Lithuania urges Greece to embrace the pain

By bne IntelliNews February 27, 2015

Jan Cienski in Vilnius -


Greece is looking for sympathy across Europe as its new government looks for a way to soften austerity policies, but Athens' pleas are falling on deaf ears in Vilnius, where Rimantas Sadzius, Lithuania's finance minister, advises his Greek counterparts to take a look at his own country's brutal experience of restoring competitiveness after the economic crisis.

"They must have some cuts that their people will not like," Sadzius told bne Intellinews. "Our Greek colleagues will have to count on twice what they can afford."

Sadzius knows what he's talking about. Along with the other Baltic countries, Lithuania saw a "Tiger economy" turn to a bust with the start of the global economic crisis. From growth of 9.8% in 2007 the economy sank to an expansion of just 2.9% in 2008. It crashed to a 14.7% contraction in 2009. 

However, although faced with a collapse in the banking sector, and all but shut out of international debt markets, Lithuania did not turn to international institutions for help. Eager to avoid entanglement in the strings which come attached, Vilnius instead borrowed at a rate of more than 10%, and undertook a radical internal devaluation.

Salaries were cut more more than 10%, including in the private sector. Some civil servants saw their pay slashed by one third. Pensioners also saw slimmer benefit cheques. 

The right-wing government that brought in the swingeing cuts paid the price at elections in 2012, but Lithuania managed to keep its peg against the euro - in place since 2002 - and restored competitiveness. By 2012, GDP per capita was above pre-crisis levels.

That willingness to bite the bullet gives Lithuania little sympathy for padding the Greek landing. Athens reached an agreement with the rest of the Eurozone in recent days on a four-month extension on its financial rescue programme. In return, Greece's new left-wing government promises to stick to reform measures aimed at improving public finances by beefing up tax collection and making the country more competitive.


"For the first time we got on paper a list of the measures that the Greek government will implement," says Sadzius. "The Greek government is moving in the right direction." However, he suggest discussions over a new aid package for Greece later this year "will be quite hot" in the Lithuanian parliament.

Help for Athens has been especially controversial among the poorer Eurozone members in Central Europe, whose living standards are significantly below those of Greece. Sadzius points out that while Greece has more or less the same GDP per capita at purchasing power parity as Lithuania - about $25,500 - average Greek salaries are twice as high, and Greek pensions three times as generous, as those in Lithuania.

"There can't be any miracle," the finance minister insists.

As the debate over austerity as a policy response to crisis has raged in Europe over the past six or seven years, the Baltics and their hardline approach have taken on a starring role. It even saw Estonian President Toomas Hendrik Ilves trade online blows with Nobel prize-winning economist Paul Krugman in 2012. The Greek saga has brought the arguments back to the surface.  
Sadzius suggests the Greeks take a closer look at how countries like Lithuania restored competitiveness. The Baltic economy, which adopted the euro on January 1, is expected to grow 2.9% this year, despite being buffeted by Russia's recession and the impact of Moscow's sanctions regime. Growth is expected to rise to just above 3% in 2016.

"Fiscal discipline is a precondition for growth," the Lithuanian minister says in a message to his Greek counterparts. "This is a reasonable position for a leftist government."

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