22nd Oct 2016


Lithuania's remarkable recovery

This year, Lithuania is one of the fastest growing economies in Europe with an annualized growth rate of 6.6 percent during the first half of the year. This high growth is driven by an exports surge of no less than 38 percent.

This is an incredible achievement after a vicious financial crisis. Remember that Lithuania’s GDP slumped by 14.7 percent in 2009. The explanation is rigorous government policy. Lithuania’s attainment is often ignored or belittled because its neighbors Estonia and Latvia have carried out similar miracles, but they are all true heroes, and Lithuania’s cure looks remarkable also among this tough competition.

Dear EUobserver reader

Subscribe now for unrestricted access to EUobserver.

Sign up for 30 days' free trial, no obligation. Full subscription only 15 € / month or 150 € / year.

  1. Unlimited access on desktop and mobile
  2. All premium articles, analysis, commentary and investigations
  3. EUobserver archives

EUobserver is the only independent news media covering EU affairs in Brussels and all 28 member states.

♡ We value your support.

If you already have an account click here to login.

  • (Photo: European Commission)

As the bankruptcy of the American investment bank Lehman Brothers in September 2008 caused a global liquidity freeze for half a year, the countries that were hit the hardest were small, open countries without guaranteed access to swap credits from major central banks. In other words, the Baltic countries.

In Lithuania, foreign net savings, that is net capital inflow, swung from 11.9 percent of GDP in 2008 to a net capital outflow of 3.8 percent of GDP, meaning that aggregate demand fell by 15.7 percent of GDP.

As GDP fell, state revenues plummeted even more. Lithuania was lucky to have parliamentary elections in October 2008 in the midst of the crisis. The main winner in these elections was the Homeland Union–Lithuanian Christian Democrats. On November 28, its leader Andrius Kubilius became prime minister and the new government adopted a substantial programme and a budget for 2009 in the ensuing week.

Its approach was quite radical, as the crisis demanded. But as the economic decline proceeded, even more radical measures were adopted in May 2009. Without the government’s swift reaction, Lithuania could have defaulted.

Four-fifths of the fiscal adjustment consisted of expenditure cuts. As a consequence, most performance indexes bottomed out in the first quarter of 2009. Unemployment, usually the last crisis variable to peak out, did so in early 2010 at 17.8 percent.

The Lithuanian government managed to carry out this fiscal adjustment without calling for support from the International Monetary Fund (IMF), which played a major role in Latvia. The government was worried that the IMF would push for devaluation. To the surprise of most, Lithuania managed to maintain the confidence of the international credit market.

Thanks to its vigorous fiscal adjustment, Lithuania escaped devaluation yet stayed competitive and could hardly have expanded its exports faster than it did. The IMF expected “strong deflation,” but it never materialized. The expected long recession lasted only one year.

The Lithuanian government opted for internal devaluation. It utilized the crisis to raise the efficiency and competitiveness. Top public salaries were cut by more than 20 percent, but by less for those with lower salaries. The gross average wages declined by 12.4 percent from the pre-crisis peak to the bottom.

While the total tax burden increased marginally, the structure of the tax system changed considerably. Overall, taxes moved from labour to consumption. The current government continued the trend of reducing the flat personal income tax – from 33 percent in 2006 to 15 percent at present. After a temporary increase of the corporate tax rate to 20 percent in 2009, it is back to 15 percent. This tax structure offers people and entrepreneurship improved incentives for work.

Social benefit expenditures had risen excessively by 44 percent in real terms between 2006 and 2008. The government had no choice but to trim benefits, often in a progressive fashion to safeguard the most vulnerable. Eligibility requirements were tightened. The government also went ahead with pension reform. In June 2011 the parliament legislated a gradual increase of the retirement age to 65 for both men and women by 2026, to render the public pension system financially sustainable.

The government removed restrictions on flexible work arrangements and established a substantial job support programme with EU funds, pushing unemployment down.

Lithuania has enjoyed a good business environment for a long time, ranking as no. 27 on the World Bank index of ease of doing business for 2011, that is, about twice as high as Lithuania’s ranking by GDP per capita in the world (no. 51). During the crisis, the government has made it simpler to register property, to resolve insolvency, to pay taxes, to start a business and to enforce a contract. It has also improved protection of investors.

