Government gives in to EU pressure for further austerity
Latvia’s economy shrank by over 18 per cent in the third quarter of this year – the most drastic fall in Europe. Unemployment has surged to practically 20 per cent – also the worst in Europe. The crisis is even more drastic, considering that the country’s growth was the strongest in Europe in 2006. When the Latvian government hesitated to make further huge cuts in the state budget, the Swedish government, on behalf of Swedish banks and the European Union, increased the pressure for further austerity. The International Monetary Fund gave backing to this pressure.
The Latvian government gave in, and presented a budget for 2010 which included cuts of 500 million lats (€730 million). The same amount was cut from the budget for 2009. Combined, these cuts of 1 billion lats are roughly 25 per cent of the total budget. The budget income is estimated to be 3.8 billion lats and spending 4.3 billion.
Man with trumpet on a street protest with about 20 students in Riga, 13 November.
The Wall Street Journal reported: "’This budget reveals the limited opportunities of the state,’ Latvian Prime Minister Valdis Dombrovskis said in a speech to the Saeima … The government was forced by the International Monetary Fund, the European Union and other lenders to cut 500 million lats from its 2009 budget as part of a €7.5 billion aid package to prop up its economy. The lenders, including Sweden whose banks have a big presence in Latvia, have been unbending in stipulating that Latvia also implements all of next year’s agreed-upon cuts and keeps its 2010 budget deficit below 8.5% of gross domestic product."
"I welcome this", Sweden’s prime minister Fredrik Reinfeldt commented on the new cuts, while the EU commissioner in charge, Joaquín Almunia, said it was "very good news".
According to Bloomberg News, this “good news” included a pledge to "reduce maternity benefits, cut salaries and pensions and raise some taxes to satisfy EU and IMF demands". Prime Minister Dombrovskis informed local councils, public communications and the Riga airport about the reduced support to. State authorities are already in crisis. Half of all tax offices have been closed down and the rest are working four days a week. Half the country’s hospitals have also closed.
All these measures are meant to ensure access to the €7.5 billion package negotiated with the EU, the IMF and Sweden in the Spring. At that stage, however, the estimated drop in the economy was only half of what it is now.
The latest budget also includes a new property tax; but taxes on ordinary people will not solve the crisis. Previously, Value Added Tax – a tax on consumption – was increased. However, with wages in the public sector cut by 40 percent, consumption has fallen like a stone, leading to a drastic fall in total VAT income.
The enormous cuts have worsened the crisis. In the third quarter, when GDP fell 18.4 per cent, preliminary figures show a drop in industrial production of 17 per cent while retail sales fell a massive 31 per cent.
The role of Swedish banks
In Latvia, many have understood that the EU and Sweden are not acting to save the country’s economy, but to rescue the Swedish banks.
As blogger Didzis Melbikis writes: "It is impossible to cut the budget by 500 million lats, as Sweden insists, without destroying Latvia. That, Anders Borg and Fredrik Reinfeldt [Swedish finance and prime minister] know all too well. But they continue pressurising its already so weak neighbouring country – for the sake of the Swedish big banks. The same banks that created the Latvian credit bubble… the Swedish banks which earned immense amounts (25 billion SEK) by lending unbelievable amounts (100 billion SEK) right and left over a few years, now refuse to understand how deep our crisis is."
The bank profits, 25 billion SEK (Swedish krona), are double the size of the two rounds of Latvian budget cuts. Yet, the banks complained heavily when the Latvian government floated the idea that housing debts should be reduced to the value of the house.
Didzis Melbikis also describes the mood: "Teachers and doctors have such lousy wages that, as a hospital manager once told me, ’there are not swearwords in our dictionary sufficient to describe it’. Public service television and radio are close to doom. This week, viewers of a TV show voted on what the government should do about the demands from Sweden and the IMF. The majority thought Latvia should flatly refuse and pull out of the agreement".
The government, the EU and the banks now believe they have escaped from devaluing the lat, which is pegged to the euro. But the pressure for such a move is not over, for both economic and political reasons.
The Swedish banks, in particular Swedbank and SEB, in their reports for the third quarter claimed the situation in Latvia had improved. But statistics show an increase in bad loans (90 days without payment of interest or mortgage), from 13.8 percent in August to 14.5 percent in September.
The state has gone from having no debts since the time of its independence in 1991 to being totally dependent on the global finance market. Only three other governments have to pay more for their loans – the Ukraine, Venezuela and Argentina.
The pressure on the lat was clear the other week, when the central bank had to buy its own currency for €17.5 million to keep it stable. The currency market is speculating that new protests will either force the government to resign or to retreat on some of the cuts. Devaluation has for a long period been the traditional way of governments making their own goods and industries like tourism cheaper, reducing income for everyone in one sweep.
Why the weak Latvian bourgeoisie and the European Union want to avoid devaluation is partly prestige, but mainly the risk of a wave of devaluations in other countries in Eastern Europe, plus the risk for the banks, mainly in Sweden. Devaluation would be close to a default with Latvia not able to pay the loans. The Swedish state is de facto the insurer of last resort of the banks, meaning increased costs also for workers in Sweden.
In Latvia, politicians and banks want the old and sick, workers and unemployed, pupils and teachers, to pay – whether there is a devaluation or not. It is still very likely there will be a devaluation, because of the continuing crisis. Workers and those protesting against the cuts, however, should support neither the ‘peg’ of the currency (to the euro) nor devaluation.
Nils Kaza (CWI Sweden) interviewed Janis Krastins, vice president of the teachers’ union in Latvia. "Wage cuts for teachers are around 40 percent", Krastins explained.
Crisis in three countries
Sweden and its banks are more often called colonial powers in the three Baltic countries, Latvia, Estonia and Lithuania. The Lithuanian GDP fell 14.3 percent in the third quarter. Estonia is one of the few countries where the GDP prognosis has been revised downwards recently, with a predicted GDP drop of 14.2 per cent this year. Estonia has made as big budget cuts as Latvia. A Swedish website reports a big increase in the number of people "looking for food in garbage bins outside food shops". Despite an official minimum wage on €700 a month, the unemployed are now offered jobs for €280. All three countries are most likely to see falling GDP also next year.
Since in January, mass protests in Riga had forced the previous government to resign, politicians and police indicated already in September their nervousness about demonstrations planned for Friday, 13 November. The security police started an investigation into the call for a mass demonstration, apparently to scare people off. The people behind the call criticiesded the police action, but in fact protests were postponed or very limited. In the morning, a small protest by some students got a lot of publicity. Police in uniform and plain clothes, alongside military police, dominated the scene outside parliament in the evening.
A protest movement in Latvia needs to be independent from all existing political parties and the state. It must fight for all those affected by the crisis and unite Latvian and Russian-speaking workers, pensioners and youth, as the protests so far have done. The aim should be to form a genuine workers’ party, with a programme formulated out of the struggle and protests. It should be submitted for maximum discussion in meetings and conferences and in workplaces and housing areas. Such a movement should also seek to link up with protests in the other Baltic States and in Sweden. An anti-capitalist, democratic, socialist programme is needed which puts the responsibility for the crisis onto the banks, the IMF and the European Union, as well as onto the politicians and ‘new rich’ of Latvia itself.