By LANDON THOMAS Jr.
Published: April 1, 2010
VILNIUS, Lithuania — If leaders of the world’s many indebted countries want to see what austerity looks like, they might want to visit this Baltic nation of 3.3 million.
Ints Kalnins/Reuters
A rare protest near the Parliament in Vilnius last year. Lithuania's austerity plan had the grudging support of trade unions.
Maxim Shipenkov/European Pressphoto Agency
“You have to do the most difficult cuts as quickly as possible,” Prime Minister Andrius Kubilius said of the austerity plan.
Faced with rising deficits that threatened to bankrupt the country, Lithuania cut public spending by 30 percent — including slashing public sector wages 20 to 30 percent and reducing pensions by as much as 11 percent. Even the prime minister, Andrius Kubilius, took a pay cut of 45 percent.
And the government didn’t stop there. It raised taxes on a wide variety of goods, like pharmaceutical products and alcohol. Corporate taxes rose to 20 percent, from 15 percent. The value-added tax rose to 21 percent, from 18 percent.
The net effect on this country’s finances was a savings equal to 9 percent of gross domestic product, the second-largest fiscal adjustment in a developed economy, after Latvia’s, since the credit crisis began.
But austerity has exacted its own price, in social and personal pain.
Pensioners, their benefits cut, swamped soup kitchens. Unemployment jumped to a high of 14 percent, from single digits — and an already wobbly economy shrank 15 percent last year.
Remarkably, for the most part, the austerity was imposed with the grudging support of Lithuania’s trade unions and opposition parties, and has yet to elicit the kind of protest expressed by the regular, widespread street demonstrations and strikes seen in Greece, Spain and Britain.
To be sure, Mr. Kubilius has many critics here and abroad. Government austerity in the midst of a recession runs counter to the Keynesian approach of increasing public expenditures to fight a downturn. That was the path most countries chose.
But Mr. Kubilius and his team say that with a budget deficit of 9 percent of G.D.P., a currency fixed to the euro and international bond markets unwilling to lend to Lithuania, the government had no choice but to show the world it could impose its own internal devaluation by cutting public spending, restoring competitiveness and reclaiming the good will of the bond markets.
Another motivation was to conform to the rules of membership for the euro currency union, which Lithuania hopes to join by 2014.
Indeed, outside of Ireland, no country in Europe has come close to replicating Lithuania’s severe spending cuts without the aid of the International Monetary Fund. Ireland passed the most austere budget in the country’s history, and public sector pay cuts were a centerpiece of the government’s reform effort.
The Finance Ministry has forecast growth of 1.5 percent this year, and this week Moody’s increased its outlook on the Lithuanian economy to stable, from negative.
“From a credit rating perspective, Lithuania has put itself on positive trajectory,” said Kenneth Orchard, a senior credit officer in Moody’s sovereign risk group.
As European nations consider what the social and political costs will be when they take steps to cut public sector spending, Lithuania offers a real-time case study of the societal trade-offs.
Speed and communication are the most crucial to success, Mr. Kubilius said in an interview in his office last week.
“You have to have a dialogue with your social partners, and you have to do the most difficult cuts as quickly as possible,” he said. “I told them this is history. You need to decide now how you want to be described in our history books.”
Like Latvia and Estonia, Lithuania rode a boom driven by banking and real estate earlier this decade.
Construction came to dominate the economy, and low interest rates spurred a housing boom. Many Lithuanians took out low-interest-rate mortgages denominated in foreign currencies.
With the onset of the crisis, house prices plunged, building ground to a halt and quite suddenly thousands lost their jobs and began to default on their debts.
While the quaint cobblestone streets of Vilnius may project an air of prosperity, one does not need to travel far to witness the pain many Lithuanians are feeling.
Monika Midveryte, a university student, and her mother are now supporting the family after her father lost his construction job. Now, she said, he sits at home in front of the television drinking his troubles away. “He has no hope.”
The psychological toll has been immense. Suicides have increased in a country where the suicide rate of 35 per 100,000 is already one of the world’s highest, local experts say.
According to figures collected by the Youth Psychological Aid Center, telephone calls to its hot line from people who said they were on the verge of committing suicide nearly doubled last year to 1,400, from 750.
As the president of Solidarumas, one of Lithuania’s largest trade unions, Aldona Jasinskiene has an acute understanding of how bad things are — not just as the head of her union, but as a mother.
For more than a year, her salary has paid the 2,300 litas, about $900, in monthly mortgage payments for her 40-year-old son, who lost his construction job. Ms. Jasinskiene says his mental health is suffering, he is fighting with his wife and his family of four dines on potatoes three times a day.
Now, with her own pension having been slashed, she is left with just 300 litas a month to support herself and her 15-year-old granddaughter.
Ms. Jasinskiene said she signed the agreement with the government because unions, which are extremely weak in Lithuania, were not capable of calling the type of general strike well known in other parts of Europe, and because she wanted to do what she could to prevent even deeper cuts.
While Mr. Kubilius points to positive signs like renewed growth, busy cafes in Vilnius and upgrades by the credit agencies, from her vantage point, Ms. Jasinskiene sees no upturn.
“He is telling you a fairy tale,” she said. “Unemployment is going up and up.”
Algirdas Malakauskis, a priest at St. Francis and St. Bernardine Friary, has also experienced the recession’s toll firsthand.
He has had to preside over an increasing number of funerals for people who have taken their own lives. Parishioners now come to him seeking work, and his elderly parents, whose pensions have been cut, are angry.
Like a surprising number of people here, however, he has not turned on the government. “You can see they are doing everything that they can to keep the situation stable,” he said.
Still, the tough measures have drawn criticism outside Lithuania.
“The internal devaluation strategy may have succeeded in delivering short-term stabilization, but at what cost?” asked Charles Woolfson, a professor of labor studies at the University of Glasgow who has expertise in the Baltics.
Professor Woolfson points out that deepening social alienation in Lithuania has resulted in the sharpest rise in emigration since the country joined the European Union in 2004.
“Then it was the migration of the hopeful,” he said. “Now it is the migration of the despairing.”
There is no greater totem to the excesses of the lending frenzy that gave Lithuania one of the highest growth rates in Europe in 2007 than the sparkling Swedbank office building. Completed just last year, it is 16 stories high and monopolizes the modest Vilnius skyline.
Swedbank is the dominant bank in Lithuania, and its aggressive lending to first-time home buyers — including Ms. Jasinskiene’s son — continues to be a millstone for many here.
“People are angry,” said Odeta Bloziene, who runs a unit within the bank that gives advice to Lithuanians who are having trouble repaying their loans. “But we never run away from our customers.”
In the reception area of the bank’s headquarters, bankers laughed and drank beer from a well-stocked bar as rock music played in the background.
It is a far remove from the soup kitchen at St. Peter and St. Paul’s Church in Vilnius, where 500 people a day line up for a free meal of soup and Lithuanian pancakes.
Mecislovas Zukauskas, 88, a retired electrician, has lived through the devastations of World War II, the Soviet occupation and, most recently, the death of his wife. He is taking his pension cut in stride.
“The government does what it wants to do,” he said. “We can do nothing.”"
1. NYTimes.com
