Public Finance Systems for Coping with the Crises: Lessons from the Three Baltic States

Abstract

Of all EU member states the three Baltic countries were hit the hardest by the economic crises in 2008–2010 but they recovered relatively quickly, with all three countries even being able to qualify for EMU membership (Estonia joined the Eurozone in 2011, Latvia in 2014 and Lithuania in 2015). The speed and determination with which the Baltic countries carried out austerity measures is often put forward as an example for other E(M)U member states. This paper critically assesses the validity of various models of austerity (expansionary fiscal contractions, internal devaluation and fiscal devaluation) when applied to the case of the Baltic States. It is argued that in the case of the Baltic countries more complex economic mechanisms were at play then these models suggest. In the paper specific attention is paid to the way fiscal consolidation was shaped in the three countries, and to the role of EU structural funding. The paper concludes with a discussion of the lessons that can be learned for other EU countries.