After their credit booms imploded in 2008, Latvia, Lithuania and Estonia embarked on austerity drives to reduce deficits and encourage growth. As they had tied their currencies to the euro, they were in the same situation as the euro periphery is now: they had to restore competitiveness by reducing wages and prices.
Baltic austerity packages went far beyond anything seen in southern Europe. Public-sector wages were cut by an average of 28%. This contributed to severe falls in GDP – in Latvia it dropped by 18% – but the region is now booming again.
However, it is hard to see the eurozone periphery following suit. As credit ratings agency Fitch points out, Baltic labour markets are highly flexible – cutting wages in southern Europe is far harder.
Perhaps the crucial factor is the population’s pain threshold. As Estonia’s president Toomas Ilves puts it: “After [Stalin’s] mass deportations, [austerity] didn’t seem that bad. I guess it’s harder if you’ve been living the good life of bunga bunga parties.”