lv

Riga 21 October 2010

On 20 October the Bank of Latvia held its annual economic conference entitled "Latvian Economy: from Crisis to Sustainable Growth ".
(Conference materials: speeches, presentations, and the video recording will be gradually posted on the Bank of Latvia's web page www.bank.lv.)

Kārlis Bauze, Head of Monetary Policy Department of the Bank of Latvia, who chaired the conference, emphasized the following conclusions in his synopsis: the crisis is behind Latvia, but important reforms have yet to be carried out, with the closest being the adoption of the 2011 state budget by cutting the deficit by 400 million lats through long-term solutions. Latvia will thereby reinforce confidence of its international partners and reach higher credit ratings, which will promote both foreign and local investment and serve as an impetus to the lending market. It is important, as Charles Goodhart, guest speaker from the London School of Economics, concluded, that Latvia is no longer at the eye of the global "storm" yet one must remember that the storm is not yet over.

In his introductory report, Ilmārs Rimšēvičs  emphasized that Latvia's success story of recovering from the crisis has yet to be written to the end and that the fate of its competitiveness will be decided by the adoption of the 2011 budget.  Two thirds of the way is already behind us, but there is at least one round of cutting budget expenditure ahead. If the 400 million lats consolidation of the budget is accomplished by raising taxes instead of cutting expenses by way of structural reforms, we would risk Latvia entering a longer term stagnation (not unlike Portugal in its day).
Fresh experience confirms that it is impossible to devaluate to the point of prosperity: during the crisis, countries with fixed exchange rates have fared neither better, nor worse as a study published by the IMF suggests, but future prospects clearly suggest that growth will be greater in just such countries." I hope that the conclusions from this conference will serve to dispel the illusion - I would say even dangerous illusion - that with a greater budget deficit Latvia could achieve greater growth and prosperity right now."

Professor Goodhart evaluated of world superpowers during the global economic crisis and sketched in the future prospects and risks. As one of the greatest challenges Professor Goodhart sees the lack of balance between the countries that work to reduce their budget deficits and debts and those that spend beyond their means in both the private and state sectors.  The most problematic for the development of other regions, from this perspective, is the ability of the United States to exit the course of expenditure and indebtedness, which, along with monetary expansion, creates inflationary pressures in the Asian countries and diminishes Europe's competitiveness.
Goodhart also praised Latvia's achievements in domestic adjustment and reduction of the budget deficit while preserving financial and political stability.
It is Latvia's ability to reach a political agreement, envied and at least partly emulated by other European countries that puts it in a better position than the other countries affected by the crisis (Greece, Spain, Portugal).The countries that are able to preserve political stability and maintain a good education system will manage to better overcome the crisis.
Latvia has been more successful in resuming economic growth than the other crisis-struck European countries: compared to Ireland which suffers from great problems in the local banking sector, Latvia is helped by the involvement of parent banks in the renewal of capital; compared to countries where the problem is excessive government expenditure, state budget reforms have been conducted more successfully.
Among the greatest future risks, Goodhart mentioned the expected deterioration of the demographic situation, which will affect even such a great power affecting the global economy as China, as well as dramatic changes in food production and global prices that will be affected by global warming and thus called for reinforcing the agricultural sector.