European Central Bank Executive Board member Joerg Asmussen said the Baltic states have reaped the benefits of implementing fiscal reforms rapidly.
“When adjustment is inevitable, it is better to take the medicine right away than to let the fever rise for months,” Asmussen said at an event in Riga today. “By acting with speed and determination, the Latvian government was able to capture the sense of urgency prevailing among the population and mobilize it to support adjustment. This way, most of the required painful budgetary decisions could be passed before the so-called ‘adjustment fatigue’ kicked in.”
Latvia, Lithuania and Estonia all reduced spending and raised taxes to keep deficits under control, with Latvia slashing expenditure equivalent to about 9 percent of gross domestic product from its 2009 budget. The euro area’s sovereign debt crisis is worsening as political support for budget cuts in Greece dwindles and Spain struggles to recapitalize its banks.
Asmussen said the level of public support for budget cuts is “an important factor that explains the different trajectories of the Baltics and certain southern European countries.”
“The ECB has long argued that the potential trade-off between fiscal discipline and growth can be mitigated if consolidation is accompanied by growth-enhancing structural reforms,” Asmussen said. “The case of the Baltics confirms this.”
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