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. Last Updated: 07/27/2016

Once Leaders, Baltics in Deep Slump

APSome of farmer Pyotr Karatseyev's 70 milk cows eating in a barn at his farm outside Rezekne, Latvia, last week.
REZEKNE, Latvia -- For decades, the Rebir factory was the pride of the industrial town of Rezekne in eastern Latvia, with demand for its power drills and chain saws surviving the collapse of communism as it won over capitalist customers.

But the factory's owners closed up shop late last year, victims of high labor costs during the country's now-collapsed boom. Some 1,000 people in the town of 36,000 lost their jobs, sending local unemployment to nearly 15 percent, and with the recession deepening, hopes for new work are fading.

"The worst is yet to come," said Diana Zirnina, a city administration official. "We can feel that people are angry."

Rezekne's boom-to-bust woes are mirrored across Latvia and its Baltic Sea neighbors Estonia and Lithuania.

Not long ago, the three countries were nicknamed "the Baltic Tigers" for their rapid growth and business-friendly policies and held up as models for other countries that regained control of their destinies after the Soviet collapse.

Now their economies are contracting sharply, pounded by the global financial crisis just as they were struggling to deal with a decline that set in after their economies overheated because of loose credit and government spending.

The frustration and anxiety amid the drab Soviet housing blocks of Rezekne, about 45 kilometers from the border with Russia, are palpable.

"It's upsetting. Latvia's lost so much," said Andris Laglers, a driver who joined the ranks of the unemployed in October. "Somehow we have to survive this winter."

Of the three countries, Latvia is the worst off, suffering the sharpest recession in the 27-member European Union. The center-right government of Prime Minister Ivars Godmanis was forced in December to borrow 7.5 billion euros ($9.5 billion) from the International Monetary Fund and Scandinavian countries -- a huge sum for a 21 billion euro economy.

Statistics last week showed that output shrank by 10.5 percent year on year in the fourth quarter -- meeting one yardstick for a depression, as opposed to a mere recession.

The reversal of fortune has stunned Latvians, who after joining the EU in 2004 quickly became accustomed to the good life. From 2000 to 2007, gross domestic product per capita increased more than 90 percent to 6,500 lats ($11,600).

The government in Riga is cutting back sharply, reducing pay for many civil servants by 30 percent and postponing projects such as a new national library. Every day, hundreds of jobs are lost in this country of 2.3 million, and by some forecasts unemployment, now at 8.3 percent, could reach 15 percent.

During the boom, banks lent eagerly and Latvians borrowed profligately, so that over four years beginning in 2004 the loan-to-GDP ratio soared from 40 percent to 88 percent. Real estate prices climbed so far that many Latvians, afraid they would miss out, rushed to the banks for home mortgage loans to buy houses and apartments, further inflating a property bubble. In 2006, growth reached a white-hot 12.2 percent.

Latvians are already looking back on those days ruefully as "the fat years."

Economists gave abundant warnings that such fairy-tale growth was fraught with the risk of an equally precipitous fall. But government leaders pushed ahead so that Latvia would catch up to Western European living standards as quickly as possible.

Outside Rezekne, the dour expression of Pyotr Karatseyev reflects the general mood. Petting one of his 70 milk cows, Karatseyev said he was afraid that Latvia's milk industry might soon cease to exist if the government doesn't subsidize the wholesale purchase price, which is currently 0.15 lat (26 cents) per liter.

"There's no choice. If this situation continues, we'll have to slaughter the cattle and sell it for meat," the farmer said.

In the rural district surrounding Rezekne, the job situation is the worst. Unemployment in the heavily agricultural area, which has a population of 40,000, reached 20 percent on Feb. 9, according to the local employment bureau, the highest in Latvia. As farmers struggle with low food and milk prices, more jobs could evaporate.

Estonia is suffering the same boom-and-bust cycle. On Friday, its statistics agency announced that fourth quarter GDP had fallen 9.4 percent year on year. The Baltic's wealthiest economy in terms of GDP per capita now has Europe's second-worst economy.

Lithuania's economy is also headed for a contraction, though nearly all analysts agree that it won't be as dramatic.

Anders Aslund, an economist at the Peterson Institute for International Economics in Washington, said there might be a silver lining in the Baltic gloom.

"It's better to fall fast than to fall slowly for a long time. The sooner you hit the bottom, the sooner you can start recovering," he said.

Such scholarly insight is unlikely to placate people in Rezekne. The chairman of the city's council, Juris Vjakse, said Rezekne was pinning its hopes on EU funds to weather the economic crisis. This year alone, he said, the city hopes to receive 5 million lats ($8.9 million) in EU money, which is nearly one-fourth the city's total budget.

People in Rezekne have been toughened by earlier woes, including a 1999 downturn, for instance, when unemployment was 27 percent. The only difference is that this time they are part of the European community. "People here are used to working a bit more, suffering a bit more, and enjoying life a bit more," Vjakse said, smiling. "So we are very sure that we'll survive this crisis."