Latvian recession "worst in history" says economist

Jan 13, 2010, 13:26 GMT

Riga - Latvia is set to experience the biggest economic recession ever known, a leading economist predicted Wednesday.

'In two years Latvia has lost 25.5 per cent of GDP and the only example worse than that is the Great Depression in the US,' said Mark Weisbrot, co-director of the Washington-based Center for Economic and Policy Research speaking at the University of Latvia.

But with the economy continuing to contract the total loss will ultimately top 30 per cent and represent 'the worst two years in the recorded history of the world in terms of output,' Weisbrot said.

The Baltic state is the recipient of a 7.5-billion-euro (11- billion-dollar) loan package from the International Monetary Fund (IMF), European Union and regional governments as it fights to rebalance an economy that contracted by 18 per cent in 2009.

As part of the deal, the government of Prime Minister Valdis Dombrovskis has introduced a range of swingeing spending cuts on education, healthcare, social security and wages.

Pensions were also slashed but the measure was ruled as unconstitutional in court and the money withheld from pensioners must now be repaid.

Speaking to an audience including Dombrovskis, Weisbrot accused the IMF of 'double standards' in the way it treated the countries of Western and Eastern Europe.

'The IMF programme calls for a fiscal tightening for 2010 of 6.5 per cent of GDP ... This is not done in the US or Western Europe or Japan and the IMF is not recommending these kinds of policies for any of the rich countries,' Weisbrot said. The IMF's increased budget in the wake of the global economic crisis was effectively being used to shield western banks from potentially huge losses in Eastern Europe, he added.

The economist also touched on the sensitive subject of devaluation of the Latvian currency, the lat.

'Every year you have deflation you are increasing the debt burden for the country. Devaluation would get rid of that problem,' Weisbrot said.

'I think at this particular time devaluation will have less of a negative impact than it would have had a year or two ago,' he added.

Earlier, Dombrovskis defended the IMF deal calling it a 'real programme' that he believed would lead to Latvia joining the eurozone on January 1, 2014.