The Contradictions of Austerity

Jeffrey Sommers, Charles Woolfson

• Publisher: Routledge
• Year: 2014
• ISBN:
  9781317800149
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

The great financial crisis of 2008 and the ensuing global economic and financial turmoil have launched a search for "models" for recovery. The advocates of austerity present the Baltic States as countries that through discipline and sacrifice showed the way out of crisis. They have proposed the "Baltic model" of radical public sector cuts, wage reductions, labor market reforms and reductions in living standards for other troubled Eurozone countries to emulate. Yet, the reality of the Baltic "austerity fix" has been neither fully accepted by its peoples, nor is it fully a success. This book explains why and what are the real social and economic costs of the Baltic austerity model.

We examine each of the Baltic States by connecting national level studies within a European and global political economy, thereby delivering comparative breadth that supersedes localized understandings of the crisis. Thus for each of the three Baltic states, individual chapters explore the different economic and social dimensions of neo-liberal post-communism and the subsequent wider global economic and financial crisis in which these newly financialized economies have found themselves especially vulnerable. The "austerity model" adopted by Baltic national governments in response to the crisis reveals the profound vulnerabilities created by their unwavering commitment to liberalized economies, not least in terms of the significant "exit" of their labor forces and consequent population loss.

This book looks beyond basic financial metrics claiming a success story for the Baltic austerity model to reveal the damaging economic and social consequences, first of neo-liberal policies adopted during transition, and latterly of austerity measures based on "internal devaluation." Combined these policies undermine the possibility of longer-term recovery and even social and economic sustainability, not to mention prospects for successful integration in the now-faltering European project that has departed from its "Social Model" roots.

1 Austerity, internal devaluation, and social (in)security in Latvia

Jeffrey Sommers

Living at the extremes: Latvia in crisis

Latvia was at the epicenter of the global economic crisis when the financial shock hit Eastern Europe in September 2008. Latvia had one of the world’s biggest real estate bubbles in the run-up to the crisis, and the most severe collapse in GDP following it. In the wake of the crisis it also implemented one of the world’s most aggressive austerity policies in response. In doing so, it received global accolades from bankers, international financial institutions, policy-makers and opinion-framers that made Latvia a central focus of international attention. How was it that a former Soviet republic on the periphery of the European Union came to merit so much attention and debate?

Latvia is small, but has frequently had visibility disproportionate to its size. It is a country of two million persons perched on the east edge of the Baltic Sea, geographically across from, but in recent decades economically and socially worlds apart from, its affluent Scandinavian neighbors. Among the notable historical figures having called it home are Mark Rothko, Isaiah Berlin, Richard Wagner, and Sergei Eisenstein, among others. Latvia was a major actor in the 1905 revolutions for social justice against the German land barons under Czarist Russia. The area provided a greater share of votes for the Bolsheviks in 1917 elections than any other region in the Russian Empire. It also supplied Lenin’s guard (the ‘Latvian Riflemen’) who provided the chief defense forces for the early USSR before Leon Trotsky formed the Red Army. From these tumultuous times it then faded into obscurity under its first period of independence, declared from the Soviet Union in 1918 and lasting until its occupation in 1940 during World War II by the warring Soviets and Germans, of whom Latvia found itself unfortunately positioned dead center between. Latvia was forcibly incorporated into the USSR as a Soviet republic, and was again relegated to obscurity after the war. In the late 1980s Latvia briefly captured world attention again as it took a leading role, along with the two neighboring Baltic states, in massive popular protests against the Soviet rule. Thereafter, with the break-up of the Soviet Union, Latvia’s economic reconstruction was typified by a strongly neoliberal orientation, rivaling the early 1990s ‘shock therapy’ introduced in Russia.

The crisis and the myth of absent protest

Following the 2008 economic crisis, the world again turned its attention to Latvia. This time, and somewhat unexpectedly, interest was focused on the austerity regime implemented in response to the crisis, which was remarkable in its severity and previously thought impossible to sustain in a democracy. The appeal of Latvia’s austerity program was that it seem to provide a ‘model’ of austerity management for other countries in Europe similarly faced with the need for radical reconfiguration of social and economic metrics in the service of fiscal rectitude.

The plunge in GDP following the 2008 crisis for all the Baltics states was massive, and for Latvia in particular, it registered the world’s sharpest decline in output at 25 percent in a space of two years between the third quarter of 2008 to the end of 2010, with an 18 percent GDP contraction in 2009 alone. The depth and suddenness of the economic downturn was a severe systemic shock. However, greater pain was to follow with the 7.5 billion euro bail-out provided by the European Commission, the International Monetary Fund (IMF), World Bank, the European Bank for Reconstruction and Development, and Nordic/Scandinavian governments whose banking systems were directly threatened by the economic free-fall. The terms of that bailout, comprising an austerity package of unprecedented scope, provided specific policy prescriptions to implement. These included reducing the general government budget deficit to no more than the Maastricht criteria level of 3 percent of GDP by 2011; targeting a cash flow deficit of under 5 percent in 2009; reducing public sector remuneration in nominal terms in 2009 by at least 15 percent and a further 2 percent in 2010–11: reducing public sector employment at least 10 percent by the end of June 2009; reducing subsidies (excluding social support) and expenditures on goods and services; increasing value added tax rates from 18 to 21 percent, and increasing taxes on alcohol, tobacco, petrol and other items; and lastly, but by no means least, building up international reserves in order to bolster its currency then pegged to the euro (European Commission 2009).

