Latvia’s Great Depression

If you were in Latvia’s capital earlier this month, you would have noticed the snow, waist-deep in some places. For days, even big streets in Riga remained unplowed — impossible for anything other than an SUV to navigate. Still, parking inspectors walked through the city, coldly ticketing cars stuck at expired meters.

Riga has had mild, rainy winters of late, and the snow caught the city by surprise. But the real reason for the wintry mess is that the city government has slashed its road maintenance budget by a third. Although the world is watching Greece, Latvia’s economy is the most imperiled in Europe — the country is in the midst of a collapse as bad, by some metrics, as the United States’ during the Great Depression.

At the peak of the "Baltic Tiger" boom in 2006, Latvia was the fastest-growing economy in Europe, having transformed, seemingly overnight, from a sleepy former Soviet state to a flashy eastern Copenhagen. New condos and tech start-ups sprouted all over Riga; German luxury cars patrolled the streets. The skyline changed, with 10 of the country’s 20 tallest buildings constructed in the last six years. Personal income doubled to 60 percent of the European Union average, introducing many Latvians to full-fledged Western consumerism for the first time.

Then, in 2007, the Baltic real estate bubble burst. Property prices crashed as much as 60 percent. Gross domestic product fell nearly 20 percent. By 2008, the situation had gotten so bad that the International Monetary Fund (IMF) and European Union stepped in to stop the Latvian government from going belly up. They approved a 7.5 billion euro bailout, as the record-setting economic plunge dragged down tax revenue. The loans are being disbursed in separate chunks, each tied to fiscal targets.

Meanwhile, the economy might not yet have bottomed out. A full 26 percent of the population now lives in poverty, including 51 percent of senior citizens, according to the latest figures from Eurostat. Latvia’s unemployment rate is the highest in the European Union. In Riga, many of the new shops hawking High Street fashions and cell phones are empty, with retail sales down more than a third. Once bustling restaurants now look like Edward Hopper’s Nighthawks. The unemployed are living off a monthly stipend of 100 lats ($191), while prices have only deflated slightly from their boom-time peak.

As part of its deal with its international creditors, Latvia agreed to implement austerity measures to control the budget, rather than allowing deficit spending — like the United States, China, and Germany do. The government increased taxes and fees, fired public sector employees, and reduced the wages of those remaining by 20 percent. It closed or merged more than 100 schools and cut teachers’ salaries by a third. (Teachers released hundreds of black balloons with the message "Save the Education System" in front of the Cabinet of Ministers building, to no avail.) Now, it is shuttering hospitals. Public transportation ticket prices are up. Meanwhile, even those earning close to nothing must pay taxes. If you earn just $50 a month, you still pay $12 in taxes.

Luckily for the government, the population has remained largely stoic in the face of deprivation — for now, at least. There have been mass demonstrations, but only one turned riotous, 13 months ago. And no large-scale strikes have occurred. That might be because Latvians are, well, tough. Many remember life under the Soviets: the deportations to Siberia, the secret police, the widespread consumer-goods shortages. To those used to sustaining themselves with garden plots in their dreary Soviet-era apartment blocks, this crisis hardly compares with the horrors of the past.

Their stoicism may be rewarded. The wage cuts have made the country more competitive. The government’s willingness to enact the painful measures has earned Riga the praise of its creditors. On Feb. 12, Standard and Poor’s increased Latvia’s credit rating outlook from negative to stable. And its credit deal prevented the devaluation of the lats, which would have meant the end of Latvia’s dream of joining the eurozone, higher bills for the many citizens who took loans out in euros during the boom years, and more losses for banks.

Some economic fundamentals are starting to unfreeze. A modest recovery in Western Europe increased Latvia’s exports. The country’s trade balance, unsustainably weighed on the side of imports during the boom, is looking better. But this won’t help the average Latvian much.

"The trade balance improved, but only because consumption declined so much," Mark Allen, director of policy development at the IMF, said at a recent investment conference. "However, you can’t eat the trade balance; you can’t invest in the trade balance…. [It is] very, very painful."

Joblessness will likely grow. Wages are still decreasing, as is household consumption. "When the economy bottoms out, it will not mean the labor market will improve," Martins Kazaks, chief economist at Swedbank’s Latvian subsidiary, said in an interview. "Unfortunately, in terms of the average inhabitant… if they are unemployed, their ability to get a job this year is fairly slim."

Moreover, Riga is still facing a budget crisis. "For the budget for next year, we need [to cut] more than 400 million lats [$770 million]. I don’t see any substantial position where we can cut this entire amount. It indicates that we will see some further tax increases, probably," Dainis Gaspuitis, an economist at Sweden-based bank SEB’s Latvian subsidiary, said in an interview. "Some public employees will see further wage cuts. I don’t know how much. There will be further staff cuts in the public sector."

As bad as these measures are, though, economists say there isn’t much choice for Latvia’s recovery, lest the government jeopardize the international loans keeping it solvent. But the stoic Latvian public might be starting to turn. One government collapsed last year, and its replacement is hanging on by a thread this year, with the prime minister’s coalition partners strongly criticizing his policies. The opposition alliance Harmony Center is leading in the polls. If it triumphed in the fall elections, it would be Latvia’s first left-wing government since it regained independence from the Soviet Union.

"One can always blame the government of not doing what they should, but they are by and large on the right track," Kazaks said. "One of the risks of this year is parliamentary elections are taking [place]."

Persistent political corruption could also delay recovery by eating up money meant for investments. Millions of dollars have been funneled out of projects like the National Library, Riga’s Southern Bridge, and even children’s hospitals.

"The depth of economic crisis and the social-economic problems could be linked to the high level of corruption during these years of economic growth," Laura Mikelsone, director of the Delna anti-corruption organization, said in an interview. "Whether we say now we are already at the bottom or still falling, of course, we are hopefully in for some fundamental changes."