Social Europe

  • EU Forward Project
  • YouTube
  • Podcast
  • Books
  • Newsletter
  • Membership

Baltic Austerity And Euro Area Contagion

Hilmar Þór Hilmarsson 13th November 2017

Hilmar Þór Hilmarsson

Hilmar Þór Hilmarsson

I lived in Riga, the Latvian capital, from 1999 to 2003 just before the Baltic States became European Union member states in 2004. EU membership was to be a ticket to prosperity, and along with NATO membership, provide security. There was optimism that the Baltics would catch up with the richer EU15 countries and perhaps in a not too distant future offer a quality of life to their people resembling that of the richer Nordic countries. And the Baltics had periods that certainly gave reasons for optimism: GDP growth rates were for example at or near ten percent throughout the 2005 to 2007 period and exceeded ten percent for at least one year in all three countries during this period. At this rate an economy more than doubles in size every decade. Unemployment fell sharply. There was talk about the Baltic Tigers.

In 2008/9 the global crisis hit the Baltics hard, especially Latvia. Decisions had to be made on how to respond. All the Baltics chose a fixed exchange rate policy. This was favored by the EU and in effect became a condition for euro adoption. This also meant that drastic austerity programs had to be implemented with cuts in jobs, salaries, social programs, education and health expenditure. In Latvia the IMF recommended a 15 percent devaluation of the domestic currency, the lat. This was to improve the countries’ competitiveness in the hope of faster economic recovery. Foreign banks, mainly Swedish, opposed out of concern over the impact of a devaluation on their portfolio. Many of their clients had borrowed in euros. The EU said no to devaluation, concerned over the potential regional spillover effects. As with Greece in 2010, the “rescue” of European banks was to prevent contagion in the Euro Area. The Scandinavian-Baltic interlinkages are still extensive and continue to be risky for the whole region.

Banks on welfare

GDP growth in the Baltics 2005 to 2007 was not driven by fiscal imbalances; Estonia was in surplus, and Latvia and Lithuania were near balance. In 2007 government debt as a percentage of GDP in 2007 was low in the Baltics even if compared to the robust continental Nordics, much lower than in the EU or the Euro Area, not to mention countries in southern Europe such as Greece. The growth in the Baltics from 2005 to 2007 was driven by excessive consumption and investment fueled by both foreign lenders/investors and domestic mistakes. From European Union accession in 2004 to 2009 private sector consolidated debt as percentage of GDP doubled in the Baltic States.

The European banks were not made responsible for their behavior. Austerity was implemented in the Baltics that had and still have among the highest proportions of people at risk of poverty and social exclusion one can find in the EU. Income inequality there is currently close to that of much poorer Bulgaria and Romania. In contrast countries at similar income levels such as the Czech Republic, Slovakia and Slovenia have managed to preserve an income equality similar to that of the Nordic welfare states. In the Baltics the foreign banks were put on welfare, not the most vulnerable members of the population.

Friedmanite experiment

I have sometimes wondered how the Baltics became so neoliberal, so extremely pro-free market. In a Brussels Journal interview in 2005 when the Baltics were booming Mart Laar, who became prime minister of Estonia from 1992 (shortly after independence) said:

It is very fortunate that I was not an economist […] I had read only one book on economics – Milton Friedman’s Free to Choose. I was so ignorant at the time that I thought that what Friedman wrote about the benefits of privatization, the flat tax and the abolition of all customs rights, was the result of economic reforms that had been put into practice in the West



Don't miss out on cutting-edge thinking.


Join tens of thousands of informed readers and stay ahead with our insightful content. It's free.



And Laar implemented this policy despite warnings. No other country in the world has implemented Friedmanite policies, not even his home country the USA (though maybe Pinochet’s Chile).

Over the last ten years I have lectured in universities in all the Baltics and talked to students. Many of them have chosen to leave for a better life in richer countries. Baltic people are not accustomed to opposing bad government policies, but choose the exit option. Outward emigration has been especially dramatic in Latvia and Lithuania. It is sad to see the rather slow post-crisis growth in the Baltics now close to the Euro Area average. At this rate they will not catch up with richer EU member states in a foreseeable future. And their young people are unlikely to return to lower salaries and weak welfare systems at home.

But the Baltics have opportunities to reform. They can become more competitive with more investment in education, science and research, and infrastructure. They can broaden taxation with progressive rates to scale up income tax and introduce higher bands on capital and land. They can gradually strengthen their welfare systems and better protect their healthcare systems. The Baltics are now modern states and they can and should provide viable opportunities for their young people.

Perhaps it’s time for them to consider the Nordic model to counteract the negative effects of the neoliberal policies? The EU should help them in this process. Not push them into a bad balance with austerity resulting in lower growth, high unemployment and the migration of their young to richer countries.

