Macroeconomic Imbalances, Policies and the Economic and Financial Crisis:
Latvian Monetary and Fiscal Policies during 2008 and 2009 in the context of and in relation to the Economic Crisis
Introduction: Latvia in crisis
While enjoying a sustained period of rapid economic growth and increasing prosperity, it once appeared that the Latvian economy was almost effortlessly converging towards its new European Union (EU) partners post-accession in 2004. Indeed in the period 2005-2007, before recession hit the Republic of Latvia, annual real growth in gross domestic product (GDP) averaged beyond 11%, unemployment hit lows of 6% and (table 1 of annex II).
Due to the openness of the recently acceded EU member state, this growth however was compounded by the accumulation of external imbalances with a recorded current account deficit of the order of -21.8% of GDP in 2007 (table 1 and 4 of annex I). Furthermore, signs of overheating of the Latvian economy were omnipresent. Vast levels of accessible private financing (mostly euro-denominated, and via the foreign owned banking sector) were used for mortgage loans and thus resulting in rapid increases in real estate prices (EC, 2010, pp.14); substantial nominal wage growth ( 5); and rises in regulated prices and the price of food reinforced these wage-related cost shocks to secure ‘inflation hitting record highs' (EC, 2008a, pp.83) as the Harmonised Index of Consumer Prices (HICP) surpassed 15% (table 1).
To the surprise of many the booming progress of a post-transition success story, however came to an abrupt halt in 2008 as the wheels of the Latvian motorcar destabilised and the economy entered into recession by the second quarter of 2008 with negative GDP growth of -1.8% ( 1 of annex I). The initial recession can in large part be attributed to the fairly quick decline of growth below -4% in both the trade and industrial sectors of the economy ( 2 of annex I) following ‘a marked deceleration' in domestic demand (EC, 2008a). By the third quarter, the recession had deepened and the 2.26 million inhabitants of Latvia in expecting a further easing of house prices contributed to a sharp contraction in the overheated construction market by -7.9% ( 2).
The global economic and financial crisis sparked off by the spectacular failure of the Lehman Brothers Investment Bank in September 2008, aggravated the downturn in the domestic Latvian economy. At a time of low consumer and business confidence, the crisis led to a concomitant downturn in external demand as Latvia's EU and eastern European partners' economies import demands eased (EC, 2008a). Whilst the consequent tightening credit availability and increasing cautiousness of banks amplified the reversals in lending and house prices (EC, 2008b) in a ‘self-reinforcing spiral' (EC, 2010, pp. 15).
As the global financial crisis deepened and such reinforcing mechanisms became more extreme, the small Baltic economy found itself exposed by the structural and external imbalances it had accumulated in the previous years of growth (LREM, 2009b). The increasingly risk averse international environment and lack of access to external financing was starkly brought to light when Latvia's second largest domestic bank, Parex ran into significant problems leading to its ultimate nationalisation in November 2008 (EC, 2009a).
By year end 2008, unable to finance its external deficits and showing no signs of internal recovery, the Latvian economy was brought to the very brink of economic collapse. The government was forced to sacrifice a part of its sovereignty and turn to institutional financing for assistance and was duly granted an emergency loan worth €7.5 billion from the International Monetary Fund (IMF) and the EU, conditional on the implementation of certain reforms. (IMF, 2009)
The recession however showed no such mercy, as the dual contraction in domestic and external demand persisted ( 3) contributing to a drop in real GDP growth averaging -18.6% over the first 3 quarters of 2009 ( 1); levels of decline ‘on a scale rarely seen in peacetime'. Indeed, in the brief period of two years since the beginning of recession in early 2008, Latvian losses of output are estimated at 25.5% of GDP (Weibrot and Ray, 2010, pp.5). Perhaps the only upside is that the collapse in domestic demand drastically reduced imports and helped shift the current account into surplus by the fourth quarter of 2008 ( 4).
In addition to the record output losses, the labour market also suffered substantially. Since the onset of recession unemployment rates increased dramatically from pre-crisis levels of below 6% to almost 19% by 2009:3 ( 1) and we have equally borne witness to massive reductions in participation rates as many Latvian inhabitants withdrew themselves from the workforce, largely via outward migration or early retirement (EC, 2008b and LREM, 2009a). Such violent shifts in labour market outcomes have served to stoke socio-political tensions, which in their rawest form culminated in the street protests that verged on riots on January 13 and a collapse in government on February 20, 2009.
