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Drinking Their Own Kool-Aid

Latvia’s "Mandate" for Neoliberal Austerity

by JEFFREY SOMMERS

This week much of the financial press united in a celebratory chorus of praise for the neoliberal victory and “vote for austerity” in Latvia’s recent election. We are told Greeks, Spaniards, French and Irish  should all emulate the “cool-headed stoicism” that prevailed among the Nordic Latvian electorate.  What earned Latvians this acclaim?  They voted for the bankers and international financial institutions, of course!

This is all music in the ears of the Swedish bankers who flooded Latvia with credit to inflate real estate prices, along with the EU and IMF that finally bought into the internal devaluation strategy. However, unfortunately, for those trafficking in this characterization of the election, it is simply wrong.  Remember, aside from those voices of sobriety such as Martin Wolf and Michael Hudson, the financial press are the people that told you in the 1990s that the Dow would reach 36,000, and in this decade that real estate prices could only go up.  

The last two years (if not much of the past century) have been very hard on Latvia. With the  hammer that fell in 2008, Latvia suffered the world’s worst economic contraction. The economic numbers approached the Great Depression in their severity. We are told that Latvians were supposed to vigorously protest under pressure of economic pain that no West European country would tolerate. Yet, “admirably,” they did not.

Indeed, what commentators only two years out from the crisis have forgotten, or have chosen to ignore, is that there were indeed major Latvian demonstrations  against the neoliberal policy of austerity.  On January 13, 2009 the first major protest erupted.  I should know. I was there.  Over 10,000 Latvians (ethic Latvians and ethnic Russians alike) assembled on that cold winter night in the old city of Riga to protest the miss-governance of Latvia.  Moreover, while the protest was overwhelmingly civil, it was hardly stoic in character by night’s end.  The protest ended with broken shop windows, overturned cars, and looting.  

This protest was followed by an emergency European Commission and IMF loan for 7.5 million euros given to meet Latvia’s debt obligation to bankers and foreign debt holders.  The loan came with explicit instructions from the European Commission head, Joaquin Almunia, warning Latvians against use of funds for developing export capacity (in other words, their economy).  Latvia was now saddled not only with huge private debt service payments from its bank-led, credit-feeding frenzy in real estate, but now also massive public debt to boot.  

Protests continued over the next few months with participants in the many thousands. Farmers blocked traffic with their demonstrations.  Teacher protests erupted against savage cuts to education.  In the Latvian city of Bauska the national police were called in to break up protests over a hospital closure, given that many of the local police supported the protestors!

What happened after? Simply put, one of history’s great emigrations, in terms of percentages of national populations departing.  The numbers are hard to secure, given people rarely report emigrating within the EU Schengen zone.  We do know, however, Latvians left in huge numbers.  Highly-trained professionals and laborers alike departed for menial jobs in the United Kingdom and other destinations.  Families have been traumatized and destroyed, with  children  effectively orphaned while their parents have sought any work possible abroad. Indeed, some reports place the exodus as high as 5 per cent of the entire population per year since the crisis began.  In short, Latvia’s disillusioned simply left the country, with most of those remaining being too fearful, or overworked, if they still had a job, to mount much of a fight.

The Latvian government responded to the crisis by ignoring IMF counsel to devalue their currency.  Their currency had been overvalued from the start, at independence,  reflecting the prejudices of their neoliberal economic advisors from Georgetown University. Moreover, the quick currency adjustment that would have brought fast economic relief was rejected in favor of a policy in continued pursuit of fast-track euro zone entry.  The IMF quickly gave up on devaluation when it recognized the Latvian central bank was intransigent on the issue, being as much psychologically as analytically anchored to it.  Later, however, as other crises emerged in Greece and other locations in the euro zone, it quickly became apparent that the Latvian strategy was a “godsend.”  Here was a way out of the crisis.  Since nations in the euro zone can’t devalue, they can only opt out of the euro zone, thus risking the euro’s viability and nonpayment of the huge private and public loans extended to them from rich countries.   Or, they can introduce an “internal devaluation,” pace the Latvians, which shrinks wages as a replacement for depreciating a currency.

The light-bulb moment must have struck the European Commission, IMF, and bankers that the Latvian internal devaluation and austerity strategy held the key to continued profits, loan repayment, and viability of the entire euro project.  All that was required was a protracted period of great pain and significant declines in standard of living for the majority.  What was previously seen as stubbornness on the part of Latvia’s central bank was now recast as a virtue.  Here was salvation!

