Running for the euro

"The economic and financial situation in these countries has stabilized quicker than expected," explains London based Moody's analyst Kenneth Orchard. Among the member states of the European Union that were worst hit by the recession, the Baltic States saw their economies contract by 14 to 18 per cent in 2009. However, results for this year will likely halt the decline in the GDP of Lithuania and Latvia, while Estonia expects to register a return to modest economic growth.

Analysts were particularly impressed by the rapidity with which Estonia succeeded in cleaning up its debt situation. Notwithstanding a falloff in tax revenues, the government effectively managed to cut the public spending deficit to 1.7% of GDP, and it now aims to generate a budget surplus by 2012 — a truly remarkable performance in comparison with its European neighbours.

How did the Baltic states succeed?

"Estonia is almost certain to enter the eurozone on 1st January 2011," says Hugo Brady, a specialist working for the Centre for European Reform (CER) think tank in London. The European Commission and the European Central Bank are expected to announce a decision on Estonian membership of the euro by 1st May. At the same time, specialists believe that Lithuania and Latvia's plan to join the the eurozone in 2014 is wholly feasible. Notwithstanding a public spending deficit that will reach 8% of GDP this year, Lithuania remains in better financial health than Greece, Portugal and even the United Kingdom.

How did the Baltic states succeed in managing the crisis that has ravaged the countries of southern Europe, which have been consistently marked down by the Moody's rating system? "Greece, Spain and Portugal have been accumulating public debt over several years, whereas we entered the recession with a much lower level of borrowing (20% of GDP). That allowed us much greater freedom for manœuvre and we were able to borrow more during the crisis," explains Vytautas Zakauskas, a specialist at the Lithuanian Free Market Institute in Vilnius. Zakauskas also highlights the relative willingness of the Lithuanian population to accept the necessary sacrifices implied by the economic downturn.

Riga maintains stable exchange rate with euro

"Public and private companies considerably reduced salaries which enabled us to boost the competitiveness of our exports. No one protested in the streets: the unions are relatively weak, and people still remember much more difficult times before the collapse of the Soviet Union. On the other hand, in Southern Europe, people believe they have a right to their privileges," explains Zakauskas.

Within the framework of an deal with the IMF for a loan of 7.5 billion euros, the Latvian government agreed to adopt a particularly stringent package of austerity measures, which even included cuts in pension payments. Although this initiative was greeted with scepticism by many commentators, it enabled the government in Riga to maintain a stable exchange rate with the euro. In contrast, the Greek government did everything it could to avoid requesting assistance from the IMF, because it believed IMF involvement would be conditional on an excessively strict austerity package.