A further undesirable consequence of the recession is the impact this had on the state of public finances. Naturally, as the number of unemployed escalated as did requirements and demands for social transfers but these automatic stabilisers are relatively low compared to the EU-27 average as can be seen in table 2. More substantially in the case of Latvia, following such a swift significant decline in domestic demand and exports, tax revenues from collected incomes (both individual and corporate) and expenditures (particularly VAT) suffered a consequent deterioration. By the end of 2008, the Latvian Central Government's basic budget tax revenues began to diminish. In 2009, such revenues experienced a decline of 31.5% or 1663 million lat compared to 2008 (LREM, 2009b). In concrete terms of the increasing financial government liabilities that such rapid deterioration imposes, the general government debt increased from 9% in 2007 to 19.5% in 2008 following the rescue of Parex Bank (LREM, 2009b), and is estimated to have, on average, been of the order of 33% in 2009 (EC, 2009b and EC, 2009c).
Although it can be expected that the national economic recovery of Latvia, in the coming years, will ‘depend greatly on how fast [the] global financial system and main partner countries of Latvia's foreign trade will pick up growth again' (LREM, 2009b), finding the right balance of monetary and fiscal policies is of the utmost importance. This paper contends with analysing the policy response pursued thus far by the Latvian Government, its ‘fiercely independent' Central Bank, and the multinational IMF/EU initiated programmes. Through this we seek to highlight the mistakes that may have contributed to inhibiting recovery as well as to shed light on the prospects for recovery and possible exit strategies available to the Republic of Latvia during these tumultuous times of global economic and financial crisis.
Monetary Policy under Constraint: Maintaining a Hard Peg
The Latvian government and its independent central bank both share the objective of adhering to the necessary Maastricht convergence criteria necessary to ensure that the Republic joins European Monetary Union (EMU) and introduces the EU single currency (the euro) as soon as possible (LREM, 2009b). As far as monetary policy is concerned this means that it is necessary to fulfil 2 key criteria: a sustainable degree of price stability (in terms of inflation and long-term nominal interest rates); and to participate in a fixed exchange rate mechanism (ERMII) against the euro whilst respecting the fluctuation margin of ±15% for at least two years without severe tensions.
In order to signal further commitment and enhance credibility, the Latvian central bank, which entered the ERMII on the 2 May 2005 unilaterally, adopted a 1% hard peg to the euro. Given free capital flows, and following Mundell's famous ‘macroeconomic trilemma', this quasi-currency board regime in imposing an exchange rate targeting regime necessarily sacrifices the standard instrument for inflation management by monetary policy – the interest rate.
As observed prior to the crisis, and as the Balassa-Samuelson effect would predict, this peg contributed to fuel domestic inflation via lower real interest rates. In theoretical Balassa-Samuelson terms, the higher productivity gains in the tradable sector inflate prices in the non-tradable sector (such as real estate), on the assumptions that PPP holds (or at least in closer to holding) in the tradable goods sector, and that the euro price is held exogenous, as the equation below shows:
As is now seen post-shock, the peg's constraint on autonomous monetary policy leaves only limited and perhaps painful options for adjustment as exit is fraught with dangers for Latvia in terms of a loss of confidence in the fundamental macroeconomic stability of the economy, as well as the potential that exit could trigger contagion dynamics, leading to problems within the wider Baltic region and potential competitive devaluations (EC, 2010).
Opinion from academic observers, internal and external institutions over the merits of the peg in the context of the present global crisis differs and as a result many differing visions for monetary policy's role as a remedy to the Latvian economy's ills have been offered. These competing prescriptions fit broadly into two camps: those that argue that given the sacrifices and potential dangers implicit in a fixed exchange rate regime such as Latvia's, only an abandonment of the peg via devaluation or immediate Euroisation will suffice to return the economy to the path of growth; and those that, on the other hand, support the maintenance of the existing regime and seek competitive and macroeconomic adjustment via alternative mechanisms.
