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A Decade’s Lessons Learned. But By Whom?

Some people find it easy to forget just how destructive the financial crisis of 2008-9 was, but not the Latvians.

by Martin Ehl 12 September 2018

Latvian Foreign Minister Edgars Rinkevics took a deep breath as we talked at the Economic Forum in Krynica, Poland last week. I had just asked him if the exodus of tens of thousands of Latvians – during the sharp economic contraction after the 2008-2009 financial crisis – is comparable to any event in the last hundred years of Latvian history.

 

“No, it is not,” he replied, even as he recounted the history of the nation from the end of the 19th century until today, and pointed out that as a result of both Soviet occupations – 1940-1941 and 1944-1991 – the country lost one-third of its population, the majority leaving either as refugees or deported to Siberia.

 

But now, 10 years since the Lehman Brothers bank collapse and the worst economic and financial crisis of our times, Latvia remains a prime example of the harsh and lingering impact of that catastrophe.

 

In December 2008, unemployment was at 7 percent. One year later, the figure was 22.8 percent. People started to look around and, thanks to the open EU labor market, left to the UK, Ireland, Norway, and elsewhere. Since 2000, the country has lost 18.2 percent of its population. Then, it was 2.38 million; now, it is about 1.9 million.

 

In the autumn of 2008, the crisis was made deeper in Latvia by the collapse of Parex, then the country's second-biggest bank. In 2009 alone, the economy contracted by 18 percent.

 

In the worst moments, which happened in 2009, the country could not ease the economic burden through devaluing its currency, the lat, because of the strategic goal of entering the eurozone. After its historical lessons, Latvia wanted to be part of the West at – almost – any price.

 

The lat was already tied to the euro, and the Latvian economy returned to growth through the tough austerity program of Prime Minister Valdis Dombrovskis, now a European commissioner. In macroeconomic terms, the country got back on track in 2010, and in 2012 it was even the fastest- growing EU economy.

 

But bitterness remains. People lost trust in state institutions, not only in Latvia, but throughout the Western liberal democracies, which were not able to offer anything but austerity without hope.

 

By contrast, meanwhile, populists started to offer solutions, and we have ended up in a deep crisis of liberal democracy. In Latvia – which, surprisingly, after all that, was able to form pro-Western, more-or-less responsible governments – there are elections on 6 October. A couple of new populist groups have emerged to compete with the most popular party, the pro-Kremlin Harmony, whose voter base is among the local ethnic Russian minority.

 

Other countries were not so resistant to the shocks after the crisis, and there newly established post-communist institutions – including an independent judiciary, free media, and traditional political parties – have been significantly weakened.

 

In Hungary, the 2008 crisis was only an extension of previous economic mismanagement, which created large public debts, while hundreds of thousands of Hungarians had taken out mortgages in Swiss francs or euros because of lower interest rates and monthly payments. During the global crisis, those loans became unpayable for many. That made the road to power easier for current Prime Minister Viktor Orban, who could persuade the electorate that the pre-crisis government – a coalition of socialists (the former Communist party) and liberals – was the evil that needed to be evicted.

 

People lost trust in public institutions which, in their eyes, had not defended them during those harsh times. While casting the previous government as failing to regulate the Swiss franc- and euro-denominated loans – and not forcing the banks to explain all the risks associated with them – Orban has since pushed for a solution to the loan problem at the expense of the banks.

 

In an interview last week at the Economic Forum in Krynica, Rinkevics highlighted a potential conflict of interest between government and the people. “For government, [the goal] is to get out of crisis as soon as possible; for people, [the goal] is to survive. And when it's over, there is still a social dynamic and social impact that are long lasting.”

 

He declared, “This harsh lesson of the financial crisis of 2008 should be remembered and should not be repeated.”

 

Rinkevics was speaking of his own country, but his words have a much more universal resonance. The danger is that those in Central Europe who have taken this lesson most seriously have been the populists and nationalists.

