 Hello everybody. Welcome. My name is John Hamry. Welcome to clad to have all of you here We're very fortunate that Prime Minister Domrovskis is here with us today. He was delayed up on Capitol Hill and I don't know why that would ever happen Yeah, and but I'm delighted that he could join us for this event and it's we're looking very much forward to having him speak with us The Latvian delegation that we have say seats reserved up here for you, so please join us up front I've always marvel at when a country gets in trouble It somehow manages to bring forth its very best sons to help through the problem and of course, that's the case here This is an unusually talented man Who had a sparkling and bright career in the technical sciences in physics and then phd from From Maryland here in town in engineering, but at the same time had was able to get a master's degree in Customs policy and tax policy and all of a sudden coming forth at a time founded a political party and Coming forth at a time now when Latvia needs almost precisely this combination of skill and talent because this is a challenging day But we have an unusually gifted man who's in charge And so we're looking forward to his presentation. Our time is a little bit compressed We're first going to to hear the Prime Minister and then Heather is going to help field questions Heather do you want to make any further introductory remarks and let me turn let me turn it to you and thank you Prime Minister for being with us. Thank you Thank you so much. Dr. Hamry Knowing how honored we are the Prime Minister is with us and this is an important moment as Europe Tackles a daunting crisis and Latvia is certainly at the forefront of meeting that challenge and Mr Prime Minister, we're just grateful that you could be with us And our partner and ally in so many of the great endeavors of the day And so with that, Mr. Prime Minister, you can either choose to remain seated or you may use the podium We'll welcome your remarks and then we will invite you all to join the conversation. Mr. Prime Minister. Thank you Well, good afternoon everybody. It's a great honor for me to have the opportunity to address you here at CSIS Thank you very much For the president and organizers of this event So in today's presentation, I would briefly go through the situation as it has developed in Latvia as regarding economic and financial crisis and also some sorts of how the development should Or could continue in Eurozone and also in Latvia so to put Latvian crisis in the global economic crisis context I also try to Make some parallels So in any case we had Similar developments as many other countries had including us just pushed to the much more extreme side so after joining the EU in 2004 we Experienced at the period of strong growths at some occasions our growth rates even exceeded Increased to double digit growth rates and there was probably too much optimism about Economy to about too much optimism about are behind us and there is going to be eternal growth and Unfortunately turned out in global financial markets. It was a time when World was booming and Latvia was booming probably twice as much as the world but also While this economic development there were also Signs of trouble which at that time apparently went unnoticed While having a double digit economic growth. We still had a budget deficit and Government was interpreting a Mastery criteria which sets limits to budget deficit way to Simplified basically saying as long as budget deficit is below 3% which is master criteria limit Everything is just fine. Of course, that's not true. What master criteria really says is that? Budget should be balanced during the economic cycle and then in the times of stagnation or recession It should not exceed 3% of GDP Whereas our approach at that time was like, okay, we have 10% growth and our budget deficit is still below 3% of GDP What do you want? Also having this problem we had Inflation and also inflation before joining the EU for five years We had inflation between 1.9 percent and 2.9 percent Then after joining the EU inflation at certain stage reached Again double digit figure so it was some 10, 11, 12 percent inflation and part of this was Filled by or most of it was filled by domestic consumption which in turn was Filled by the easy accessibility of bank credits. So what we had during the years 2005-2006 amount of credit in our economy doubled. So those were huge Huge credit increase and that's where we were part of the booming global financial markets there was easy credit our currency was pegged to euro and We were basically Importing EU monetary policy meaning low interest rates 85% of our our loans were in euros which people then could exchange to lots. That's a fixed exchange rate and Enjoy this Cheap credits so this was really how our imbalances build up and also it meant while Having an economy which is running on on credit. So to say we also created a large current account deficit and if a decade ago or so People were saying economists were saying that the current account deficit of more than five percent of GDP Already spells some trouble Then in 2007 we had a current account deficit of 22.5 percent of GDP so Another issue was real estate bubble which then Couple of months after the US real estate bubble bursted our real estate bubble bursted but with a difference that in US Prices were going down from the peak values maybe by some one-third in Latvia in some segments The prices were going down by two-thirds of the peak value So really we were the real Showcase for economic disbalance and the last Drop was once Financial crisis started