Latvia was one of the great bubble countries of the world, until last year, borrowing vast sums (denominated in euros) from west European banks. The country is now seeing its economy contract at close to a 20 percent annual rate. The European Union is offering to help (how else can those loans to the banks be repaid?), but is demanding that Latvia move quickly to reduce its deficit. The NYT reported that the EU relaxed the conditions on its loans, allowing Latvia to reach a deficit target of 3.0 percent of GDP in 2012 rather than 2011. The NYT notes a controversy over whether this pace of deficit reduction is still too fast. It would have been helpful to point out that Latvia's debt to GDP ratio was just 17 percent at the end of 2008. This would suggest that it could easily support considerably higher debt levels. Given that Latvia's economy is likely to still be far from full employment in 2012, and that it can anticipate relatively rapid growth over the longer-term as it catches up to west European living standards, the 3.0 percent deficit target for 2012 could still be overly restrictive.
--Dean Baker