Latvia: Economy in Freefall

IMF and EU’s poisonous “medicine”

On 18 June, almost 15,000 people took part in a protest against the drastic package of cutbacks that had been forced through the Latvian parliament the previous day, according to the Latvian Congress of Trade Unions. In the capital Riga, 7,000 demonstrated against what Valdis Keis, president of the Latvian health workers’ trade union, Lvsada, described as the ”government’s holocaust of the public sector”.

The new cuts package, totalling 500 million lats (€800 million), the equivalent of 4 % of GNP, will have the following consequences from its implementation on 1 July.

  • The already low old-age pension is being cut by 10 %
  • No child benefit will be paid during the first year of a child’s life
  • Civil servants’ salaries are to be cut by a further 20 %

These cutbacks come after public servants’ salaries had already been slashed this year and with a background of mass unemployment, as well as a predicted 20 % drop in Gross National Product (GNP) this year. Soon, the local government municipalities will run out of money. But if that was not enough, state spending is going to be pared back by a further 500 million lats next year and again in 2011. It is a crippling blow that has already driven the unemployment rate up from 4% to 17 %, in one year, and which has seen many workers’ wages halved. Furthermore, the budget deficit will remain high as a result of the impact of the crisis and the reductions in income for the state.

The cutbacks made, thus far, and those planned in the health sector are so great – for example, the number of hospitals offering acute services and overnight beds will plunge from 59 to 16 over the next few years – that the conservative health minister, Ivars Eglitis, felt the need to resign last week.

“ From 1 July, I will only earn 130 lats (€200) a month and my mortgage alone costs 100 lats a month (€160). I work in three different schools. I work seven days a week. I cannot work any more. What’s happening is crazy. How am I going to survive?” a school teacher told Reuters on 17 July.

The cutbacks are being driven through on the orders of the International Monetary Fund (IMF), the EU and the Swedish government, who are “ thought to be most worried about [the Swedish banks] SEB and Swedbank’s wellbeing” (Veckans Affärer, 10 January). At a recent EU top meeting the gathered heads of government announced their support for the new Latvian cutback programme and for Latvia’scontinued internal devaluation.

That the EU should comment on and lend its support to a single member state’s policies and crisis remedies is unusual and highlights the EU leaders’ fear of the

Latvian crisis spreading to other countries. The internal devaluation that the IMF and EU are demanding of Latvia – with huge cuts and declining wages – gives a glimpse of the actions can be forced on the Eurozone governments when devaluation of the currency is no longer an option.

Latvia’s currency is tied to the Euro, with the goal that the country can be a Eurozone member within a few years. The defence of the fixed exchange rate policy with the Euro, at enormous cost, has further depleted currency reserves. The EU’s, and in particular the Swedish government’s request that Latvia continue to pursue these currency ties, at any cost, has brought the nation to the brink of bankruptcy.

Should Latvia nonetheless be forced into currency devaluation in the autumn, which is quite likely, the two other Baltic states, Estonia and Lithuania, will follow soon after and the entire Euro project could be shaken.

Even if Latvia were given new loans, it is economically, politically and socially impossible to continue on the current course. This is even being admitted by more capitalist commentators, who are comparing the Latvian situation to that of Argentina in the beginning of the decade.

In Argentina, the government tried to prop up the exchange rate ties to the dollar, but it led to revolutionary developments that brought down several successive governments and in the end, the Argentine currency was devalued in 2002. Neither a devaluation nor an internal devaluation can solve the crisis. In both cases, it is workers who end up paying.

Only a socialist mass movement and policies can solve the crisis. Trade unions together with student and pensioners’ organisations, must take today’s protests against the cutbacks as a springboard for a massive campaign to stop the cuts, the job massacre, the wage decreases, and the IMF’s and EU’s blackmail, and for a state takeover of all large industry and banking assets, cancelling of debts and a democratic, planned economy.

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July 2009