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They survived the global financial crisis that started back in 2008, but new international storm clouds are now appearing on the Baltic horizon.

When the three Baltic finance ministers recently visited Stockholm, they were cautiously optimistic about the coming year and happy with how they had so far coped with the financial crisis since 2008.

“But there are certainly concerns,” says Jürgen Ligi, Minister of Finance of Estonia. “We have just come out of the crisis and there seems to be a new one on the way.”

But let’s get back for a minute. From 1991 to 2006 (before the effects of the global financial crisis began to be felt) the Baltic States were experiencing strong growth. Their economies grew so rapidly that they became known as the ‘Baltic Tigers’.

Despite the development, their GDP per capita (in U.S. dollars) reached about 25 % of Sweden’s GDP per capita. Respectively the so-called purchasing power parity was estimated to be 40 %. The Baltic States were fast catching up with the Western European countries in living standards, but many of their goals remained unattained.

Then the global financial crisis hit the Baltic States deflating asset bubble and bursting credit bubbles one after the other. Before the crisis, the countries were enjoying growth rates in the range of 8-10 per cent per year. From then the Baltic States saw negative economic growth and their economy contracted in some quarters of 2009 by 20 percent.

Torbjörn Becker, the Director of the Stockholm Institute of Transition Economics (SITE) at the Stockholm School of Economics, estimates that Estonia, Latvia and Lithuania lost 30-40 percent of their GDP growth (total output of goods and services) during the crisis.

There were several reasons, including that foreign currency loans were cheaper than domestic currency, which led to a credit explosion. Swedish banks dominate the Baltic financial market. Borrowing drove up the house prices and fueled consumption.

At first sight, it looked like it would result in huge losses to the Swedish banks and the International Monetary Fund provided emergency loans, but at somewhat harsh conditions. There has been a strong tightening up, pensions and wages were reduced. Hospitals and schools were closed down.

In two years, unit labor costs dropped and made the countries more competitive.

“Now it looks pretty good. The increase of export will increase GDP,” says Torbjörn Becker.

Still, domestic consumption remained subdued and unemployment was stubbornly high. And average productivity can improve.

Although there are differences between the Baltic countries, similarities are most striking, at least when you look at them from outside and compare to how such Southern European countries as Portugal and Greece are trying to tackle their problems.

“Various countries coped differently with the crisis. Southern European countries have been affected differently than the Baltic States,” said Minister for Financial Markets Peter Norman during a seminar at the School.

Finance ministers of the three Baltic States also attended the seminar.

“In response to the crisis we have implemented austerity measures,” said Jürgen Ligi, Minister of Finance of Estonia.

Compared with the Southern European countries, reactions in the Baltic States were milder, even though there were demonstrations and heated debates.

“Is it a sign of political maturity? Maybe so, but also of pride,” says Jürgen Ligi.

“I think,” he says, “it is basically because we come from different backgrounds. We are accustomed to different living standards and react differently to crisis.

His Latvian counterpart Andris Vilks agrees with him.

“We know how much we have done and then it is difficult for us to understand that other countries are not willing or able to do what is required.”

He believes that Latvian politicians have managed to communicate with citizens and they have an understanding of these actions.

“The parties that took fiscal tightening measures won renewed confidence in the election,” said Andris Vilks.

He says, “The crisis provided the opportunity for us to do things that we would not have done otherwise.”

“Now we do not need any more support, thanks. We are at the point where we feel we can handle things on our own,” said Andris Vilks.

The Nordic countries and the IMF provided ‘emergency rescue packages’ and loans. Latvia did even more than what was required of them.

According to his Lithuanian counterpart Ingrida Šimonytė, the people understood what was required of them, which does not seem to be the case in the Southern European countries.

“Remember that we have only recently regained our independence. Our people remember the real crisis, when people were being sent to Siberia. In those days this would happen so. And so far we have managed to cope,” says Ingrida Šimonytė.

All the three ministers hope that the rescue package that was agreed upon at the Brussels summit would rescue Greece. But the situation is serious.

“Eurozone leaders have underestimated the problem. They have lost a year, but, hopefully, they can still solve the debt problem,” said Andris Vilks.

By Leif Petersen