Analytics, Economics, EU – Baltic States, Financial Services, Latvia

In the European Voice article, Lucas reminds that Latvia's economic woes came in 2008 following an unsustainable boom fuelled by lax fiscal policy and reckless bank lending. At the same time, he also reminds about the International Monetary Fund's (IMF) recommendation to devalue to national currency, which the political elite in Latvia did not listen to. ''Whether that was right or wrong, it was not a case of the IMF forcing medicine on an unwilling patient,'' Lucas points out, informs LETA.

''Latvia needed money to pay its bills and could not borrow on the international markets. So it took loans from the IMF and European Union. To balance the budget (and to satisfy the lenders), it pushed through spending cuts (especially in public-sector salaries) and tax rises. Income per head declined by nearly a fifth. Unemployment rocketed. Emigration (already dire) continued,'' Lucas writes.

However, he points out that it would not be correct to say that everything has gone right.

''Hurried public-expenditure cuts are wasteful. Latvia still has a lot to do in reforming and improving public services and attracting back the hundreds of thousands who have voted with their feet and gone abroad. Estonia does some things better. The turmoil in the eurozone could still bring big new problems,'' Lucas goes on to say.

Lucas points out that comparing the situation in Latvia and Greece is not useful.

''Latvia enjoys low debt, social consensus, prosperous neighbors and a flexible economy. Greece does not,'' Lucas points out.

''But for those wanting to portray Latvia only as a dreadful warning of the evils of austerity, such a nuanced but broadly optimistic verdict is intolerable. Krugman wrote recently that Latvia makes many people “leave their critical faculties at the immigration desk”. Perhaps it is the other way round,'' Lucas asks at the end of the article.