Firstly, according to opponents of preserving Latvia's position in the ERMII system, it is noted that as the global crisis filtered out and deepened, the real exchange rate remains overvalued as ‘trading partner currencies [not pegged to the euro] have depreciated sharply' (IMF, 2009, pp.11). Table 1 shows that the real effective exchange rate appreciated during the period 2005-2008 and this has subsequent to the crisis response only dropped 5.8 percent from its peak in 2008 (Weibrot and Ray, 2010). The lack of real effective exchange rate to turn the terms of trade more in favour of the lat is not only explained by depreciations of the nominal exchange rate of Latvia's major trading partners, but also because of the limited amount of downward price and wage flexibility (CEPR, 2010) meaning that the gap in competitiveness under the peg persists thus hindering prospects for growth.
Such a misalignment as well as resulting in a deficit in competitiveness, can present other, more severe problems such as capital flight. To the extent to which the lat is perceived as being overvalued and expected to be adjusted, risk premiums spread as investors fear a possible collapse and mounting speculative attacks,. Indeed, as 6 shows, the IMF projects that in 2009 Latvia had a total financial and capital account deficit of €4.2 billion and that a further €1.5 billion is set to leave in 2010 (CEPR, 2010). To counteract this process and reinstate credibility and defend the Latvian hard peg against the euro, the Central Bank necessarily needed and still needs, to restrict capital flight (via firm commitments as well as by the sale of foreign exchange, FX, reserves). As a consequence the exchange rate uncertainty that is created by the peg, according to Weibrot and Ray ‘harms the entire investment climate' (pp.10).
Another negative consequence associated with the maintenance of a hard peg in the light of the economic and financial crisis is that, without a devaluation that could in principle stimulate external demand, an increased number of non-performing loans and defaulting debtors will result as the Latvian tradable goods sector continues its contraction.
However, in spite of the arguments against the hard peg of the lat to the euro as discussed above, the Latvian Central Bank and Government have ‘remain[ed] strongly committed to the maintenance of their long-standing monetary and exchange rate arrangements' throughout the crisis period (EC, 2010). In support of this, under the conditions of the IMF and EU bailout loan it was specified that the ERMII regime be maintained.
The argument for maintenance of the peg derives firstly from a belief in its role as an anchor for stability and secondly on the dismissal of potential large-scale capital flight due to the supplementary anchor of bilateral and multilateral commitments from foreign investors (particularly the Scandinavian banks) to remain and provide support to their subsidiaries as indeed they have thus far done.
Moreover, devaluation is discounted as a real alternative since the resultant negative balance effects far exceed any negative consequences due to a contracting export sector. If one considers the 89% of Latvian residents' and the Latvian corporations whose debt is denominated in foreign currency (IMF, 2009b, pp.11), one sees that devaluation, in making these debts larger would have the undesirable direct effect of inhibiting private consumption and investments even further, as well as leading to a further tightening in credit as expected bank losses mount (EC, 2010). For this reason, the Central Bank argues that devaluation would set off a chain of loan defaults and ultimately run the risk of complete financial collapse, thus having the net result of any devaluation being contractionary (CEPR, 2010).
Moreover, in response to the principle that after an initial lag due to the J-curve effect devaluation can help boost exports, supporters of the status quo maintain that the unusually weak demand for Latvian exports given the extreme global downturn, could limit any lasting benefit of devaluation in providing a positive export stimulus. This coupled with the Latvian economy's relative high import content of exports and its high share of imports in aggregate expenditure (EC, 2010) may provoke domestic inflation as import prices rise and thus further reduce the Baltic economy's competitiveness.
In the recent academic debate, largely carried out in the blogosphere, it has been emphasised that, fundamentally, recovering price competitiveness via disinflationary processes while keeping the current pegs or via nominal depreciation would lead to the same outcome on debt service (Hugh, 2008) . IMF and EU support for the Latvian preference for the former ‘internal devaluation' policy approach rather than an abandonment of the peg is also driven by the desire to support (to a certain extent) the sovereign wishes of the Latvian government. Insofar as it is felt that any policy approach can only be successful if those closest to the levers of control are of what lever to pull i.e. ‘national ownership of the chosen strategy is key' (EC, 2010, pp. 98). Before turning to discussing this chosen policy path of ‘internal devaluation,' given the necessary emphasis on the role of fiscal policy in this adjustment strategy, it shall prove expedient to firstly place the Latvian fiscal regime into its rightful context.
Fiscal Policy Context
With monetary policy limited to the role of maintaining the hard exchange rate peg, the role of discretionary fiscal policy in delivering Latvia from crisis becomes crucial. However, as noted in the introduction, the recession had the impact of leading to the deterioration in Latvia's public finances and a less positive outlook for their sustainability leaving little room for countercyclical policies to restore some of the lost internal demand and try to ‘lean against the wind.'