and Many financial institutions started to help problem. Also, we had to nationalize our largest independent commercial bank All together we put directly in some four point nine percent of our GDP in cash Another 2.6 percent of GDP in guarantees and that was exactly the point when we had to turn to IMF and European Commission for the international loan package so the international loan package was created of seven and a half billion euros to To finance our economy finance were budget deficit stabilized financial sector and Of course it came as a conditionality of rapidly reducing budget deficit and since the debate started of whether we should devaluate our Currency to address part of the imbalances and in this way to Get down the real income and values and of savings or We should stick with our exchange rate, which is effectively pegged to euro and Go through the internal devaluation and fiscal adjustment So we choose the second pass which at that time Created lots of questions and doubts about among economists. Is it reasonable? Why and is it possible? Also, there were speculative attacks on Lutz like in June 2009 we had a speculative attack on our currency. Well, which was successfully fought But in any case so what we choose we choose to have a fixed exchange rate and go through the fiscal adjustment so all in all 2009 amendments in 2010 budget we went through a fiscal adjustment of well over 10% of GDP which In such such a short period of time is well almost unprecedented at least we have not come up any Examples where This could Had been done as regards General economic and social policy Basically, our work was divided in three main directions first was fiscal adjustment fiscal consolidation second was economic stimulus of Which we could afford given the fiscal consolidation and serve as Social safety net to ensure social stability. I will briefly go through the three main those directions and then separately, of course, there was agenda of structural reforms which were partly Linked to the fiscal adjustment partly run by the fiscal adjustment, but also Many of them were long overdue before that so on fiscal adjustment measures we took Not not very surprising ones tax raises Including rays of VAT rate the value added tax Including rays of excises some income taxes wage cuts reduction of social benefits Reduction of public sector Jobs so all in all some More than 14,000 public sector places were downsized which may not sound Huge here, but we are a country of only 2.3 million people and on that scale. It's of course Feels quite substantially to give some examples like central apparatus of our ministries were reduced on average by 30% 3-0 Number of different kind of agencies was halved. So really and if we look at the budget State budget finance institutions Average salaries in first quarter of this year are some 25% below average salaries in 2008 of 2008 so really it's a very substantial adjustment. We had been taking Second given this Adjustment we couldn't really rely on domestic consumption as a driver of our economy. So we had to Do something else and not very originally because many countries are talking about this So we also decided to be like exporter into the economy and the fiscal stimulus Which we had which mainly was coming from European EU funds being a member of European Union we can receive certain structural and cohesion funds which for support of Economic development for support of infrastructure for some social programs. We reallocated those resources quite substantially towards Support of entrepreneurship and especially export oriented industries we created export credit guarantee scheme as of June last year and It seems to have been paying off because First quarter of this year was a first Quarter after eight month after eight quarters When we had a recession in the first quarter of this year, we had 0.3% growth quarter-on-quarter whereas if we look at the figures of industrial production and Exports so First quarters this year to first quarter last year industrial production was up 7.4% exports were up 10% So really we see that not only we are coming back to economic growth, but also our Structure of our economy is changing and Regaining competitiveness certainly was one of the key Priorities for this fiscal Not fiscal for this stimulus package, which we had third important issue while going through large-scale fiscal consolidation of over 10% of GDP It's important to ensure Social stability so for this also in cooperation with World Bank we involved Developed so-called minimum social safety network, which was Targeted as exactly those People who were most affected by the crisis. So we had a very substantive temporary works program for unemployed Prolonged unemployed benefits payments period increased guaranteed minimum income benefit, which was what people get after They stopped receiving unemployed benefit Co-finance some benefits to local governments improved accessibility of health care and medicines to poor people and Really, I think this was one of the factors which helped to ensure social stability So while facing tax raises and wage cuts and so people still could see that State is taking care of those most in need during this crisis Coming to the structural reforms agenda we had Had been doing quite substantial Structural reforms in the number of sectors including public administration education and health care and Interestingly on education and health care. Luckily. We did not how to come up with a new ideas Do reforms there because the principles of reforms were known already from 1990s there had been World Bank papers with Detailed