Latvia has been one of the most successful former Soviet republics. It quickly turned to the market from communism and instituted a flat income tax. Riga ran small deficits and accumulated a debt low compared to that of the Eurozone. Latvia enjoyed an average economic growth rate of ten percent a year from 2005 to 2007, but suffered a crash in 2008.
The government adopted a serious austerity program. The total fiscal adjustment amounted to 15 percent over three years, but it worked. Latvia enjoyed real GDP growth of 5.5 percent in 2011. The economy now is one of the fastest growing in the EU. Per capita GDP is heading back to its peak of 2007.
Riga next plans to join the Euro. Reported the EU Observer: “Latvia’s parliament, the Saeima, passed legislation on fiscal discipline, which enshrines the balanced budget ‘golden rule’ to keep government debt and deficit levels below the 60 percent and 3 percent thresholds, as well as a bill detailing the timetable to switch from the Lat to the Euro.” Latvia hopes to become the 18th member of the Eurozone in January 2014.
Not everyone is certain that this is a wise decision. After all, Riga is taking the Eurozone’s requirements far more seriously than did most of the early members, such as Greece. Nevertheless, Latvia has followed policies which make its economic success likely irrespective of the fate of the Euro.