The Impact of Policy Retrenchment in Europe
Edited by Daniel Vaughan-Whitehead
Chapter 3: Early application of fiscal austerity measures in the Baltic states
The economic recession in 2008–09 had a strong negative effect on the public sector in the Baltic states. Unlike the rest of the EU, where public sector reforms to cope with the challenges arising as a result of the crisis started in 2010–11 and were related to the debt crisis, in the Baltic states the public sector was heavily consolidated as early as 2009 and in Estonia significant budget cuts were introduced in February 2009. Thus, for the Baltics there should be comparatively more evidence on the effects of public sector cuts on the economy, the labour market and the quality of public services. The Baltic states’ experience of the crises might also provide some lessons for the rest of Europe: hopefully some positive, but also some concerning the possible negative consequences of public sector adjustments. Adjustment in the course of crises without exchange rate devaluation through so-called ‘internal devaluation’ (wage cuts restoring international competitiveness) has sometimes been described as fairly successful (for example, due to the relatively rapid recovery since 2010), and was introduced on the basis of quite a strong consensus among both politicians and the general public (for example, according to Eurobarometer, the approval ratings for the government increased from 38 per cent in summer 2009 to 53 per cent in spring 2010 (OECD 2011a) and without major protests.
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