proposals on structural reforms in education Introduction of principal money follows pupil optimization of the schools network. So there was detailed recommendations on what we call master plan in health care also to do with Optimization of hospital Network with Primary care and so on and so on so for there all those Structural forms from basically no, but as I love to say reform starts where the money ends So when those those documents were drafted It was just politically not popular to do so and so it basically nothing was done So what we had to do we basically had to take those reforms and Implements and was exactly what we did During the last year, of course, we had to do it in an accelerated pace without proper safeguards and Not everything went so smoothly as if would have been if it would have been done in a due time but well, unfortunately, we only Did those reforms once? Once our money ended In this term now it seems that we are on the path of economic recovery Unemployment is decreasing every month since March. So our first signs of Economic recovery growth not recession finally there is quite robot growth of industrial production and exports and Also from a so to say world attention point of view Latvia is off rather and where we were Considered to be the country worst affected by economic crisis in the EU Now this attention has shifted to southern Europe to Greece Spain some other countries and Properties there's also some Some lessons to be learned from our experience How to deal with internal Devolation because in a case of Latvia we Theoretically had this debate that we could have chosen also to go for devolution But our feeling is that devolution is easy way for a government. It's not even government decision It's central banks decision But certainly it's not an easy way for the people as it immediately erodes Real value of the savings real value of the incomes of pretty much everyone. So and it's also a huge redistribution of wealth from Pretty much everyone to a couple of exporters and even there being a very small and very open economy those competitiveness gains would have been short-lived because Imported energy prices will increase immediately imported component prices would increase immediately and we didn't see much gain on this Plus while doing through the fiscal adjustment We in fact had to implement also many Overdue structural reforms which otherwise probably would not be implemented again and those imbalances would continue to accumulate Whereas now if you look at the example of eurozone countries in eurozone countries Technically speaking there is no this option of devolution because If you are in eurozone and want to continue with euro as a stable and credible currency You cannot call for devolution of euro So really it is this pass of internal devolution, which is the one you how to follow and There I really feel that there is some Some lessons which could be learned from our experience which we had gone through in a last One and a half years. I'll stop here. Thank you very much for your attention Mr. Prime Minister, thank you very very much For those very insightful comments I have to say I really enjoyed the quote reform starts where the money ends and I think that's That's certainly a keeper and we're very grateful for For the articulation of really the measures and the scale and the scope of the measures that Latvia has had to take to to whether The economic crisis so with with your permission and the audience permission We have approximately a half an hour for for discussion and conversation The moderator has the great privilege of not only keeping the clock But if throwing out the first first question or so so with to get that conversation started and then We look forward to taking your your questions. Mr. Prime Minister. I have I have a two-part question one is sort of internal to the EU dynamic during this economic crisis and then one is sort of addressing the economic the ramifications of the economic crisis on NATO and larger European defense spending efforts for my first question Are you concerned that? Europe will start developing a two-tiered Europe those within the eurozone those who stay beyond And outside of the eurozone other countries have expressed their concern as the EU starts to Articulate its economic government structure Are you concerned about a two-tiered? Europe moving forward economically and then second you've you've articulated a series of very tough choices And Latvia had to make a very tough choice about whether to sustain its Deployment in Afghanistan during these very dire economic days and Latvia chose to remain In Afghanistan But moving forward do you think there will be more difficult decisions about Latvia's Military spending its its security posture vis-a-vis NATO in light of some of the these still Deep cuts that will have to be made in your in your fiscal outlook Well, thank you. So on our first question on Eurozone and eurozone versus non eurozone countries Well, I don't think there is so much concerned for developing a two-speed Europe and What we currently see with a crisis in eurozone? It's it's quite clear that the problem of eurozone is lack of control Mechanisms within eurozone because with new countries, which are just to join your eurozone It's relatively clear you either fulfill mastery criteria or you are not allowed in Whereas within eurozone, there are no control mechanisms and in fact, we know that most eurozone countries do not fulfill mastery criteria and That's certainly a problem and until 2003 there were in fact sanction mechanisms Those were later scrapped Now commission is