The document summarizes a presentation given by Ettore Dorrucci of the European Central Bank comparing Latvia's internal devaluation strategy following its 2008 financial crisis with similar programs in Romania, Greece, Ireland and Portugal. It shows charts examining changes over time in key economic indicators such as GDP, unemployment, debt levels, inflation and competitiveness. It finds Latvia had stronger growth and more successful reforms compared to other countries, attributed to both exogenous factors like initial conditions and endogenous policy choices that delivered frontloaded austerity and structural reforms.

1. Joint Commission - Bank of Latvia Seminar
“EU balance-of-payments assistance for Latvia: Foundations of success”
Roundtable “Lessons from Latvia, and the way forward”
Latvia’s internal devaluation
in a cross-country perspective
by Ettore Dorrucci,
European Central Bank
1st March 2012
1 March 2012

2. Comparison with other program countries
(1) Real GDP growth
Real GDP growth
(quarterly frequency; year-on-year growth rates; t stands for the quarter in which the program started in the
respective country)
LV RO GR IE PT
15
10
5
0
-5
-10
-15
-20
t-8 t-6 t-4 t-2 t t+2 t+4 t+6 t+8 t+10 t+12
Source: Eurostat.
Latest observation: LV, GR 2011Q4; RO, IE, PT 2011Q3. Note: t stands for the quarter in which the program started in the
respective country: LV 2008Q4, RO 2009Q2, GR 2010Q2, IE 2010Q4, PT 2011Q2. Data sa or wda and sa, GR: nsa.
1 March 2012 2

3. Comparison with other program countries
(2) Real GDP level
Real GDP levels
(quarterly frequency; index, t =100; t stands for the quarter in which the program started in the respective
country)
LV RO GR IE PT
110
105
100
95
90
85
80
t-8 t-6 t-4 t-2 t t+2 t+4 t+6 t+8 t+10 t+12
Source: Eurostat.
Latest observation: LV, GR 2011Q4; RO, IE, PT 2011Q3. Note: t stands for the quarter in which the program started in the
respective country: LV 2008Q4, RO 2009Q2, GR 2010Q2, IE 2010Q4, PT 2011Q2. Data sa or wda and sa, GR – internal
ECB seasonal adjustment. 3
1 March 2012

4. Comparison with other program countries
(3) Competitiveness
Real effective exchange rate (deflated with total economy ULC)
(quarterly frequency; index, t =100; t stands for the quarter in which the program started in the respective
country)
LV RO GR IE PT
130
120
110
100
90
80
70
t-8 t-6 t-4 t-2 t t+2 t+4 t+6 t+8 t+10
Source: Eurostat.
Latest observation: 2011Q3. Note: Calculated vis-à-vis 20 trading partners. t stands for the quarter in which the program
started in the respective country: LV 2008Q4, RO 2009Q2, GR 2010Q2, IE 2010Q4, PT 2011Q2.
1 March 2012 4

5. Comparison with other program countries
(4) General government debt
General government debt (as % of GDP)
(annual frequency; t stands for the year in which the program started in the respective country)
LV RO GR IE PT
200 2013, before PSI agreement
150
100
50
0
t-2 t-1 t t+1 t+2 t+3 t+4 t+5
Source: European Commission Autumn 2011 forecast.
Latest observation: 2013. Note: Data after 2010 are forecasts. t stands for the year in which the program started in the
forecasts
respective country: LV 2008, RO 2009, GR 2010, IE 2010, PT 2011.
1 March 2012 5

6. Comparison with other program countries
(5) Prices
HICP
(monthly frequency; year-on-year growth rates; t stands for the month in which the program started in the
respective country)
LV RO GR IE PT
20
15
10
5
0
-5
-10
t-24 t-20 t-16 t-12 t-8 t-4 t t+4 t+8 t+12 t+16 t+20 t+24 t+28 t+32 t+36
Source: Eurostat.
Latest observation: Jan2012. Note: t stands for the month in which the program started in the respective country: LV
Dec2008, RO May2009, GR May2010, IE Dec2010, PT May2011.
1 March 2012 6

