Presentation by Gabriele Giudice (European Commission, DG ECFIN) at Country workshop: "EU Balance-of-Payments assistance for Latvia: Foundations of Success" organized by the European Commission, Directorate General for Economic and Financial Affairs, and the Bank of Latvia. Brussels, March 1, 2012

1. EU Balance-of-Payments assistance
for Latvia: Foundations of Success
Lessons from and for Latvia
Gabriele Giudice
DG ECFIN, 1 March 2012

2. What lessons from Latvia ?
Time is of the essence: a rapid response is crucial when the economy
and the budget are getting out of hands, but time is needed for surgical
and meaningful action. Have a large enough financial package, horizon
long enough to avoid across-the-board cuts.
Size is of the essence: when trends are wrong, everybody, including
markets, must be impressed by the action. Going big, can change
mindsets. Much of what has been done has been large from the
beginning, wage adjustment, employment, key reforms (cut of1/3 of
schools, of hospitals, 4/5 of municipalities, etc.)
Trust is of the essence: at the end, what drives the economy is the
behaviour of agents. This is strongly affected by credibility of policies,
but even more by the trust in the counterparts

3. Good judgement is of the essence: the adjustment of Latvia defied
much of conventional economics. There must be courage to
challenging some of its assertions, when new ground is being
broken. Every economy is different at any given time. While there are
similarities, one should not overlook key differences. Measurement
issues are hurting economics and economic policy...
Prudence is of the essence: in devising an adjustment, one should not
bank on uncertain benefits. Markets and observers have asymmetric
reactions. Better results lead at best to a progressive increasing
credibility. But any credibility can be quickly lost because of a small
negative underperformance. Keep a distance from the hedge…
Optimism is of the essence: the glass can be half empty or half full.
To fill it up, there must be willingness and awareness that action can
make things happen. Pessimism is the biggest enemy of change.

4. Convergence of interests is of the essence: One has to remain
realistic, knowing that the chances of success may not be high. But
as long as there is at least one small chance that the programme can
work, it is important to focus all minds on getting what is necessary
done.
Communication is of the essence: without proper communication, to
spell out misinterpretation, or to persuade actors, it is difficult to
achieve a turnaround of this sort. Telling the ‘hard-truth’, explaining
what needs and can be done, reminding about the final objective,
have been key elements of the programme
Social attention is of the essence: social dialogue is important, though
perhaps not exploited as much as possible. More relevant is to take
care of those who are hit the most by the adjustment. Perception that
those more in need are somehow protected is important to increase
readiness to bear the adjustment.

5. What lessons for Latvia ?
• Party is over, but temptations will return
• Risks are building up
• Joining the euro not a piece of cake
• Thriving in it is a hard job
• Pinocchio only turns into a real person, when he permanently
changes his attitude and behaviour….