World Economic Crisis: Latvia’s Neoliberal Madness

by Prof Michael Hudson and Prof. Jeffrey Sommers
Global Research, February 15, 2010

While most of the world’s press focuses on Greece (and also Spain, Ireland and Portugal) as the most troubled euro-areas, the much more severe, more devastating and downright deadly crisis in the post-Soviet economies scheduled to join the Eurozone somehow has escaped widespread notice.

No doubt that is because their experience is an indictment of the destructive horror of neoliberalism – and of Europe’s policy of treating these countries not as promised, not as helping them develop along Western European lines, but as areas to be colonized as export markets and bank markets, stripped of their economic surpluses, their skilled labor and indeed, working-age labor generally, their real estate and buildings, and whatever was inherited from the Soviet era.

Latvia experienced one of the world’s worst economic crises. It is not only economic, but demographic. Its 25.5 percent plunge in GDP over just the past two years (almost 20 percent in this past year alone) is already the worst two-year drop on record. The IMF’s own rosy forecasts anticipate a further drop of 4 percent, which would place the Latvian economic collapse ahead of the United States’ Great Depression The bad news does not end there, however. The IMF projects that 2009 will see a total capital and financial account deficit of 4.2 billion euros, with an additional 1.5 billion euros, or 9 percent of GDP, leaving the country in 2010.

Moreover, the Latvian government is rapidly accumulating debt. From just 7.9 percent of GDP in 2007, Latvia’s debt is projected to be 74 percent of GDP for this year, supposedly stabilizing at 89 percent in 2014 in the best-case IMF scenario. This would place it far outside the debt Maastricht debt limits for adopting the euro. Yet achieving entry into the eurozone has been the chief pretext of the Latvia’s Central Bank for the painful austerity measures necessary to keep its currency peg. Maintaining that peg has burned through mountains of currency reserves that otherwise could have been invested in its domestic economy.

Yet nobody in the West is asking why Latvia has suffered this fate, so typical of the Baltics and other post-Soviet economies but only slightly more extreme. Nearly twenty years since these countries achieved freedom from the old USSR in 1991, the Soviet system hardly can be blamed as the sole cause of their problems. Not even corruption alone can be blamed – a legacy of the late Soviet period’s dissolution, to be sure, but magnified, intensified and even encouraged in the kleptocratic form that has provided such rich pickings for Western bankers and investors. It was Western neoliberals who financialized these economies with the “business friendly reformsâ€