coming up with the proposals of pre-screening national budgets before Those can be submitted to the parliament to ensure that Countries of EU countries basically would follow stability and growth packed rules Latvia is supporting this proposal and we're open to discuss also other kind of Proposals, it's quite clearly that there are control mechanisms needed within eurozone to ensure that countries fulfill their own rules because Unfortunately, we see that without those control mechanisms. That's not always the case another Important aspect on this there are lots of discussions about new EU economic governance, but My personal feeling is that These proposals still will help to work within the existing Institutional framework within this existing treaty Because there's not much appetite in the EU to draft a new treaty after two Failed referendums on the constitutional treaty in France and in Netherlands after two Referendums in Ireland on Lisbon treaty There is really not So much willingness to open the treaty again and to start to negotiate this once again so There will be limitations Which with a framework which in fact was created just before this economic trouble started and just before people started to Think about that kind of an economic government's issues So my guess is that will be still be acting within Lisbon treaty But also there you can be creative. We know that in what Germans are very much Indicating that there is a no bailout close in in the treaty So eurozone countries cannot be bailed out because they are supposed not to run in trouble And then Once the citation in Greece developed they had to read more carefully the treaty and to discover, okay bailout is not allowed let's call it rescue and That bilateral loans direct bilateral loans from EU member states or eurozone countries does a eurozone countries are not Prohibited and that's how the rescue package for Greece was prepared in a structure. It's Relatively similar in in fact to Latvia's package it's Europe it's Mainly European loans bilateral loans of EU member states with a substantial IMF financing In Latvia's case it was easier. We were not in part in eurozone. So we also have bilateral Loans of European countries with a substantial IMF financing, but we also have European Commission loans Which is not the case in Greece because of this no bailouts close But so really we will have to work with an existing treaty and recreate Control mechanisms to ensure that Eurozone follows its own rules. I think that's key for successful Functioning of the euro for credibility of the euro as global currency and As that's I think that's that's how it's going to happen. So second question on Defense spending and defense efforts. Yes, we also While downsizing budget pretty much every field was affected and defense was no exception So there we had to also prioritize our Spendings and quite clear one of our priorities was also to maintain our current existing level of engagement in Afghanistan in international operations because Our feeling is that we have to do our part of the job as a NATO members It's important for Latvia to be a part of the solution for global Safety rather than part of the problem. So we are sticking with our obligations and in fact our Contribution to NATO forces in or is our forces in Afghanistan is One of the highest in per capita terms So we are Maintaining this level of engagement and in fact during the crisis we also assumed lead nations status for a so-called northern distribution network, which she is Transferring us and NATO goods to Afghanistan via northern route through Latvia Russia Kazakhstan and of Pakistan to Afghanistan as an alternative and supplement to the southern route to via Pakistan and All in general, it's quite clear once countries will help to go through fiscal adjustment in EU Quite clear. It's going also to affect defense spending there's basically no way around it. So then it's question of prioritizing the choices and looking that it would not affect Defense capacity in a medium and long term. So that's how we also see The developments in Latvia and in fact this also allowed us to implement a successful commander form While really streamlining and downsizing command while it's the same time Keeping troops at the ground level Thank you, mr. Prime Minister. I'll just open the floor now to question if you could raise your hand we have colleagues with microphones and The wait for the microphone to come and if you could Please give us your name and your affiliation before you pose the question to the Prime Minister sir right there Thank you for brilliant presentation. My name is Alex Grigory. If I work in for Ways of America Russian service, what if thinking about the future of euro is a global currency mentioned about that But what do you think it about? Thank you? well, I think there is still future in Europe as a global currency and as a reserve currency, but it's quite clear that Now in a year or two Eurozone will be going through the crisis countries will have to do fiscal adjustment It may affect also the economic growth rate in Europe, but there is No way around it I don't think that Any of those hastily conclusions which are sometimes being drawn that eurozone would disintegrate or Countries would start to throw some countries out of the eurozone. I don't think anything of this will Happen it is going to be Here or two of quite substantial trouble to go through this crisis but I Think you Eurozone will stay euro will stay As a project, I think it's one of the most successful projects in the EU Internal market common currency and it has brought lots of benefits to