and wage increases of 20 – 30 % a year became a fact of life. in latvia, salaries more than doubled between 2004 and 2008 opening a wide wage - productivity gap. similar developments were recorded in estonia, and somewhat less pronounced but still significant departure of wages from productivity was observed in lithuania. consequently all three countries suffered from a significant deterioration of cost competitiveness. all these developments weakened the economies and made them extremely vulnerable to sudden changes in investor sentiment and global woes. initially it seemed that the baltic countries were easing into a soft landing. this was supported by banks cutting lending in a controlled way at the outset of the global financial crisis. however, the collapse of lehman brothers uncovered the real weaknesses – flushing away most of the wealth created in an unsustainable way. throughout 2009, gdp fell by close to 14 % in estonia and lithuania, and by an even more shattering 18 % in latvia. many suggested devaluation as the best solution to support economy and to solve old problems. however, that was clearly not an option for the baltic countries given their openness, flexibility, large foreign - currency - denominated debt and long history of fixed exchange rate regimes serving as an anchor for macroeconomic stability for the baltic states, and also bulgaria. already now baltic performance has reassured many sceptics that the internal adjustment strategy simply works, making a good case for other countries to move forward with fiscal consolidation and much needed reforms. i mentioned the internal adjustment strategy – there was actually such strategy : the state treasury was running out of funds and there is simply no other alternative. the reform agenda in the baltics has been ambitious. to ensure fiscal sustainability, the adjustment burden undertaken ranged from an estimated 9 – 10 % of gdp in lithuania and estonia to 14 % of gdp in latvia throughout 2009 – 2010 – something that the world had not seen before. and yet we did not get stuck in a protracted recession as sceptics predicted. we have already reached a significant progress in regaining cost competitiveness, have made our economies structurally more resilient and are moving towards sustainable growth. so far i have addressed the baltics as a region rather than the individual economies that they are and therefore it might seem that developments there were rather similar. despite the many similarities, however, there were also significant differences that are extremely important if one is to draw lessons from the recent crisis. one may also say that while all three being tigers – a metaphor commonly used to describe the past exceptionally strong expansion

baltic states. a by - product of estonia ’ s persistent prudent policies or – should we say – a prize for its very top stands during last 10 years, that is also going to be its membership of the euro area as early as 2011. the euro is not a solution to all problems and it does not mean a automatic welfare gains for converging economies like ours, but if policies are kept on track, the euro helps boosting growth potential and provides vast opportunities for future development. while we have been struggling to simply stay afloat, estonia has strategically moved towards its aim of joining the euro. i can only express a friendly envy regarding their pragmatism, strategic mindset and ability to move in unison to make use of synergies and reach common targets. “ yes we can! ” sounds like estonia, and i would like to wish every success to the estonian authorities in their future endeavours of making their country a better place to live and advance. what can we learn from estonia? our northern neighbour is a good example that any target can be reached, but this requires strategy and ambition. latvia has shown that it can brace up and make hard but necessary steps forward when cornered. however, all determination tends to fade away with the situation becoming less pressing. when afloat we start drifting downstream instead of heading towards the river bank. i am afraid, as we hear, that latvia has done a good job, that we are leaving the crisis behind us, there could be less motivation to continue the adjustment. hopefully, this has been changed by the recent crisis. latvia is gradually heeling its economic wounds and, hopefully, has learned the lesson that a county cannot live beyond its means without endangering its future prospects. to create a stable economy, which generates more prosperity, is clearly the target for the undertaken reform agenda in this country. in any case, we need another round of fiscal consolidation and structural reforms to bring public finance on a sustainable footing and economy back on a sustainable growth track. at the moment, unsustainable public finance is significantly hampering lending activity, investment, economic activity and new jobs, reduction of the state debt. in other words – deficit can hamper future growth should this problem remain unsolved. while the economic and financial situation in latvia has improved significantly since the onset of the recent crisis, we are not out of the woods yet. according to our estimates another 400 million in expenditure cuts backed by structural reforms that make