The government has launched a substantial higher education reform, tying state financing to students, so that institutions of higher education are competing to attract the best students and have obtained incentives both to economise on resources and to raise quality.

Finally, the Lithuanian government stepped up its use of EU funds, sharply raising its absorption of such grants from €1.2 billion in 2008 to €1.75 billion in 2009, that is, from 3.7 percent of GDP to 6.6 percent of GDP.

Thanks to its victory over the financial crisis, Lithuania is readying itself to adopt the euro in 2014. As a member of the eurozone, Lithuania would be entitled to ample ECB credit, so that the frightful liquidity squeeze will never be repeated.

One of the best kept secrets in Europe is how well the current Lithuanian government has managed the nation’s economy. The country’s international competitiveness had never been seriously undermined, but now it has improved significantly. The Lithuanian government has proven that internal devaluation was both possible and beneficial.

The writer is a senior fellow of the Peterson Institute for International Economics and co- author with Valdis Dombrovskis of the book “How Latvia Came out of the Financial Crisis”


Europe ready to tackle Greek debt relief

The Greek government has built and broadened alliances in EU institutions and member-states that acknowledge the need to restructure the debt and deliver another economic model for the eurozone.

News in Brief

  1. Canada and Wallonia end talks without Ceta deal
  2. Juncker hopes for Canada accord in 'next few days'
  3. Romania drops opposition to Ceta
  4. Difficulties remain on Ceta deal, says Walloon leader
  5. Brexit could lead to 'some civil unrest' in Northern Ireland
  6. ECB holds rates and continues quantitive easing programme
  7. Support for Danish People's Party drops, poll
  8. Spain's highest court overturns Catalan ban on bullfighting

Stakeholders' Highlights

  1. EFADraft Bill for a 2nd Scottish Independence Referendum
  2. UNICEFCalls on European Council to Address Plight of Refugee and Migrant Children
  3. ECTAJoin us on 9-10 November in Brussels and Discover the new EU Digital Landscape
  4. Access NowCan you Hear me now? Verizon’s Opportunity to Stand for Global Users
  5. Belgrade Security ForumMeaningful Dialogue Missing Not Only in the Balkans, but Throughout Europe
  6. EASPDJoin the Trip! 20 Years on the Road. Conference & Photo Exhibition on 19-21 October
  7. EuropecheEU Fishing Sector Celebrates Sustainably Sourced Seafood in EU Parliament
  8. World VisionWomen and Girls Urge EU Leadership to Help end Gender-based Violence
  9. Dialogue PlatformIs Jihadism Blind Spot of Western Intellectuals ? Wednesday 26 October
  10. Belgrade Security ForumGet the Latest News and Updates on the Belgrade Security Forum @BelSecForum
  11. Crowdsourcing Week EuropeMaster Crowdsourcing, Crowdfunding and Innovation! Conference 21 November - 10% Discount Code CSWEU16
  12. EJCEU Parliament's Roadmap for Relations with Iran a Massive Missed Opportunity

Stakeholders' Highlights

  1. Nordic Council of MinistersFish Skin on Bare Skin: Turning Fish Waste into Sustainable Fashion
  2. CEDECOpportunities From the Creation of Synergies at Local Level in the Energy Transition
  3. ACCAFinTech Boom Needs Strong Guidance to Navigate Regulatory Hurdles
  4. Counter BalanceWhy the Investment Plan for Europe Does not Drive the Sustainable Energy Transition
  5. Nordic Council of MinistersThe Nordic Region Seeks to Make Its Voice Heard in the World
  6. Taipei EU OfficeCountries Voice Support for Taiwan's Participation in ICAO
  7. GoogleDid You Know Europe's Largest Dinosaur Gallery Is in Brussels? Check It Out Now
  8. IPHRHuman Rights in Uzbekistan After Karimov - Joint Statement
  9. CISPECloud Infrastructure Providers Unveil Data Protection Code of Conduct
  10. EFAMessages of Hope From the Basque Country and Galicia
  11. Access NowDigital Rights Heroes & Villains. Who Protects Your Rights, Who Wants to Take Them Away