the European economy. There are also some more ideas coming up on more bolder scale Also, probably making some joint European lending for sovereign debt and other ideas. So I think there is different Directions where you can in fact deepens this Cooperation so my prediction euro euro will stay in any case. It's also part of our exit strategy to bring budget deficit to the master criteria levels in 2012 with a target date for joining eurozone in January 1st 2014 and in this sense It was very important signal. We were receiving just previous weeks that eurozone is an open project and that Current eurozone troubles are not affecting eurozone enlargement We know last year Estonia met master criteria pretty much one of the very few EU 27 countries which met master criteria last year and They are on their path to eurozone accession in January 1st next year Yes, sir, the gentleman down the front microphone is coming My name is Walter Stathler National Defense University Foundation. My background is career diplomacy and by the way I was the US member of the IDAP the international defense advisory board for the three Baltic Republics during late 1990s and Early part of this decade my question concerns foreign investment Which as we know is really key to maintaining equilibrium in economy because it brings not only money but Employment and technology as well and my question is what is that is Latvia doing to attract that foreign investment Okay, so First of all again one of the macroeconomic data. I didn't mention during the introductory Speech also first quarter of this year was the one when we saw again increased flow of foreign The direct investment in Latvia First thing we had to do Initially was to really stabilize the economy. That's a short-term question Nobody is going to invest in a country which is deemed Economically and financially unstable. So that was really the first thing Once we did it once this signal is going through the world. So to say that really economy is more stable there are Gross potential and so then investors also start to look at other matters and this policy of internal Devolation also improved our competitiveness. They improved our real effective exchange rate and So we also see some increase in FDI then it also takes some Practical work to be done. So for we're working several directions as a plan for Improving the business environment and then work on implementing this plan. This is a continuous effort Now we also are setting Some project lists and team ad hoc working groups basically to deal with a large incoming FDI projects Because what we had felt as experience also in previous years that some projects were not implemented for the reasons that So we're just stuck somewhere in bureaucratic layers and could not really pass through them. So for this sense, it's important really to help Especially if you're talking on large projects to deal with a bureaucracy to deal with a red tape and also to signals It's this FDI is welcoming Latvia. So there we also see some growth John Miller with Raytheon May I ask do you think the economic situation will cause Be an impetus for greater cooperation with Estonia and Latvia and perhaps other countries? And if so what areas did you would you see greater cooperation coming to pass? Well, I would say regardless of the economic situation. We have a great cooperation with Estonia and Lithuania And it was also so so during the crisis. We were coordinating to extend our tax policies. We are now working on some projects of Even deeper economic integrations and EU would require to really Trying to create Baltic states as a single possibly single market and Certainly we have cooperation on political issues regular consultations where I would say traditionally We had been very supportive to each other So I would say in this political dimension. I wouldn't expect much major change Due to this economic crisis. It's really more to do with economic governments issues Some control mechanisms issues to ensure that we do not run in that kind of crisis again Also some political large political processes we can See like reset policy between US and Russia, which also has so far. I'd say positive implications for Latvian and Baltic states relations with Russia for EU Russia relations but I Don't think it's so directly linked with the economic crisis. So those I wouldn't make too much links there Hello, so welcome. Don Mayurich is from Embassy of Croatia Just wanted to hear your view on the EU enlargement process Not only to Croatia, but also to other Western Balkan countries. Thank you well Latvia has always advocated that you should be an open project also open to enlargement and In this sense, we have always supported Croatia's way towards EU accession and We see that you're making real progress and I think it's really a Question of relatively short perspective before you will be in the EU. We know that other Balkan countries are in different stages of negotiation and so far countries which had expressed interest from Balkans towards EU integration are really at various stages of Progress, we know that EU enlargement as as a whole is Also a controversial project Not every country in the EU are very supportive. There are talks of EU enlargement fatigue There were there is situation with Turkey as we know that first Granted candidate countries status and then questions are asked. Do they really belong to Europe? Probably should have been as a way around Briefly, there were some discussions of maybe Ukraine's way towards EU accession, but that was not even mentioned in EU enlargement strategy of like what was it 2004 or 2005 so