Boom to bust

Just a few years ago, the Baltic countries were considered a European success story. Fifteen years after gaining independence from the Soviet Union in 1991, Lithuania, Latvia and Estonia were labelled the Baltic Tigers, heralded for their business friendly governments and their highly educated and creative workforce.

Perhaps the best symbol of the Baltic rags-to-riches story was Skype, a company enabling its customers to make international telephone calls for free over the internet. Skype soon attracted a large following and today is a leader in international phone calls. While its founders, Niklas Zennström and Janus Friis are Swedish and Danish respectively, the company's technological innovation was masterminded in Talinn, the capital of Estonia, which the New York Times back in 2005 called "a sort of Silicon Valley on the Baltic Sea."

Today Estonia is reeling from the financial crisis that has crippled its economy. Unemployment trippled within the last year and now hovers around 14 percent; the economy is expected to contract by more than ten percent. But compared to its Baltic neighbors, Estonia is still faring much better. Unemployment in both Latvia and Lithuania has skyrocketed to 17 percent and Latvia especially is on the brink of collapse and could only be saved through a capital injection from the International Monetary Fund (IMF).

Living in a credit bubble

The main reason why the Baltics went from boom to boost in less than a decade is easy credit, say analysts. "Our population was never used to credit before and so a lot of the growth was financed through it, be it credit for consumption or credit for construction," argues Jonas Cicinskas, an EU expert at Vilnius University in Lithuania.

The continued double-digit growth rates over a period of seven years triggered a chain reaction, leading first to an increase in wages up to the point where the rise in wages outpaced productivity and then to an increase in inflation, adds Cicinskas. "Basically our economy was overheating and we produced more than our potential gross domestic product which is very unusual and couldn't be sustained."

Hermann Bünz, who heads the Friedrich Ebert Foundation in the Baltics, a non-profit organisation affiliated with Germany's Social Democrats, says people have been living in a bubble for the last years. "They were bombarded with foreign loan and credit offers that had no basis to the economic situation on the ground." He recalls that people were even getting credit offers from banks via SMS on their mobile phones. It was just a matter of time until that whole system collapsed like a house of cards, says Bünz. That happened within just a few weeks last year.

Now the situation is dire, especially in Latvia."The demands made by the IMF hit the average people first", says Bünz explaining that monthly pensions were cut by 10 percent, teacher salaries slashed in half and the police pension fund reduced by two-thirds. "Many people don't know how to survive from one day to the next."

Swedish help

Some immediate relief for the country should come from 1.2 billion euros ($1.6 billion) in financial aid the EU agreed upon last week. In addition, Swedish prime minister Fredrik Reinfeldt, whose country takes over the EU presidency as of July, has urged all member states to recognize the plight of Latvians.

So will Sweden with its close cultural ties to the Baltic states have a special focus on the region during its presidency? "Yes, says Cicinskas, "I would expect more from the Swedish EU presidency than of other countries." But not just for cultural reasons: "The Swedes are most deeply involved in the Baltic economy and so they also have financial reasons and responsibility to help out."

Herman Bünz disagrees: "I would warn people not to expect much from Sweden's EU presidency. Sweden can't do anything alone in the EU, so it would be already very helpful if Sweden could start an awareness campaign about the situation in the Baltics, but one really shouldn't expect any miracles from its EU presidency." German Chancellor Angela Merkel, for instance, has been reluctant in the past to bail out Eastern European countries.

Cicinskas is aware of that and doesn't expect miracles either. He has a simple demand from Germany: "Europe's largest country would do us and most other countries the biggest favor, if it gets its economy back on track again very soon."

He adds that people in the Baltic countries in general are accustomed to the brutality of economic forces. "We have experienced the Soviet blockade of our countries in 1991 and we had to deal with the hardships of the switch of the economic system between 1991 and 1993."

Instead of waiting for miracles from the EU, Cicinskas proposes concrete measures that wouldn't even cost very much. Sweden should convince the EU to set up an extra line of credit for small companies, which suffer especially in the Baltics. In addition, Sweden could train young graduates from the Baltic states on how to start a company.

Perhaps Niklas Zennström could teach young Baltic graduates a lesson about entrepreneurship. The Swedish co-founder of Skype sold the company to Ebay in 2005 for 2.6 billion dollars and is focused now on his next start-up, Joost.

Author: Michael Knigge

Editor: Rob Mudge