- The Washington Times - Tuesday, February 17, 2009

REZEKNE, Latvia (AP) — For decades, the Rebir factory was the pride of the industrial town of Rezekne in eastern Latvia, with demand for its power drills and chain saws surviving the collapse of communism as it won over capitalist customers.

But the factory’s owners closed up shop late last year, a victim of high labor costs during the country’s now-collapsed boom. Some 1,000 people in the town of 36,000 lost their jobs, sending local unemployment to nearly 15 percent, and with the recession deepening hopes for new work are fading.

“The worst is yet to come,” said Diana Zirnina, a city administration official. “We can feel that people are angry.”

Rezekne’s boom-to-bust woes are mirrored across Latvia and its Baltic Sea neighbors, Estonia and Lithuania.

Not long ago, the three countries were nicknamed “Baltic Tigers” for their rapid growth and business friendly policies, and held up as models for other countries that regained control of their destinies after the 1991 collapse of the Soviet Union.

Now their economies are contracting sharply, pounded by the global financial crisis just as they were struggling to deal with a decline that set in after their economies overheated due to loose credit and government spending.

The frustration and anxiety amid the drab Soviet housing blocks of Rezekne, about 45 kilometers (30 miles) from the border with Russia to the east, are palpable.

“It’s upsetting. Latvia’s lost so much,” said Andris Laglers, a driver who jointed the ranks of the unemployed in October. “Somehow we have to survive this winter.”

Of the three countries, Latvia is worst off, suffering the sharpest recession in the 27-member European Union. The center-right government of Prime Minister Ivars Godmanis was forced in December to borrow euro7.5 billion ($9.6 billion) from the International Monetary Fund and Scandinavian countries a huge sum for an euro21 billion economy.

Statistics last week showed output shrank by 10.5 percent year-on-year in the fourth quarter meeting one yardstick for a depression, as opposed to a mere recession.

The reversal of fortune has stunned Latvians, who after joining the European Union in 2004 quickly became accustomed to the good life. Between 2000 and 2007 gross domestic product per capita increased over 90 percent to 6,500 lats (euro9,280, $12,500).

The government in Riga is cutting back sharply, reducing pay for many civil servants by 30 percent and mothballing projects such as a proposed new national library. Every day hundreds of jobs are lost in this country of 2.3 million, and by some forecasts unemployment, now at 8.3 percent, could reach 15 percent.

During the boom, banks lent eagerly, and Latvians borrowed profligately, so that over four years beginning in 2004 the loan to GDP ratio soared from 40 to 88 percent. Real estate prices climbed so far that many Latvians, alarmed they would miss out, rushed to the banks for home mortgage loans to buy homes and apartments, further inflating a property bubble. In 2006,growth reached a white-hot 12.2 percent.

Latvians are already looking back on those days ruefully as “the fat years.”

Economists gave abundant warnings that such fairy-tale growth was fraught with the risk of an equally precipitous fall. But government leaders pushed ahead so that Latvia would catch up to West European living standards as quickly as possible.

Outside Rezekne, the dour expression of Pyotr Karatseev reflects the general mood. Petting one of his 70 milk cows, Karatseev said he is afraid Latvia’s milk industry may soon cease to exist if the government doesn’t subside the wholesale purchase price, which is currently 0.15 lat (euro0.213, $0.273) per liter.

“There’s no choice. If this situation continues, we’ll have to slaughter the cattle and sell it for meat,” the farmer said.

In the rural district surrounding Rezekne, the job situation is worst. Unemployment in the heavily agricultural area, which has a population of 40,000, reached 20 percent on Feb. 9, according to the local employment bureau, the highest in Latvia. As farmers struggle with low food and milk prices, more jobs could evaporate.

Neighboring Estonia is suffering the same boom-and-bust cycle. On Friday its statistics agency announced that fourth quarter GDP had fallen 9.4 percent year-on-year. The Baltic’s wealthiest economy in terms of GDP per capita now has Europe’s second worst economy.

Lithuania’s economy is also headed for a contraction, though nearly all analysts agree that it won’t be as dramatic.

Anders Aslund, an economist at the Peterson Institute for International Economics in Washington, D.C., said there may be a silver lining in the Baltic gloom.

“It’s better to fall fast than to fall slowly for a long time. The sooner you hit the bottom, the sooner you can start recovering,” he said.

Such scholarly insight would be unlikely to placate people in Rezekne. The chairman of the city’s council, Juris Vjakse, said Rezekne is pinning its hopes on EU funds to weather the economic crisis. This year alone, he said, the city hopes to receive 5 million lats (euro7.1 million, $9.1 million) in EU money, which is nearly one-fourth the city’s total budget.

People in Rezekne have been toughened by earlier woes, including a 1999 downturn, for instance, when unemployment was 27 percent.

The only difference is that this time they’re part of the European community.

“People here are used to working a bit more, suffering a bit more, and enjoying life a bit more,” Vjakse said with a smile. “So we are very sure that we’ll survive this crisis.”

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