The Latvian Election

Returning to the financial press acclaim for the Latvian public’s “support” of austerity, anyone familiar with Latvian politics sees nothing of the sort.  Latvia’s election came down to chauvinism, ethnicity, and nationalism, pure and simple.  The election season had a promising start.  The sometimes center-left Harmony Center party put forward a post-Keynesian plan to rebuild the economy and unite ethnic Latvians and ethnic Russians together in the face of parties run by criminal oligarchs (some have spent time in jail), and the disastrous neoliberal policies leading to the exodus of its people in search of work.

Harmony Center was seen as the predicted winner in advance of the election, but instead came in at a close second place.  What happened? First, progressive elements within that party feared nationalism from ethnic Latvians that might prevent their electoral victory. Thus, instead of moving closer to progressive ethnic Latvians, they held on to every ethnic Russian voter they could, as there was a chauvinist Soviet apologist party waiting in the wings to take these voters.  So, Harmony Center played a semantic game whereby they refused to concede that there had been a Soviet “occupation.”  Thus, they retained ethnic Russian chauvinists, but lost any chance of getting significant ethnic Latvian support.

Moreover, as the election neared the Harmony Center strategy of “Finlandization” (cooperation with Russia on economic matters, while eschewing political conflict) was cast by the media hostile to ethnic Russians as a Kremlin- orchestrated attempt to bring Latvia to heel.  Just days before the election accounts of Kremlin payments to launch Harmony Center appeared in the press.  Nobody can confirm the veracity of this presently. It may, or may not, be true.  Yet, announced just prior to the election there was no time to investigate. Fears were fueled and ethic Latvians left to wonder whether these charges were true.

In the end, what was to be a Harmony Center “coalition” of progressive ethnic Russians and ethnic Latvians, proved illusory.  Only 7 per cent of their voters were ethnic Latvians.  They had hoped for several multiples of this figure. Thus, instead of victory the Harmony Center party that opposed neoliberal austerity came a close second in the election.  In a nutshell, significant part of Latvians who left the country did not vote.  Ethnic Latvians who remained to vote feared ethnic Russian and Kremlin influence.   Yet, even with this, Harmony Center performed strongly at the polls. The big loser in the election, however, was the chief oligarch party (For a Good Latvia) that contained many of Latvia’s past corrupt political leaders.  Latvians of all stripes rightly punished them at the polls.

Who then did the ethnic Latvians vote for? The big unexpected victor was the Green and Farmers Party, who came in a close third with far more votes than anticipated. A strange coalition, as many Latvian parties are, the Greens and Farmers are a curious mix of anti-Semitic conspiratorial “anti-Sorosistas,” nationalists, and a powerful outlier oligarch, Aivars Lembergs.  Lembergs, for all his faults, is the only oligarch who has practiced anything like a noblesse oblige.  While Latvia’s other politicians have been content to see their brethren sink into Dickensian poverty, Lembergs threw a few bones to his constituency, while busily seizing port infrastructure.  In the end, though, Latvia’s neoliberals marginally got the largest plurality, with, some 30 per cent of the vote, but these numbers are hardly a mandate.  Indeed, many expressed the view that  they only voted for them to keep the ethnic Russians out of power.  Ironically, now that they have achieved this the international community is pushing hard for a coalition between Latvia’s neoliberal coalition and the ethnic Russian Harmony Center party.  The goal is to get a buy-in by the ethnic Russians for the neoliberal program.

Today, Latvia’s economy is barely hobbling along.  The long decline has finally stopped.  Yet, prospects are far from bright.  Non-financial investment (the real economy) is down by 42 per cent from last year.  Meanwhile, there are some growth areas, such as deforestation to feed Swedish appetite for Latvian timber, but this is hardly the kind of high-value added activity from which they could build a robust economy.  There are prospects for growth in agriculture and industry, but the state does little to facilitate it.  Wages have plummeted — 30 per cent in the public sector. Young people, the country’s future, are emigrating and not bearing children, while the country’s social infrastructure is collapsing.  As austerity  slashes its destructive path through the economy tax revenues are insufficient to meet budget obligations of the state in its current emaciated form. In short, this “success” that the financial press, foreign bankers, and international financial institutions are celebrating is for a country that remains one of the poorest in the European Union and if demographic trends continue will no longer be viable as a nation.

In the end the neoliberal economy has produced a victory and recovery that reminds one of Tacitus’ characterization, put in the mouth of the Celtic chieftain Calgacus before the battle of Mons Graupius, of Rome’s victories, where “they make a desert and they call it peace.”  Whatever this election was about it certainly was not a mandate for neoliberal austerity and it certainly is not victory for Latvia.

JEFFREY SOMMERS is an associate professor at the University of Wisconsin-Milwaukee in the Department of Africology and visiting professor at the Stockholm School of Economics in Riga. He can be reached at: jeffrey.sommers@fulbrightmail.org