Also, it has its limitations and political limitations within EU but as as regards Balkans I would say that's one of the regions where EU in general is positive and those There will be real progress and Croatia will be in in a matter of I don't know one two years Thank you. We have time for two more questions I'm gonna take the two that are right beside each other sir gentlemen the blue and then you can just pass the microphone to the gentleman beside you and The Prime Minister you can bundle those two questions and okay, so we'll finish up there Gentlemen with the blue shirt and yellow top and then pass it down. Thank you Bob McClellan retired Department of Defense more specifically Latvian historian It is my understanding that Latvia was experiencing a population drain has that stopped and Did the government taking any effort to stop it? Stephen Stoltenberg State Department analyst covering Poland in the Balkans Baltic States The cuts that you've described in terms of social benefits and salaries seem Amazing that you've been able that your population has been able to withstand that You're entering a parliamentary election season as I understand it and I don't see any evidence that the economic reforms that you've introduced or the cuts that you've implemented have necessarily Impacted you negatively in terms of your political prospects in the upcoming election. So my question is how did you manage to? implement this program and not In bring about a huge social backlash against against your government. I think that that might be an interesting lesson for other governments Okay, so On the first question really we had this problem with emigration, especially during Years 2004 2005 just after our EU accession Wage levels in Latvia were much lower than old EU member states and with a free movement of labor and Three countries initially opened up their labor markets. It was like you care Ireland and Sweden in fact Many people left estimates vary some more typical estimates are around 50,000 people left Latvia to work in Old EU member states then when economy was booming In fact, we saw that this tendency stopped and even reversed people started to come back to Latvia But now with economic crisis again with law High unemployment with wages suppressed to the extent again. We are again having this problem But as we learned from the previous way you cannot just increase salaries Because then without increasing productivity and that's exactly what happened in Latvia after EU accession We had a period of very rapid wage growth We lost our competitive competitiveness we run into deepest crisis in the EU and So that's why we are also thinking very much of the change of the structure of the economy So that our economic growth would be sustainable because fundamental answer to this emigration problem is To ensure more or less Equal salaries or not so dramatic salary differences between Latvia and some other EU member states Coming to the second question on social stability I mentioned one of the points which was this social safety network, which was important also we had lots of discussions with Social partners with employers organizations with trade unions with local governments union And in fact 2009 budget amendments, which were the most painful ones so to say were made based on agreement between coalition parties and trade unions employers local government union Not that I really wanted to know about it later, but it was written it was on paper Of course, and there were many Discussions yes, we kind of supported it, but not really but at least they were kind of on board which was important to also have them on board we launched what we call reform management group where government was sitting together with exactly this social partners and it also gave their part of the Contribution and Yes While the approval ratings of government or myself if you want were falling when we were making 2009 amendments 2010 budget It started to improve again once people saw that well situation is to the extent stabilized We are coming back to economic growth and really we see that it also improved approval ratings of my party of of myself being one of the most popular politicians in the country But of course, it's always Fragile of course there More decisions to make and you never know where exactly it's Too much politics is is always a very unpredictable business. So you cannot be Enjoying too much now and popular maybe in a month. I will not be unpopular again This is what you don't know. Yeah But really it was this social safety network and social dialogue, which are important to ensure and also Interestingly if we compare with a citation of Greece and public opinion polls in Greece show that most of Greeks in fact supports those austerity measures implemented by governments they understand that That's what it is that those are the choices and there are some militant entities which are creating those protests and this huge negative publicity about This situation that if you look at the polls in fact Most of the Greek circles say yes, we understand it's a crisis. We need to do something about it Well, mr. Prime Minister, I'd like to thank you for your thoughtful remarks You're very candid remarks, and I think I'll end where dr. Hammering began that in times of deep crisis our nation's turn to Leaders who can see them through those troubled times and Latvia and its wisdom selected you to lead them through this very Difficult time. So we thank you and I think the audience you asked some terrific Questions and very insightful as well. So I thank you very much. Please join me in a round of applause