Latvia: Unprecedented economic collapse

IMF and EU blackmail means misery for workers

Latvia’s Gross National Product (GNP) fell by 18 % in the first quarter of 2009 compared to the same quarter the previous year. Industrial production declined by 22 % and retail sales by 25 % in the same period. These are catastrophic figures. “Latvia has become a capitalist inferno,” wrote the Swedish economic journal, Veckan Affärer, earlier this year. The Latvian economy is collapsing at a rate and to an extent that are unprecedented. For the first three months of this year, the annualised contraction of GNP was 30%. With the economy collapsing, the International Monetary Fund and European Union officials have demanded that the Latvian government cut its budget by 40% – a drastic measure that can only strangle a country already on the edge.

Until the government presents its cutback plans to keep the budget deficit under 7% of GNP, the IMF and EU are refusing to pay out the emergency loans already promised to Latvia. The IMF’s demand has been that the budget deficit should be set below 5%; the government maintains, however, that they negotiated it at 7%.(It is still unclear whether this is true or not). But even if the Latvian government slashes 40% off this year’s budget, they will not fulfil the IMF’s and EU’s requirements.

”It’s worse than we could have imagined in our wildest nightmares. Latvia has no chance of getting the budget deficit down to 7% of GNP. We think that it will be about 15%” says Lars Christensen, chief analyst at Danske Bank, in the Swedish Newspaper, Dagens Nyheter (13 May).

Last December, the IMF, EU and Swedish government promised to give Latvia a loan of almost €8 billion. The Swedish government promised €750 million – “all to save the Swedish banks; Swedbank, SEB and Nordea, who between them have lent around €50 billion in the Baltic States.” (Dagens Nyheter, 13 May)


The promise of a loan became the means of political blackmail aimed at protecting interests such as the large Swedish banks and to prevent the devaluation of the Latvian currency. The IMF as early as March withheld a payment of nearly €200 million and is now threatening to withhold the loan to be paid out in June.

“In order to receive the next payment of the EU’s support loan, Latvia must implement the promised budget and structural reforms,” said the EU commissioner, Joaquin Almunia, last week

The internal devaluation that the IMF and others wish to impose on Latvia is doomed to failure and if the government should attempt this, then it is signing its own death warrant. The cutbacks that have been made public so far speak for themselves. Half of the country’s teachers could lose their jobs, the number of hospitals would be cut by almost half, another decrease in civil servants’ salaries and reductions in child welfare benefits are included.

Meanwhile unemployment has risen to 14% and continues to climb. Half of the almost 200,000 unemployed have no unemployment benefit and those who have, receive a minimal amount for just nine months.

On the 2 May, the correspondent for Dagens Nyheter met a family of teachers in Latvia who had a combined income of around €3,000 per month before tax, which is relatively high in Latvia. But since last Autumn each of them has lost their extra job and their teacher’s salaries have been reduced twice, by nearly 40%. In just under six months, the family’s income has crashed to a mere €1,000 a month. To demand enormous cutbacks in such a climate is a recipe for social and human destruction.

Protest grows

Protests have mounted. Teachers, farmers and even the police have taken to the streets. An outcry from parents has warned against cutbacks in welfare to families.

Last week, at least 1,000 students took part in a demonstration in the capital, Riga, against education cutbacks for the second time in a month. This time the protestors laid a wreath at the door of the Department of Education to symbolise that the cutbacks are burying the country’s school system.

Latvia will probably be forced to devalue its currency, which will inevitably be followed by similar devaluations in the neighbouring two Baltic States, Estonia and Lithuania, where the economies have also collapsed.

That will in turn deepen the banking crisis in Western Europe, since fewer countries will be able to pay their debts in euros (over 80% percent of the Latvian loans are in euros). Furthermore, devaluation is no solution; it hits the working class in the form of higher prices and nor will it be any guarantee against further cutbacks.

No capitalist ‘crisis policies’ can remove Latvia from the iron grip that the banks, businesses and capitalist institutions have over the country. A struggle is needed to weaken this stranglehold and to fight for: an end to loan repayments, no more money to the bankers, write-off the debt, stop the IMF’s and EU’s blackmail, for a new workers’ government that stands on a socialist and democratic platform.

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May 2009