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Latvia learns from the biggest crash of them all

The economy has gone a double-digit economic boom to a double-digit recession. Guy Norton reports on how the embattled Baltic state is coping.

THE NARROW COBBLED streets of the Old Town area of the Latvian capital of Riga are still clogged with luxury cars but an outsider’s first impressions are deceptive. A closer examination of the harsh realities of the downturn in the Latvian economy points to a different picture of life in the Baltic state after GDP shrank by 18% last year.

Car repossessions because of loan defaults outnumbered new purchases in 2009, with repo men the only beneficiaries and former owners, car salesmen and leasing companies the prime victims.

The trials and tribulations of the car market following the triumphs of previous years perfectly illustrate the dangers of excess that have come to haunt Latvia in the past 18 months. In the middle of the last decade Latvia was touted as one of the great economic success stories of New Europe. After its economy was laid low by the Russian debt default of August 1998, the Baltic republic firmly reoriented itself politically and economically in the direction of the European Union, which it joined in 2004.

That, however, is arguably when the country’s troubles started. EU membership seems to have gone to Latvians’ heads and prompted a drive for economic convergence with western European living standards, resulting in a bank-driven consumption and construction boom that sent wages and prices rocketing, torpedoing any hopes of rapid entry into the eurozone.

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