Why Latvia Now Succeeds and Greece Remains Depressed

Latvia Greece

In this excellent article by Anders Aslund at Bloomberg.com, he tells the tale of 2 countries. Both of them are small and subject to the cold breezes of the bond markets. Both fell into depression quickly in 2008.

One, Latvia has emerged. The other, Greece, remains mired in economic and societal despair.

What did the 2 countries do differently?

Latvia got religion. When things darkened economically they decided that it was wisest to cut government expenditures. Civil servants were laid off. Many who remained took deep cuts in pay.

It was painful. There was unrest. But having let the reckoning come, Latvia was then able to see an economic spring. The economy adjusted and markets cleared. Where the economy was once frozen and lifeless, factories are now beginning to bloom.

Greece in contrast never even went to church.

It has chosen a different route, one of bailouts and continued profligacy. It refuses to cut government work forces. It refuses to cut services. Even though the country wallows in misery it continues down the same sorry path of spending and debt. A path it must be noted which is not entirely unlike the one the USA continues on. (Though, as the author points out in the article, the USA has the luxury of the world reserve currency.)

Interestingly despite Latvia’s success the IMF is still not entirely happy. Latvia might have been just a bit too harsh for the folks at the IMF. Even though Latvia is rising while much of Europe continues to sink, Cristine Lagarde and company worry that social services may have been cut too deeply. The IMF doesn’t want Latvia getting too much religion. That would be very un-European.

Click here for the article.