Moreover, in order to keep in line with the Government objective of ensuring euro adoption at the first possible moment, it is necessary for Latvia to keep maintain prudent control of these finances to satisfy the two public finance sustainability based Maastricht criteria: the ratio of government deficit to GDP should not exceed 3%; and the ratio of government debt to GDP cannot exceed 60%. Given that large budget deficits as well as restricting room for discretionary fiscal adjustment also have as a consequence higher interest rates, which in turn, can lead to snowball effects (high rates of interest on the debts means that even a budget surplus do not necessarily reduce the government debt burden) thus augmenting the risk of runaway debts and government default. It follows therefore that any Keynesian fiscal policy directed at restoring Latvian demand would need to be taken with one eye on the Maastricht criteria and the sustainability of public finances.
Notwithstanding the need for caution in enacting countercyclical fiscal policy highlighted above, at the outset of the recession, the Latvian government budget of November 2008 was initially ‘very expansionary' (EC, 2008b) and included the decision to raise both the non-taxable earnings threshold and the minimum wage, whilst announcing only modest tax rises on oil and tobacco products (EC, 2008c, pp.236). Meanwhile, public sector wages were also forecast to continue to increase rapidly (EC, 2008a pp.83) and a personal income tax reduction from 25 to 23% (LB, 2009a, pp.35) and generous pension increases in 2008 contributed to greater budget outlays (EC, 2009a, pp. 79)
However due to the increasingly deteriorating nature of the fiscal position, and particularly after the rescue of Parex Bank, there soon remained little choice but to adopt a strategy of consolidation. Indeed, when the IMF and EU agreed to provide a bailout fund to the Latvian authorities, and effectively took control of the direction of their fiscal policy, among the strict conditions it was stipulated that the growing debts impeded any further room for countercyclical manoeuvres and that instead a strategy fiscal retrenchment was necessary to support the broader policy of macroeconomic stabilisation via ‘internal devaluation' to which we now turn.
IMF to the Rescue: ‘Internal Devaluation'
Following the December 2008 decision to conditional provide Latvia with a €7.5 billion euro bailout loan, attached to this agreement the IMF and the EU placed certain conditions that it felt necessary to help Latvia effectively exit the crisis. With the exchange rate fixed and independent monetary policy thus denied, they instead opted to adjust the real exchange rate via ‘internal devaluation through wage and price declines' (IMF, 2009).
There is scope for this within the Latvian economy, the multinational grouping of lenders believe, since the preceding years of boom, led to wage growth above and beyond increases in productivity in both the public and private sector and therefore that there exists room for competitive improvements via widespread wage moderation and cuts (LREM, 2009b). Moreover, it is felt by the lenders that the ‘flexibility of the [Latvian] economy… and the fact that double digit negative growth rates are more tolerable after almost a decade of very strong growth' makes such imposed wage cuts more politically feasible (EC, 2010 pp.16).
Such a strategy, which necessarily imposes a heavy adjustment burden, is of course not without its opponents. First and foremost, unashamedly the policy is procyclical. This will further exacerbate the recession by raising tax burdens and reducing margins for growth enhancing government policies thus dimming any growth prospects for ‘some time ahead' (EC, 2010). In its first review of the compliance of the Latvian policy response, the IMF acknowledges this fact though it suggests this to be only a short-term cost stating that the tight fiscal stance ‘will likely cause continued demand weakness through early 2010' IMF (2009).
What's more, given the context of global crisis and the Latvian government's lack of track record, in order to be credible and effective at smoothing the cycle, discretionary policy in Latvia needs to be bold. Boldness is necessary in order to generate an impact on debt stabilisation in benefiting from 'reverse Keynesian multiplier' effects, which are likely to be fairly 'small in light of the high degree of openness' of the Latvian economy (EC, 2010). Bold expenditure cuts or tax hikes are also important for their 'non-Keynesian effect' as by swallowing some tough medicine, the Government is able to demonstrate a more credible commitment to fiscal discipline.
As a direct consequence of the potentially protracted and sharp short-term pain, given that since public preference for utility now rather than in the next time period, it follows that if improvements happen slowly or the austerity packages are considered too painful, public support will dwindle and the reform train will risk grinding to a halt as the political will succumbs to 'reform fatigue'. Prolonging the recession via procyclical budget cuts can also create other long-term economic costs in that the long-term unemployed lose their skills and motivation or if public investments in maintaining infrastructure do not occur.