Fiscal consolidation was, in the words of jubilant European Commission policy experts, “bold, frontloaded and expenditure-oriented” declaring that “well over half of it consisted of expenditure cuts, especially in health, education and public administration” (Guidis et al. 2012: 3). The bulk of the consolidation (about 10 percent of GDP) was designed and adopted in less than six months, in the second half of 2009 (Di Comite et al. 2012). In the words of the World Bank (2010: 1), “Latvia has achieved years’ worth of difficult structural reforms in the short space of just a few months.” In total, these measures amounted to an attack on living standards of such scale and intensity that if applied to the established democracies of the ‘Old’ Europe, were thought likely to provoke social disorder.

Latvia’s austerity was brutal, and many analysts around the world expressed surprise that it did not elicit mass protest. It was assumed that in a democracy any government imposing such measures, would be summarily removed at the ballot box. Thus, when not one, but two elections after austerity implementation kept the incumbent neoliberal administrations in power, it was assumed voters approved the austerity measures imposed and accepted them without protest.

This narrative of ‘absent protest’ was carefully cultivated by Latvia’s government and advisors, chiefly Anders Aslund. In their Petersen Institute published book, How Latvia Came Through the Financial Crisis, Latvia’s Prime Minister, Valdis Dombrovskis joined Aslund to construct the Latvian government’s official narrative, essentially that a mature electorate could voluntarily choose the pain of austerity (Aslund and Dombrovskis 2011: 119–20). The financial press joined this celebratory chorus of praise for Latvia’s ‘austerity vote.’ The broader narrative was that other crisis-stricken nations should emulate the ‘cool-headed stoicism’ that prevailed among the ‘Nordic’ Latvian electorate that ‘maturely’ displayed an ‘admirable’ Protestant restraint in contrast to the ‘noisy’ excesses of Greeks and Spaniards. Yet, the real story was not so simple. Latvians did massively protest against austerity. Protests first broke out among medical workers over cuts to employment and services. Some 2,000 employees at two separate locations began protests in the last week of September 2008 (Patore 2008).

However, the biggest mass protest surfaced on a cold January 13, 2009 night in the Dome public square of the capital city, Riga. Some 10,000 gathered in the largest protests since the pro-independence rallies against Soviet rule. Unlike demonstrations in other countries, a certain Baltic coolness of temperament was displayed. There were no ‘pots and pans’ as in Argentina. The crowds were large, serious, yet somber. While a small number of lumpen elements did cause trouble towards the end of the proceedings (overturning police cars, smashing windows and facing off against riot police), most participants were overwhelmingly civil, yet simultaneously angry if subdued. Two decades after their ‘singing revolution,’ which originally promised prosperous Scandinavian-style social democracy, their disappointment with the outcomes of harsh neoliberalism was palpable on the scene (Sommers 2009).

Next demonstrating were the farmers. Some 4,000 drove tractors on the streets, protesting simultaneously across several cities in January 2009 as thousands faced bankruptcy, with many thousands more looking at survival at best under conditions of poverty (Fīrere et al. 2009). The farmers were followed by the teachers protesting against pay cuts. The Latvian Teachers Trade Union (LIZDA) was the strongest and best organized, and with the Latvian Free Trade Union Confederation (LBAS), brought out more than 8,000 protestors. They marched in Riga and converged on the Cabinet of Ministers Building where they were met by top government policymakers, such as Einars Repse, the head of the Finance Ministry and one of the architects of Latvia’s neoliberal economy. He was duly heckled as he implored the teachers to understand the ‘fat years’ were over, to the dismay of onlooking educators for whom the ‘fat years’ had proved quite lean (Delfi 2009).

Demonstrations against health care cuts also continued. On August 29, 2009, the closing of the hospital in Bauska, a regional center in southern Latvia provoked a blockade of the bridge on one of the country’s main arterial highways to Lithuania in the south. Bauska’s district governor, Valdis Veips, declared:

Bauska has a hospital since 19th century, it has survived both world wars, regime changes, now it has modern equipment, free of debts and credits, and all of a sudden it cannot survive the crisis—I do not understand why it should be closed.

(Barkan 2009)

At Bauska bridge, Latvia’s national interior police forces were mobilized in full riot gear to confront what they discovered on arrival were wholly peaceful protestors (Barkan 2009). Protest placards proclaimed “nothing special, just genocide” as old ladies stood shoulder to shoulder alongside mothers with prams. “Nothing special” referenced a remark by the then Minister of Finance, Atis Slakteris, who infamously declared in a Bloomberg interview that the economic crisis was caused by “nothing special” (an ill-articulated phrase that invited ridicule amongst Latvia’s more articulate citizenry).

