Discipline, deep pockets cure for euro zone woes: Latvian PM

RIGA — European Union states must balance their budgets and ready huge emergency funds if they are to restore the faith of the financial markets, according to Latvian Prime Minister Valdis Dombrovskis

(pictured).

"To restore the confidence of the financial markets and their willingness to finance the euro zone and other EU countries that (balanced budgets) is what is needed," the Baltic state's centre-right premier said in an interview.

Dombrovskis, who has attracted both praise and criticism for policy of ultra-austerity, compared the current strife in the euro zone to the recovery of his own country from the world's deepest recession following a 7.5 bil- lion euro ($9.5 billion) bailout from the International Monetary Fund and EU in 2008.

Latvia's loan programme, which ushered in three years of biting spending cuts and tax hikes, wound up on December 22 with a little over half of the available funds used.

In Dombrovskis' view, a similar mix of fiscal discipline and large-scale rescue funding standing in reserve is the only way for the euro zone to recover.

"By design it was right that our programme was huge. It convinced markets that it was big enough to deal with the crisis in Latvia. We used only 4.4 billion euros in the end," said the 40-year-old leader, who in March will rack up three years in charge of three

coalition

govern- different ments.

"It was good that the programme was committed to have substantial amounts of money and that's exactly what's needed in dealing with the euro zone crisis," he underlined.

"Once markets are convinced, maybe you don't need all the money, but if markets are not convinced that it's enough to deal with the euro zone problems, this crisis will continue," he stated.

Dombrovskis' former Soviet republic of 2.2 million joined the EU in 2004 and posted double-digit growth stoked by rising wages and easy credit.

But its overheated economy went off the rails as the global crisis struck, shrinking by a quarter over 2008 and 2009 combined, and unem- ployment shot over 20 per cent. While joblessness is still around 14 per cent, Latvia bounced back into growth in 2011. Dombrovskis said it hit at least 4 per cent compared with 2010.

Even a forecast slowdown to 2.5 per cent this year would leave Latvia near the top of the EU growth table.

With the EU'S Maastricht Treaty financial rules long having been breached by most members of the 27-nation bloc — until the crisis upped the pressure to get their houses in order — Dombrovskis agreed that countries should be subject to penalties if they fall out of line.

"A commitment to fiscal discipline is important," he said, underlining that that applied to all EU members.

"If we want to join the euro zone it's in our best interests to join a financially stable zone that follows its own rules where countries comply with the Maastricht criteria, which unfortunately they are not doing."

But Dombrovskis warned against penalties that would hit smaller countries — including many in Eastern Europe — harder than the more developed economies of Western Europe.

"It can be a financial penalty but it is important that it is a penalty that can be applied equally to any EU country. So for example it could not be — as some have suggested — taking away structural funds because not all EU countries are cohesion countries," he insisted. Such funds aim to boost economic development in poorer countries in a drive to strengthen the EU'S single market.

Largely unfazed by the euro zone crisis, Latvia still insists it would be better off inside the currency bloc alongside its main trade partners.

Riga remains committed to adopting the euro in 2014, Dombrovskis said, although he admitted that domestic debate on the wisdom of such a move is increasing.

"We still stick with that target but of course should some really negative scenarios become a reality we may reconsider," he said.

"Currently we aim to meet the Maastricht criteria this year to join as of January 1, 2014." — AFP