A gradual cutting of the deficit – from the 7.7% of GDP in 2010 to about 4% in 2011 and reaching 2.5% of GDP in 2012 (well under the 3% of the Maastricht criterion) – will mean a gradual return to expenditure that is based on national revenue and the kind of reforms in state administration and the education and health systems for expenditure to be highly expedient and sustainable in the coming years as well. The 2012 budget is decisive both in terms of Latvia being able to weather the possible turbulence in the global economy and its euro turnover, since it will have an impact on the evaluation of the meeting of the criteria.

Last year in the economy was a period of successful stabilization. Along with her Baltic neighbours Estonia and Lithuania, both of whom have also cut the excessive budget expenditure, Latvia is among the leaders of economic growth in the European Union.

Albeit the economy is undergoing successful recovery and the macroeconomic situation is stabilizing, thus making Latvia stronger and more resilient vis-à-vis turbulence elsewhere in the world, we predict a weakening of the economic activity in the shorter term as ominous clouds gather over Europe.

In January, the Bank of Latvia updated its GDP prediction for 2012 by reducing it to 1.3% (from 2.5%): the external demand has shrunk and the consequently slower export growth can be reflected in a weakened household-population consumption, which in turn would mean smaller investment as enterprises face greater uncertainty in the world's markets.

The budget deficit has been contained within the last three years: if we compare it to 2009 when the excess of expenditure over revenue was close to reaching 20% of gross domestic product; we are moving in the right direction, yet we still have deficit: this year again we will spend about a million lats a day of money we have not earned! Latvia has also yet to regain the full confidence of the financial markets. An unpleasant surprise at the end of last year was the downgrading of the future prospects of Latvia's credit rating in sharp contrast to the expected upgrade.

That goes to prove yet again that the stability we have achieved is still fragile and our success story is far from complete: it has to be reinforced by moving toward a balanced budget and reducing our dependence on the financial markets.

If the EU recession scenario comes to pass, it is unlikely that the Latvian economy would manage to avoid a repeated drop in its GDP. True, the shrinking of the economy would take place on a much smaller scale than in 2008.-2009. Macroeconomic lack of balance is no longer the case and the economy is much more impervious to external shocks. Therefore it is crucially important to follow the development of the economic situation and prepare for any worst case scenario. Despite the good news in the fourth quarter of last year regarding GDP and positive trade and industry data in the first months of this year, uncertainty in the external markets still remains high. At the beginning of March, the European Central Bank downgraded the GDP predictions of the euro area countries: instead of the small growth (0.3%) predicted earlier forecasting a drop of 0.1% in 2012. In the fourth quarter of last year, the euro area GDP dropped 0.3% quarter-on-quarter.

It can be said that the positive indicators of the last quarter of 2011 and the first couple of months of this year are like little rays of hope that provide a modicum of balance to the overall bad news. Even though the possibility of making further expenditure cuts in the 2012 budget becomes smaller day by day, risks for further growth remain quite high. These are mostly determined by various external factors, which Latvia cannot influence directly. What we can and should do, however, is to be prepared and not to spend what we have not earned. If over the course of the year tax revenues will continue to exceed what has been predicted, the Government should keep this reserve for balancing the macroeconomic risks and for unforeseen expenses (similar to last year's unexpected expenses related to AirBaltic).

As a small and open country that is dependent on export and investments, Latvia should care for its credibility much more than the large nations. Confidence in a country is created when it is obvious that it is moving away from expenditure exceeding revenue and from great indebtedness. If we act in a trustworthy way, we are faced with lower interest rates on our external debt and thus have more money to meet the needs of the nation. If the Latvian state is trustworthy, our businesses find it easier to collaborate with foreign partners and to make deals with them. If Latvia is trustworthy, lending can resume here and there will be no large additions to the interest rates that make production almost impossible.

In 2012 Latvia has to start repaying the international loan that has been used since 2009 for a gradual renewal of the sustainability of the budget and economy; the largest payments will have to be made in 2014 and 2015: about 870 and 930 million lats respectively. In order to be able to do so, for a while Latvia will have to borrow on the international financial markets at market rates. The euro ensures much lower interest rates, so in the absence of the euro, Latvia would overpay its external debt for about a billion lats within the next ten years! It is a simple correlation: if we cut the deficit, 1) we will have to borrow less and 2) we will be able to do so at lower interest rates, thus climbing out from under the burden of debt and cutting the expenditure for repaying the debt. There is no other way: Latvia is not and does not want to be among those underdeveloped countries whose international debts are written off.