Latvia's economy went into free fall in H2 07 but due to significant adjustments in wages and prices it has been able to restore competitiveness and strong economic growth.
Latvia is thus a clear example that comprehensive reforms that result in internal devaluations can lead to a fast return to strong economic activity after a significant slowdown.
Comparing the economic situation in Greece to the development in Latvia, it appears that the Latvian economy has had an even faster deterioration than seen in Greece although the recession lasted longer.
The comparison is encouraging for Greece, as it appears that other countries, which have experienced to some extent an equal or larger downturn than that in Greece, have rebounded and that the catch-up can happen strikingly fast.
Significant adjustments seem necessary but Greece has adjusted both wages and prices. Although the adjustments have been slower and less considerable than in Latvia, we believe it will be sufficient to generate growth.
Other periphery countries have also adjusted wages and prices and it seems that their recovery will look a bit like the one in Latvia, although the sovereign debt crisis delayed the process temporarily.
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