Why was the internal devaluation strategy effective in Latvia and the Baltics, while other countries are still struggling with a deep economic and political crisis? It is worth drawing lessons from the Baltic experience for euro area member countries. BIS central bankers’ speeches  1  II. Lessons for euro area member countries  Let me start with fiscal consolidation. The Baltic experience shows clearly that speed is of the essence. In all three Baltic countries, the government reacted swiftly to the deterioration of public finances and frontloaded fiscal adjustment. With a budget consolidation of around 9% of GDP in 2009 alone, Latvia’s effort is unparalleled in Europe. Undertaking the necessary austerity measures at an early stage had a triple beneficial effect. First, it allowed the Baltics to benefit from positive confidence effects. Second, it allowed Latvia to return to the financial markets well ahead of schedule. Third, it allowed growth to bounce back after exceptionally severe output contractions. In 2011 the Baltic countries were the three best performers in the EU in terms of GDP growth. At a time when all euro area policy-makers urgently seek ways to relaunch growth, this is a remarkable achievement. The concept of “expansionary contraction” has been used and criticised in the ongoing debate about growth and austerity. The Baltic experience provides an indication that this need not be an oxymoron: even if fiscal consolidation weighs on the growth prospects in the short term, it has sizeable positive effects in the medium to long term.
Particularly economic independence of central banks – the freedom of taking policy decisions independently of political interference – places Chile well above the average level of independence of both emerging and developed economies in 2003. Chile has shown a responsible fiscal policy, which has contributed significantly to successful monetary policy. During the 1990s, the fiscal balance averaged a surplus of 1.5% of GDP. The above-mentioned structural fiscal surplus rule stabilizes government spending over time, by linking it explicitly to permanent government revenue. Therefore fiscal dominance of monetary policy is ruled out in Chile, as a result of central bank autonomy and Chile’s sound fiscal policy. Public debt has shown a substantial decline since the 1990s, as a result of prudent fiscal policy. The share of consolidated gross public debt has been reduced from 76% of GDP in 1990 to 20% of GDP in 2006, whereas the consolidated net public debt position turned from 34% of GDP in 1990 to -6% in 2006 (figure 3). The successful performance of the fiscal position has been enhanced by the fiscal balance rule applied since 2001 (figure 4). Chile’s good growth performance, complemented by a market-based incentive structure, appropriate regulation and sound supervision of the financial system, has resulted in a safe and sound financial system and deep capital markets. As a result of the major banking crisis that came with the deep 1982-1983 recession, the 1986 Banking Law enhanced regulation and supervision of the financial system.