Latvia a model of economic malaise

BAUSKA, Latvia — More than 400 protesters blocked two bridges last week to oppose the closing of the only hospital in Bauska, a rural city (population 50,000) about an hour away from the capital Riga.

“Bauska’s hospital has been here since the 19th century. It lived through both wars, all regime changes … I don’t understand, why we have to close it,” Bauska’s City Council chairman, Valdis Veips, was quoted  as saying by the Latvian newspaper Diena.

It is just one of many painful stories arising from Latvia’s recession — the second deepest recession in the 27-nation European Union, after neighboring Lithuania.

As the global financial storm sweeps across Eastern and Central Europe, Latvia has been especially hard hit: Its GDP dropped by 19 percent in the second quarter of 2009. The International Monetary Fund (IMF) projected in April that Latvia would experience the worst economic downturn in the world this year. Latvia’s government secured an emergency loan package of nearly $10 billion from the IMF and EU.

The emergency aid is contingent on deep cutbacks in government spending. While most governments across the world are responding to the financial crisis by increasing government deficits to stimulate local industries, Riga is being forced to make cuts across the board to obtain the bailout.

It passed spending cuts worth about $1 billion in June and has committed to cut the same amount every year until 2012. Government officials waited until the day after the municipal elections in early June to announce 10 percent cuts in pensions and 50 percent cuts in teachers’ salaries.

The wait was triggered by fear of a public reaction like that on Jan. 13, when more than 10,000 people took to the streets to protest spending cuts. What began as a peaceful protest that day turned into the worst riots Latvia had seen since the collapse of the Soviet Union in 1991.

Since January, Latvia has seen four more massive protests opposing the deep cuts. Many Latvians feel that the government cuts are arbitrary, without any clear vision or planning, and are directed disproportionately at the masses.

“It just doesn’t look to me like the top is making the same sacrifices, while they squeeze the bottom,” the director of a local homeless shelter, Dagnija Komarovska, said in May.

The Latvian state controller, Inguna Sudraba, came out with a preliminary report last week stating that the large state bureaucracies that swelled in the boom years, overall, hadn’t made the required 20 percent cuts to their salaries.

Many Latvians are also upset that the government officials are not explaining their tactics or communicating which cuts have been requested by the IMF and EU and which decisions are being made by the local officials.

Bauska city officials and residents asked the health minister, Baiba Rozentale, to address the protesters and explain how the ministry had arrived at recent decisions.

As a special police unit arrived to break up the protest, Prime Minister Valdis Dombrovskis and President Valdis Zatlers, didn’t throw any lifelines to Rozentale — instead they laid the blame directly on her. And while Dombrovskis characterized the protests as unproductive, Bauskas’ local paper reported that the residents received a fax from the government stating continued — though slightly reduced — financial support for the hospital.

This kind of finger-pointing, lack of open communication with ordinary citizens and last-minute changes to complex decisions seem to add even more anxiety and chaos to an already dire situation.

The current economic meltdown follows Latvia’s real estate bubble — the biggest in Europe. It began in 2004 when, after nine years of negotiations, Latvia formally joined the EU, along with its Baltic neighbors Lithuania and Estonia. As global stock markets overheated and competition for investment opportunities intensified, Scandinavian banks showered Latvia with more cheap credit than ever before. Its double-digit growth topped all of Europe within a year.

This economic explosion was taking place in a nation where, 15 years earlier under Soviet rule, no one had experience with banking, investments or credit, and no one owned property. By 2005, Latvians could buy everything they’d ever dreamed of on credit — from a tea kettle to a Bentley to a luxury apartment.

The Latvian government didn’t do much to slow the pace of change. If anything, it stepped on the gas. Riga’s new vice-mayor, millionaire Ainars Slesers — who served in the Latvian parliament during the boom years — coined a phrase that seems to capture the government’s attitude during that time: Gazi Grida or “pedal to the metal.” This despite the warning signs of inflation tripling between 2006 and 2008 and of Latvians having the highest negative savings rates in the EU. Now, to use sporting parlance, Latvia’s economy resembles a race car that smashed into a concrete wall.

Some outside economists — Kenneth Rogoff, the former chief economist of the IMF, among them — are suggesting currency devaluation as a less painful alternative to the deep budget cuts.

Such tactics — used in Argentina and Iceland — shortens recessions and reduces social costs, they argue. But the Latvian government is holding firm on pegging the lat to euro. 

Commentators in the EU fear that in the event Latvia devalues, neighboring countries will be pressured to devalue as well, spreading the economic crisis across the continent and hurting the balance sheets of West European banks especially that have loaned heavily in the region.

Meanwhile, with continued government budget cuts as the only solution on the horizon, the pain and suffering continues.

Unemployment in Latvia  tripled this year, and homeowners are facing the threat of foreclosures, although banks have resisted evictions.

The economic crisis of recent months, along with the frequent protests and the resignations of two ministers, was a boon for the left-leaning coalition party called the Harmony Centre in the June municipal elections. For the first time since Latvia regained its independence, the Harmony Centre will hold the largest share of seats in the Riga’s City Council, tripling the number of seats it previously held.

And for the first time since 1991, an ethnic Russian and a social democrat, Nil Ushakov, will take office as mayor of Latvia’s capital, which is home to 700,000 people, almost a third of Latvia’s population.

The People’s Party, considered the most corrupt by Latvians, and Fatherland and Freedom, the most extreme on issues of nationalism, suffered the biggest losses in the elections.

These changes may signal a new era in Latvia — one in which ethnic divisions become less relevant, where nationalism is not a campaign mantra, where capitalism is tempered with regulation and where there is an increased role for government in stimulating local business and reducing red tape and corruption.

Kristine Drevina, a 34-year-old co-founder of a new Latvian left-opposition party called Jaunlatvija (New Latvia), wants to reorient Latvia away from the blind dominance of free markets and focus on the ethnic tensions. “In the current situation, we have definitive proof that you can’t let the markets run completely free," she said. "The state has to be involved to assure fair rules for everyone, and provide safety nets for the most vulnerable.”

Together with Ushakov, they represent a new generation of politicians in Latvia — young, progressive and with no immediate ties to the oligarchs. “New Latvia will be a test for our democracy. Can we rise to power without a long [money] tail behind us?” Drevina said.

The party was founded only two months before the municipal elections, and made minimal gains, but is determined to boost its visibility and membership before the parliamentary elections in November of 2010.

(Kristina Rizga traveled to Latvia on a grant from the Pulitzer Center on Crisis Reporting.)