7. Factors underpinning a successful internal
devaluation strategy: The case of LATVIA
strategy
Exogenous factors Endogenous factors
“Countries’ initial conditions” “Right policy
Very country-specific Possibly in common
does deliver”
with other countries
Magnitude of crisis shock and Small open economy Appropriate IMF/EU
pre-crisis imbalances conditionality, W B support
Perceived lack of alternatives Low stock of public debt at the Frontloading of measures
to hard peg beginning of the crisis (“Big Bang” approach)
Magnitude of FX loans Prospects of euro adoption Proper communication strategy
Collective memory of past Degree of market liberalisation Overall government credibility
crises that were successfully
overcome
Electoral rules, form of Distribution of costs
government
Degree of party fragmentation Government’s cohesion
and political (in-)stability
Partly drawing on “Fiscal austerity, structural reforms and re-election: Explaining the “Possible Trinity in the case of
Latvia”, by Marion Salines and Kristaps Bērzinš, mimeo.
1 March 2012 7

8. The importance of productivity-enhancing
structural reforms: EU country ranking (1)
Chart: Development of country rank in the EU now and 5 years ago
The World Bank Institute: Average of Worldwide Governance Indicators (2011)
Transparency International (Corruption Perception Index 2011)
World Economic Forum (The Global Competitiveness Index 2011-2012 rankings)
The World Bank and the International Finance Corporation (Ease of Doing Business 2012)
30 AVERAGE OF RANKS (2011)
AVERAGE OF RANKS (2006)
25
20
15
10
5
0
FI DK S DE UK NL
E IE AT BE LU FR EE PT CY ES MT LT SI PL CZ LV HU SK IT BG RO GR
Source: own calculations on data from The World Bank Institute (Worldwide Governance Indicators 2011, 2006), World
Economic Forum (The Global Competitiveness Index 2011-2012 and 2007-2006 rankings), Transparency International
(Corruption Perception Index 2011, 2006) and the World Bank and the International Finance Corporation (Ease of Doing
Business 2012, 2007).
Note: Malta is not covered in Doing Business report. Early period for Luxembourg refers to 2008 report, for Cyprus to 2009
report.
1 March 2012 8

9. The importance of productivity-enhancing
structural reforms: EU country ranking (2)
Chart: Development of country rank in the EU now and 5 years ago
AVERAGE OF RANKS (2006) AVERAGE OF RANKS (2011) Range of ranks (2011)
30
25
20
15
10
5
0
FI DK S DE UK NL
E IE AT BE LU FR EE PT CY ES MT LT SI PL CZ LV HU SK IT BG RO GR
Source: own calculations on data from The World Bank Institute (Worldwide Governance Indicators 2011, 2006), World
Economic Forum (The Global Competitiveness Index 2011-2012 and 2007-2006 rankings), Transparency International
(Corruption Perception Index 2011, 2006) and the World Bank and the International Finance Corporation (Ease of Doing
Note: Malta is not covered in Doing Business report. Early period for Luxembourg refers to 2008 report, for Cyprus to 2009
report.
1 March 2012 9

10. Background slides
1 March 2012 10

11. Comparison with other program countries
GDP per capita
Real GDP per capita
(annual frequency; index, t = 100; t stands for the year in which the program started in the respective
country)
LV RO GR IE PT
110
105
100
95
90
85
80
t-2 t-1 t t+1 t+2 t+3 t+4 t+5
Source: European Commission Autumn 2011 forecast.
Latest observation: 2013. Note: Real GDP per capita in PPS. Data after 2010 are forecast. t stands for the year in which the
program started in the respective country: LV 2008, RO 2009, GR 2010, IE 2010, PT 2011.
1 March 2012 11

12. Comparison with other program countries
Unemployment
Unemployment rate (as % of labour force)
(monthly frequency; t stands for the month in which the program started in the respective country)
LV RO GR IE PT
25
20
15
10
5
0
t-24 t-20 t-16 t-12 t-8 t-4 t t+4 t+8 t+12 t+16 t+20 t+24 t+28 t+32
Source: Eurostat.
Latest observation: RO, IE, PT Dec2011;GR Oct2011; LV Sep 2011. Note: t stands for the month in which the program
started in the respective country: LV Dec2008, RO May2009, GR May2010, IE Dec2010, PT May2011.
1 March 2012 12

13. Comparison with other program countries
Current account balance
Current account as % of GDP
(quarterly frequency; 4 quarter moving averages; t stands for the quarter in which the program started in the
respective country)
LV RO GR IE PT
20
10
0
-10
-20
-30
-40
t-8 t-6 t-4 t-2 t t+2 t+4 t+6 t+8 t+10
Source: Eurostat.
Latest observation: 2011Q3. Note: t stands for the quarter in which the program started in the respective country: LV
2008Q4, RO 2009Q2, GR 2010Q2, IE 2010Q4, PT 2011Q2.
1 March 2012 13