In addition, the scope for price and wage deflation in Latvia is limited by the freedom of movement enjoyed in the Single EU Market (EC, 2009b, pp.112). Following Tieboutian theory of inter-jurisdictional competition, if Latvians are unhappy about the lowered domestic safety net and decline in public service provision, they will simply 'vote with their feet' and emigrate, and make their contribution to another member state's economy and budget.
In the longer term, however, the IMF and EU argue that the adjustment will exert a positive role by restoring price competitiveness and 'steer market expectations towards stability' (EC, 2010). Now, having discussed briefly the relative theoretical merits of an internal devaluation, we now turn our attention to weighing up the relative success of the specific consolidation policies adopted by the Latvian authorities in response to the crisis as it evolved during late 2008 and 2009.
The Path of Fiscal Retrenchment
By end 2008, the Latvian government had agreed to the IMF proposed package and sought measures to fulfil the requirements of fiscal tightening and in particular public sector wage reductions. Presently the package, which the government has agreed to, requires a fiscal tightening of 6.5% of GDP by 2010 (IMF, 2009). In order to achieve this Latvia has to date undertaken two major rounds of consolidation, one in December 2008 and the other on the 16th June 2009 (IMF, 2009).
The first round of cutbacks focused on wage reductions for public sector workers and an increase in excise taxes and the VAT rate (LREM, 2009a). This first package was on paper highly ambitious, hoping to achieve cuts worth 7% of GDP (particularly impressive given this supplementary budget replaced the proposed expansionary budget of just one month prior). However, perhaps unsurprisingly in operation a large part of the program remained unimplemented perhaps reflecting a 'ratchet effect', whereby it is easy to increase expenditures but much harder to reduce them, whilst the VAT and excise rises actually meant tax revenues fell as domestic demand was further weakened by the harsher than expected downturn (LB, 2009b, pp.38).
In the second fiscal package the previous shortcomings were sought to be overcome and surpassed, though this was delayed by two months due to a change in government. Under a fresh public mandate, the new government put pensions and healthcare under the knife. Pensions were slashed by 70% for working pensioners and sliced by 10% for those not working (LREM, 2009b). This enabled state contributions to the national pension scheme to be cut by 2%. Meanwhile, education is subject to targeted cuts of 50% and healthcare was subject to cuts of around 33% as well as a number of structural reforms leading to the resignation of the health minister (IMF, 2009, pp.46).
It is difficult to see how such broad and indiscriminate cuts in essential spending will have a beneficial long-term effect on the Latvian economy, particularly given the relatively small initial size of Latvian public expenditures. These sentiments are echoed by the World Bank, who according to the IMF is particularly ‘concerned with the sharp cuts in teacher wages, [which] will discourage new entrants to the teaching profession, worsen the quality of education, and undermine long-term growth' (IMF, 2009, pp.46).
On the basis of the proposals the Latvian Economics Ministry forecasts that in 2010-2012 central government debt level will not exceed 60% of GDP (LREM, 2009b). Initial signs of wage moderation are clear though modest as average wages in the third quarter of 2009 declined by 5% as 5 exhibits. The public accounts in 2009 though remain firmly in deficit and below Maastricht levels (-5.9%, table 1) as the consolidation of public finances proves difficult in the context of such a severe recession.
It is therefore recognised that fiscal retrenchment alone is not sufficient to restore the public debt sustainability necessary to reassure markets of Latvian macroeconomic stability. A recently published EC report on the Baltic economies (EC, 2010, pp.96) highlights several initiatives approved in the 2009 budget that can potentially help rise the country out of recession and onto a more sustainable path of growth. Most interestingly, this list includes attempts to re-orientate the economy to capital intensive export industries (and away from construction) by eliminating taxes on profits from the sale of high-tech industries.
Additionally, to minimise the growth-dampening effect of lower public expenditure, the EU structural funds are to be 'frontloaded' to provide for some infrastructure, technological and human investment (EC, 2009c, pp.228). It should be noted though that these funds, valued €2100 per capita (EC, 2010), will likely crowd-out domestic investment and may induce problems of dependency in later periods.