Latvian Foreign Minister Edgars Rinkevics took a deep breath as we talked at the Economic Forum in Krynica last week. I had just asked him if the exodus of tens of thousands of Latvians – during the sharp economic contraction after the 2008-2009 financial crisis – is comparable to any event in the last hundred years of Latvian history.

 

No, it is not,” he replied, even as he recounted the history of the nation from the end of the 19th century until today, and pointed out that as a result of both Soviet occupations – 1940-1941 and 1944-1991 – the country lost one-third of its population, the majority leaving either as refugees or deported to Siberia.

 

But now, 10 years since the Lehman Brothers bank collapse and the worst economic and financial crisis of our times, Latvia remains a prime example of the harsh and lingering impact of that catastrophe.

 

In December 2008, unemployment was at 7 percent. One year later, the figure was 22.8 percent. People started to look around and, thanks to the open EU labor market, left to the UK, Ireland, Norway, and elsewhere. Since 2000, the country has lost 18.2 percent of its population. Then, it was 2.38 million; now, it is about 1.9 million.

 

In the autumn of 2008, the crisis was made deeper in Latvia by the collapse of Parex, then the country's second-biggest bank. In 2009 alone, the economy contracted by 18 percent.

 

In the worst moments, which happened in 2009, the country could not ease the economic burden through devaluing its currency, the lat, because of the strategic goal of entering the eurozone. After its historical lessons, Latvia wanted to be part of the West at – almost – any price.

 

The lat was already tied to the euro, and the Latvian economy returned to growth through the tough austerity program of Prime Minister Valdis Dombrovskis, now a European commissioner. In macroeconomic terms, the country got back on track in 2010, and in 2012 it was even the fastest- growing EU economy.

 

But bitterness remains. People lost trust in state institutions, not only in Latvia, but throughout the Western liberal democracies, which were not able to offer anything but austerity without hope.

 

By contrast, meanwhile, populists started to offer solutions, and we have ended up in a deep crisis of liberal democracy. In Latviawhich, surprisingly, after all that, was able to form pro-Western, more-or-less responsible governments there are elections on 6 October. A couple of new populist groups have emerged to compete with the most popular party, the pro-Kremlin Harmony, whose voter base is among the local ethnic Russian minority.

 

Other countries were not so resistant to the shocks after the crisis, and there newly established post-communist institutions including an independent judiciary, free media, and traditional political parties have been significantly weakened.

 

In Hungary, the 2008 crisis was only an extension of previous economic mismanagement, which created large public debts, while hundreds of thousands of Hungarians had taken out mortgages in Swiss francs or euros because of lower interest rates and monthly payments. During the global crisis, those loans became unpayable for many. That made the road to power easier for current Prime Minister Viktor Orban, who could persuade the electorate that the pre-crisis government a coalition of socialists (the former Communist party) and liberals was the evil that needed to be evicted.

 

People lost trust in public institutions which, in their eyes, had not defended them during those harsh times. While casting the previous government as failing to regulate the Swiss franc- and euro-denominated loans – and not forcing the banks to explain all the risks associated with them – Orban has since pushed for a solution to the loan problem at the expense of the banks.

 

In an interview last week at the Economic Forum in Krynica, Rinkevics highlighted a potential conflict of interest between government and the people. “For government, [the goal] is to get out of crisis as soon as possible; for people, [the goal] is to survive. And when it's over, there is still a social dynamic and social impact that are long lasting.”

 

He declared, “This harsh lesson of the financial crisis of 2008 should be remembered and should not be repeated.”

 

Rinkevics was speaking of his own country, but his words have a much more universal resonance. The danger is that those in Central Europe who have taken this lesson most seriously have been the populists and nationalists.

Martin Ehl
is chief analyst at Hospodarske noviny (HN), a Czech business daily. The 28th Economic Forum of the Foundation Institute for Eastern Studies was held in Krynica, Poland, on 4-6 September 2018. Martin Ehl was reporting there for both HN and TOL.
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