Hilmar Þór Hilmarsson

Hilmar Þór Hilmarsson is a professor of economics at the University of Akureyri, Iceland and has held numerous visiting scholarships, including at the University of Cambridge in 2017 and 2018. He served as a specialist and co-ordinator with the World Bank Group in Washington DC from 1990 to 1995, at the World Bank office in Riga from 1999 to 2003 and in its Hanoi office from 2003 to 2006.

Harvard University Press Advertisement

Social Europe Ad - Promoting European social policies

We need your help.

Support Social Europe for less than €5 per month and help keep our content freely accessible to everyone. Your support empowers independent publishing and drives the conversations that matter. Thank you very much!

Social Europe Membership

Click here to become a member

Most Recent Articles

u4219834670 4977 8362 2b68e3507e6c 2 Europe’s Far Right Copies Trump—And It’s WorkingPaul Mason
u421983467645c be21 1cdd415d1c01 2 America’s Systemic Chaos Strategy: Europe Must Forge a New PathMario Pianta
u42198346ae 124dc10ce3a0 0 When Ideology Trumps Economic InterestsDani Rodrik
u4219834676e9f0d82cb8a5 2 The Competitiveness Trap: Why Only Shared Prosperity Delivers Economic Strength—and Resilience Against the Far RightMarija Bartl

Most Popular Articles

u4219834647f 0894ae7ca865 3 Europe’s Businesses Face a Quiet Takeover as US Investors CapitaliseTej Gonza and Timothée Duverger
u4219834674930082ba55 0 Portugal’s Political Earthquake: Centrist Grip Crumbles, Right AscendsEmanuel Ferreira
u421983467e58be8 81f2 4326 80f2 d452cfe9031e 1 “The Universities Are the Enemy”: Why Europe Must Act NowBartosz Rydliński
u42198346761805ea24 2 Trump’s ‘Golden Era’ Fades as European Allies Face Harsh New RealityFerenc Németh and Peter Kreko

Eurofound advertisement

Ageing workforce
The evolution of working conditions in Europe

This episode of Eurofound Talks examines the evolving landscape of European working conditions, situated at the nexus of profound technological transformation.

Mary McCaughey speaks with Barbara Gerstenberger, Eurofound's Head of Unit for Working Life, who leverages insights from the 35-year history of the European Working Conditions Survey (EWCS).

Listen to the episode for free. Also make sure to subscribe to Eurofound Talks so you don’t miss an episode!

LISTEN NOW

Foundation for European Progressive Studies Advertisement

Spring Issues

The Summer issue of The Progressive Post is out!


It is time to take action and to forge a path towards a Socialist renewal.


European Socialists struggle to balance their responsibilities with the need to take bold positions and actions in the face of many major crises, while far-right political parties are increasingly gaining ground. Against this background, we offer European progressive forces food for thought on projecting themselves into the future.


Among this issue’s highlights, we discuss the transformative power of European Social Democracy, examine the far right’s efforts to redesign education systems to serve its own political agenda and highlight the growing threat of anti-gender movements to LGBTIQ+ rights – among other pressing topics.

READ THE MAGAZINE

Hans Böckler Stiftung Advertisement

WSI Report

WSI Minimum Wage Report 2025

The trend towards significant nominal minimum wage increases is continuing this year. In view of falling inflation rates, this translates into a sizeable increase in purchasing power for minimum wage earners in most European countries. The background to this is the implementation of the European Minimum Wage Directive, which has led to a reorientation of minimum wage policy in many countries and is thus boosting the dynamics of minimum wages. Most EU countries are now following the reference values for adequate minimum wages enshrined in the directive, which are 60% of the median wage or 50 % of the average wage. However, for Germany, a structural increase is still necessary to make progress towards an adequate minimum wage.

DOWNLOAD HERE

S&D Group in the European Parliament advertisement

Cohesion Policy

S&D Position Paper on Cohesion Policy post-2027: a resilient future for European territorial equity

Cohesion Policy aims to promote harmonious development and reduce economic, social and territorial disparities between the regions of the Union, and the backwardness of the least favoured regions with a particular focus on rural areas, areas affected by industrial transition and regions suffering from severe and permanent natural or demographic handicaps, such as outermost regions, regions with very low population density, islands, cross-border and mountain regions.

READ THE FULL POSITION PAPER HERE

ETUI advertisement

HESA Magazine Cover

With a comprehensive set of relevant indicators, presented in 85 graphs and tables, the 2025 Benchmarking Working Europe report examines how EU policies can reconcile economic, social and environmental goals to ensure long-term competitiveness. Considered a key reference, this publication is an invaluable resource for supporting European social dialogue.

DOWNLOAD HERE

Social Europe

Our Mission

Team

Article Submission

Advertisements

Membership

Social Europe Archives

Themes Archive

Politics Archive

Economy Archive

Society Archive

Ecology Archive

Miscellaneous

RSS Feed

Legal Disclosure

Privacy Policy

Copyright

Social Europe ISSN 2628-7641

BlueskyXWhatsApp