Not so fast, Keynes

5 October 2010 By Martin Hutchinson

After draconian cuts designed to head off devaluation of the lat, GDP fell 18 pct in 2009. Now Latvia s economy is turning up and the currency s parity with the euro seems assured. The government responsible even got reelected. Keynesian stimulus isn t the only answer to a bust.

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The government of Valdis Dombrovskis won the Latvian election on Oct. 2, with the threeparty coalition winning an improved 55.7 percent of the vote.

Latvia's GDP is expected to shrink 2.3 percent in 2010 and grow 3 percent in 2011, according to the Economist panel, after a decline of 18 percent in 2009. Consumer prices are expected to decline 1 percent in 2010, while the current account surplus is forecast to be 7.7 percent of GDP and the budget deficit to be 8 percent of GDP. Industrial production in July was 18 percent higher than a year earlier.

The International Monetary Fund has extended to Latvia a standby loan of 1.5 billion special drawing rights ($2.4 billion), of which around twothirds is currently drawn. The EU has provided 3.1 billion euros, of which 2.9 billion euros is currently drawn. The Nordic countries have lent Latvia 1.9 billion euros.

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