The Latvian PM is charged with the salvation of his country’s economy, which is in an even worse condition than most others in Europe. He speaks to Monocle about his plans to turn things around.
Latvia may not be a big nation with its population of just 2.2 million, but lately it has been battling some very big problems. In 2009 the world economy caught a chill; in Latvia, however, it was more like a bad attack of pneumonia – GDP fell by a staggering 18 per cent and by January 2010 the unemployment rate was 20.4 per cent. Although the economy is set to return to growth this year, much of the damage was caused by the large pop emanating from the bursting property bubble.
Latvians have punished their old-guard politicians for the slaying of their Baltic tiger economy and placed their faith instead in 39-year-old Valdis Dombrovskis. The physicist and former MEP became prime minister in March 2009 and his centre-right coalition was returned to power again following elections last October. Dombrovskis has introduced a fierce austerity budget that has seen public servants’ salaries slashed (he knocked 20 per cent off his own pay cheque and, his advisers assure us, he is now the worst-paid PM in Europe) and borrowed €7.5bn from the EU and IMF to keep the nation afloat.
When Monocle meets him in London, where he is attending the UK Nordic-Baltic summit convened by British prime minister David Cameron, he tells us that he and his team came from Riga not by private jet, but on discount airline Ryanair. Dombrovskis may not be a colourful character, but he knows how to crack a joke, even if he becomes a little earnest-looking when a camera appears. But in many ways it’s his sober honesty that has won through with voters. Dr Allan Sikk, lecturer in Baltic politics at UCL, London, says: “For a country with such a pile of problems he’s been doing a rather good job. He’s well trusted by the international community.” It seems that fluffy charisma is another thing Latvians cannot afford at the moment.
Monocle: Before the crash, was Latvia naïve to put so much faith in rising property prices?
Valdis Dombrovskis: Well, of course it’s not the first and will not be the last economic bubble. When people asked if these property assets were over-valued it was said that you couldn’t apply 19th-century economic theories to the 21st century. And in Latvia after we joined the EU there was a feeling there would be eternal growth, that no crisis could affect us. People said the idea of an economic cycle wasn’t relevant any more.
M: Should your neighbours have done more to help you? After all it was Scandinavian banks that lent the money that inflated the bubble.
VD: Swedish banks were part of the problem and not part of the solution. They gave very easy credit during the good years and then stopped giving credit once the crisis started, and so they just worsened the economic balances. Both sides have to accept their responsibility. Latvians were borrowing irresponsibly but to borrow irresponsibly you need someone to lend irresponsibly – and that’s where Swedish banks come in. There was a lot that we could have done but action wasn’t taken. The regulations were too lax.
M: As you rebuild your economy, are there opportunities in your neighbour Russia that have been neglected while you have been focused on the EU?
VD: The difficult past problems we have had with Russia have left their mark but despite those problems business people were always active there. Russia is still one of our most important trading partners and now with improving relations we see that there is potential for more development. We are looking at the economic viability of new rail links to Russia.
M: Are efforts at improving relations also a way of protecting yourself? Russia invaded Georgia partly on the pretext that it was defending ethnic Russians there and over a quarter of your population is ethnic Russian.
VD: During the Georgia war there was lots of worry in the Baltic states. Of course it helps that we are part of Nato. At that time we stepped up our request to have a real plan for the Baltic states and we also prepared. As regards the Russian minority in Latvia, we certainly think it’s important to press ahead with our naturalisation and integration policy.
M: You offered a place in your coalition government to Harmony Centre, a party that represents the Russian community. Why didn’t that work out? Do you think Moscow intervened?
VD: We asked them to join the coalition based on some simple conditions. The one that they had problems with was recognising the occupation of Latvia [by Russia]. There are different speculations in Latvia about what happened. On the Friday they agreed to start discussions about joining the coalition and then on Monday morning they said, “Withdraw all preconditions and then we will speak about this.” But to comment publicly I would need solid facts.
M: Another problem you face is the loss of a generation which has moved across the EU in search of work and wealth. What are you doing about the diaspora?
VD: It is a cause for concern. We first had this problem in 2004 and 2005 soon after we joined the EU. Tens of thousands were leaving, mainly to the UK and Ireland as they were the first to open up their markets, but we saw this slow down and even reverse as the economy grew in Latvia – that is how this problem can be addressed. It’s about job opportunities. It does not mean we have to have the same wage levels, as long as there are good opportunities. We also try to keep contact with our diaspora. We are now proposing legislation to extend citizenship to Latvian children born abroad. Hopefully we can get people back when the situation improves.
M: Are there strengths in being a small nation?
VD: I don’t think size is what matters when dealing with economic problems. We still have territory that is larger than Switzerland but it’s more difficult to sustain infrastructure with just 2.2 million people across this area.
M: Are Latvians, like your cohesive Nordic neighbour Finland, good at pulling together at testing times? Does national pride see them through?
VD: To a certain extent, yes, in a critical moment Latvians can concentrate, whether that’s gaining our second independence, joining Nato or taking action to tackle the economic crisis. But look at the Finns – they have everything from the best education to the lowest corruption levels; this makes you proud of your country. In Latvia we still have many problems as regards corruption and public services, and so from this point of view there are many things to improve that will then allow Latvians to be more proud of their country.
M: What’s it like being the PM at just 39?
VD: Age is not the important thing here. Anyway, I will overcome this psychological barrier this year. Politicians are getting younger and this is a good development.
M: And how do you feel being the PM of a country facing so many problems?
VD: Mainly it’s a battle, but not so tense as it was in the first half of 2009 when we wondered, will we avoid bankruptcy? Will we be able to introduce austerity measures without causing social unrest? But now we are coming out of the crisis. It feels better.
The rise and rise Valdis Dombrovskis's CV
1971 Born in Riga
1995 Bachelor’s degree in economics from Riga Technical University
1995 Assistant in physics for one year at Mainz University, Germany
1996 Master's degree in physics from the University of Latvia
1998 Macroeconomics analyst at Bank of Latvia
2001 Appointed chief economist at Bank of Latvia
2002 Elected MP of the Saeima (the Latvian parliament)
2002 Appointed minister for finance until 2004
2004 Member of the European Parliament until 2009
2009 Prime minister