argentine-style riots on the streets of Vilnius. Nouriel Roubini’s group talked about an "Asia-style crisis." Latvia got a bailout though and went into a deep depression, the deepest in the eurozone, due in part to its refusal to devalue and the harsh austerity measures the bailout mandated.
Now Latvia appears to be on the mend – and it has advice for the rest of Europe. Take a look. Valdis Dombrovskis, Latvian Prime Minister joined CNBC to discuss the county’s growth and its intent to join the eurozone by 2014. He sees a double standard at work for those inside the eurozone and those outside it.
(video embedded below)
At a minimum, the Latvian experience does highlight that a country can overcome a massive property bubble and austerity if the global economy is in recovery and it is willing to do the internal devaluation and suffer the depression this entails. The key difference is that the Latvian banks were foreign-owned and the sovereign was not on the hook for socializing its losses onto taxpayers. That could be the difference between liquidity and solvency.
"We must all hang together. or assuredly we shall all hang separately"
-Benjamin Franklin (hat tip MJJP)
The Latvians would agree with this point. Here’s more from the Latvians below. Valdis Zatlers, president of the Republic of Latvia, told CNBC Wednesday that "Europe has learned that solidarity is the only answer". Really? That’s not my takeaway from the bickering between the Austrians, the Finns and the Germans. Zalters does say that Latvia is willing to contribute to support Ireland despite its own problems. I reckon Latvia’s desire to join the eurozone makes it more of a team player. But the sentiment is probably still appreciated. My key takeaway from his comments was that the IMF’s acting quickly was important in stabilising the situation.
In this last video, Ilmars Rimsevics, Governor of the central bank of Latvia told CNBC, “as a small and open economy, devaluation would be tremendously detrimental”. So, Latvia is going to push ahead with austerity and internal devaluation. Rimsevics is very negative on pro-stimulus approaches to recovery, saying that money printing doesn’t create jobs as the money just sits in bank accounts. He believes fiscal discipline comes first.
Are the Latvians a model for Ireland?