Latvian-style quick cuts praised as best formula

RIGA Tue Jun 5, 2012 10:57am EDT

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RIGA (Reuters) - Latvia overcame a crisis thanks to rapid and painful but necessary austerity measures, international policy makers said on Tuesday, holding the small Baltic state up as an example to troubled euro zone nations, especially Greece.

Swedish Finance Minister Anders Borg said Latvia had won the right to adopt the euro currency, extolling the small Baltic state's achievement in clinging to its currency peg through the deepest of the 2009 recessions in the European Union .

Latvia's output dropped by a fifth in 2009, the biggest recession in the European Union, after it kept the peg to the euro and forced through public sector pay cuts to reduce a yawning budget deficit.

"Latvia decided to bite the bullet. Instead of spreading the pain over a number of years, you decided to go hard, and to go quickly. The achievements were incredibly impressive," International Monetary Fund (IMF) Managing Director Christine Lagarde told a conference on lessons from the crisis in Latvia and the other Baltic states.

"You were pushing up this huge boulder but you were also doing that on a steep hill, and you managed to get to the top of it," added Lagarde, whose institution lined up with the European Union and Nordic states including Sweden to bail out Latvia in 2008 with a package worth 7.5 billion euros.

She and others at the conference stressed the idea that for austerity measures to work they have to have wholehearted official support and be carried out rapidly. She said society as a whole also understood the need for the cuts, but that Latvia also put in place elements of a social safety net.

AIM TO ADOPT EURO

Latvia has said it wants to adopt the euro in order to remove exchange rate worries, although government officials have said it might have to reconsider if the currency bloc cannot resolve the sovereign debt crisis gripping its weaker economies.

The European Central Bank last week said in a report on countries' readiness to join the euro zone that Latvia was not in shape to join the currency bloc.

Borg, whose country provided aid to Latvia under a 7.5 billion euro bailout led by the IMF and EU, said the country's austerity record showed it was suitable for euro entry.

"If the European Union is saying that Latvia cannot be a member of the euro area, who can then be? Who could have done more when it comes to budget restructuring than the government in Latvia? who could have done when it comes to restoring competitiveness?" Borg said.

The praise for Latvia comes as European leaders struggle to reconcile the need for fiscal consolidation and calls to ease the austerity drive.

Greek leftist leader Alexis Tsipras pledged on Friday to reverse unpopular wage and pension cuts, to nationalize banks and freeze privatizations if he wins this month's election.

New French President Francois Hollande and Italian Prime Minister Mario Monti have said European leaders should refocus on getting the region's economy moving.

Sweden, whose banks were heavily exposed to the Baltic states and which took part in the Latvian bailout, said Greece had been running big budget deficits several years in a row, even after crisis hit in late 2008.

"You cannot avoid the adjustment and you cannot postpone it and hope that it will bring the sunshine back to your economy," Borg told the conference.

Though Latvia kept its currency peg, the IMF initially wanted a devaluation. IMF chief economist Olivier Blanchard told the conference he had been one of those backing a devaluation, but now thought it had been right to avoid one.

"We have discussions with countries. When there is a very strong will to go one way and there is support, in this case of the rest of Europe and the Nordic countries, then we thought, 'Okay, let's give it a try'," he said.

(Reporting by Aleks Tapinsh and Ritsuko Ando; editing by Stephen Nisbet)

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