Protestors next appeared in November 2009 outside the building housing the prime minister where they established a tent city. Placards stated their simple demands to “eat and work and live.” For 236 days, including throughout the harsh Baltic winter, they remained outside in their encampment until July 2010 when they were forcibly removed (IR 2010). Demonstrations continued thereafter, but in smaller numbers ranging from several hundred to a few thousands (Liepajniekiem 2009). However, from the start of 2010 onwards, protests became more muted and dwindled in size, as mass resignation set-in. In particular, the Latvian Confederation of Free Trade Unions appeared to be largely powerless to prevent further assaults on living standards and became deeply entangled with government in ‘co-managing’ austerity in order to try to protect its members’ jobs (Kvaste et al. 2010; Radovics and Zālīte 2011). Indeed, union participation in the National Tripartite Council was an IMF condition for granting the original rescue loan. However, whatever concessionary arrangements were put in place by external lenders were effectively circumvented by the government, while any potential threats to social order in 2009, were largely dissipated a year later. Government officials no longer bothered to even come out and address demonstrators. The last protest of any size and enthusiasm was in November 2011 by 700 university students in Riga over continuing cuts to higher education (Witten 2011). In Latvia, as elsewhere in the Baltic states, it would be too simplistic to blame the already rather weak post-communist trade union movement, in both numerical and ideological terms, for the failure of popular protest to develop into a more coherent and concerted movement of opposition to austerity. Yet given the scale of the attack, it is singularly important to acknowledge that the absent dimension of labor-led mobilizations of the population was a primary factor in securing seeming popular acquiescence.

Cui bono? Myth creation and the narrative of public support for austerity

What happened at the ballot box is equally as ‘perplexing’ as what occurred (or did not occur) on the streets and at workplaces. Marco Buti, Director General of the Directorate General for Economic and Financial Affairs at the European Commission (ECFIN), the key agency in constructing Latvia’s bail-out, was moved to reflect that ‘support for austerity’ among voters was indeed politically feasible if correctly communicated:

Such policies can be understood by the population–—if they are well explained—and can eventually reward a government that has the courage to deal with these challenges. Valdis Dombrovskis, the Prime Minister of Latvia, is the prime example to show that if one is able to implement the programme and the adjustments successfully, if one does so with determination and also manages to explain it well, then one can definitely defy the so called Juncker Curse (i.e., the popular saying by which: “we all know what we have to do, but then we don’t know how to be re-elected afterwards”).

(Buti 2012: 10)

First, it should be said that while Latvia has had significant corruption issues, its people enjoy many freedoms, if not to the same extent as in more ‘mature’ democracies. There is little in the way of arbitrary state harassment, although there is some: at least one university economist with the temerity to suggest that the euro to which the lat was pegged, might be something of a liability, found himself a guest of the state security services (BBC 2008). A subsequent parliamentary enactment prohibits public comment likely to provoke ‘financial instability.’ Again, while there is formal press freedom, most major newspaper outlets are oligarch-owned, and therefore disproportionately shape national discourse. Unlike say Belarus or China, however, there is great liberty to present ideas in electronic forums.

Given then that there is some fair measure of free speech in Latvia, how did the proponents of austerity, the austerians, remain in power even after the punishing results of their policies? Latvia has no shortage of banks or political parties, with over 20 of each in a country with a population of roughly 2 million. Money and advertising, however, play a significant role in whether a party can generate enough critical mass to become electoral contenders. This presents both opportunities and significant barriers to participation in political life. Latvia’s oligarchs, who control much of the press, have had their hands directly on the machinery controlling government since independence, and until 2010 were often dominant in government office. Their role as officeholders was curtailed with their dramatic political losses occurring the next year in 2011. That election was notable for throwing most oligarchs out of government. Yet Latvia’s austerians have remained in power. Again, this raises the question: how?

Latvia’s elections following austerity in 2010 and 2011 were fought entirely on different grounds than economic policy, which only played a secondary role in elections which might otherwise have rendered a verdict on austerity. Instead, more salient factors in its elections were political chauvinism, ethnicity, and outright nationalism. The post-financial-collapse election saw the rising prominence of a party representing Latvia’s sizable ethnic Russian population of roughly 30 percent. However, around half that percentage remained officially non-citizens wi...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Table of Contents
• List of illustrations
• List of abbreviations
• Notes on contributors
• Preface
• Foreword
• Introduction: the Baltics and the political economy of austerity
• 1. Austerity, internal devaluation, and social (in)security in Latvia
• 2. Stockholm syndrome in the Baltics: Latvia’s neoliberal war against labor and industry
• 3. Failed and asymmetrical integration: the Baltics and the non-financial origins of the European crisis
• 4. The Lithuanian labor market under the impact of crisis: the formation of the new austeriat
• 5. Balancing between exit, voice, and loyalty: labor market policy choices in Estonia
• Conclusion: the neoliberal Baltic austerity model against Social Europe
• Postscript: a very Baltic tragedy – the collapse of the Maxima supermarket in Riga, Latvia
• Index