The Latvian economy is still trembling from the shock of recession and global downturn that hit in late 2008. As a consequence of this shock the authorities were required to seek external financial support from the IMF and EU in order to stabilise the macroeconomic system and avoid complete collapse. The chosen path to recovery has so far been based on three overarching principles: defend and maintain the hard peg; ‘internally devaluate' via deflation to achieve real competitiveness; and consolidate fiscal deficits to stabilise the ‘snowballing' debt to stay in line with the Maastricht criteria for euro entry.
Opponents to such a strategy on macroeconomic grounds fear that in maintaining the peg, the Latvian authorities are defending the indefensible echoing Argentina's currency board collapse in 2002 (see for instance Weibrot and Ray (2010). Whilst the World Bank, and sky high unemployment, suggests that the pains of internal rebalancing and fiscal retrenchment may outweigh the costs. The alternative, they suggest, is to orchestrate a devaluation (contained or otherwise) so as to realign exchange rates and restore Latvian competitiveness in export markets. However, there is no guarantee that a sufficient devaluation will be achieved and weighing the anchor of the hard peg may invite further speculative attack and given the extent of the shortfall on external demand it is expected that a large devaluation would be needed. (EC, 2010, pp.99)
Latvian prospects of recovery remain clouded by ‘a series of economic, financial, and socio-political risks of both domestic and foreign origin' (EC, 2010 pp.14). In particular, how the adjustment interacts with prospects for growth will largely depend on recovery elsewhere and how successful the strategy is in averting destabilising pressures on the current peg. In brief, the road to recovery for the Republic of Latvia, whichever form it takes, is going to be a long, rough one.
European Commission (EC, 2008a) “European Economic Forecast Spring 2008” European Economy pp. 82-83
European Commission (EC, 2008b) “European Economic Forecast Autumn 2008” European Economy pp. 86-87
European Commission (EC, 2008c) “Public Finances in EMU 2008”, European Economy pp. 236-237
European Commission (EC, 2009a) “European Economic Forecast Spring 2009” European Economy pp. 78-79
European Commission (EC, 2009b) “European Economic Forecast Autumn 2009” European Economy pp. 110-113
European Commission (EC, 2009c) “Public Finances in EMU 2009”, European Economy pp. 228-229
European Commission (EC, 2010) “Cross-country study: Economic policy challenges in the Baltic,” European Economy Occasional Papers 58/ February 2010
Hugh, E. (Hugh, 2008) “Travelling through Latvia in Good Company,” posted at Fistful of Euros on 24/12/2008
International Monetary Fund (IMF, 2009) “Republic of Latvia: First Review and Financing Assurances Review Under the Stand-By Arrangement, Requests for Waivers of Non-observance of Performance Criteria, and Rephasing of Purchases under the Arrangement,” Country Report No. 09/297
Latvijas Banka (LB, 2009a) “Monetārais apskats 2009 (1)”
Latvijas Banka (LB, 2009b) “Monetārais apskats 2009 (2)”
Latvijas Republikas Ekonomikas Ministrija (LREM, 2009a) “The National Economy of Latvia: Macroeconomic Review Nr.4 (41)”
Latvijas Republikas Ekonomikas Ministrija (LREM, 2009b) “Report on the Economic Development of Latvia June 2009”
Weibrot, M. and Ray, R. (CEPR, 2010) “Latvia's Recession: The Cost of Adjustment with an Internal Devaluation” CEPR February 2010
Annex II: Tables
Table 1: Macroeconomic Summary 2005-2009
Republic of Latvia: Selected Economic Indicators
(Annual percent change, unless otherwise stated)
Unemployment rate (%, period average)
HICP (Period average)
HICP (end of period)
General government balance (% of GDP)
General government debt (% of GDP)
Balance of payments
Goods and non-factor services balance (% of GDP)
Current account balance (% of GDP)
Exchange rate regime
←Pegged to the Euro →1
Exchange rate (lat per US$)
Real effective exchange rate (2000=100) 2
Quota at the Fund
SDR 126.8 million
Sources: Latvian authorities and IMF staff estimates.
1/ On January 1, 2005 the lat was re-pegged to the euro.
2/ CPI-based, period average
Source: IMF, 2009
Table 2: Pension Systems/Demographics (EC, 2010)
 The Economist, “Latvia's Economic Woes,” June 11 2009
 Paul Krugman cited by Edward Hugh in “Travelling through Latvia in Good Company (Ultra-wonkish)” posted at Fistful of Euros on 24th December 2008