The idea that suffering is good for both the soul and the economy is widely held. To “austerians”, a financial crisis is a mark of moral turpitude, to be redeemed only by suffering. But an economy exists on earth, not in the afterlife. Those who advocate the path of austerity need to show that it is not just moral, but effective. How is this to be done? By pointing to successful examples. In Europe, that example is often the Baltics and, above all, Latvia, a crisis-hit country that was rescued and is now – we are told – blooming. Is it? And, if it is, does this bring lessons for others? The answer to both questions is: only up to a point.

All three small Baltic states – Estonia (population 1.3m), Latvia (population 2m) and Lithuania (population 3m) – enjoyed credit-driven booms prior to the financial crisis. In 2007, Latvia’s current account deficit was 22 per cent of gross domestic product, Estonia’s was 16 per cent and Lithuania’s 14 per cent. The domestic counterparts of the capital inflows were huge private sector financial deficits: 23 per cent of GDP in Latvia, 19 per cent in Estonia and 13 per cent in Lithuania. As usual, the booms flattered fiscal positions: Estonia’s net public debt was minus 4 per cent of GDP in 2007, Latvia’s 5 per cent and Lithuania’s 11 per cent.

Then came the four horsemen of financial crises: “sudden stops” in capital inflows, asset price collapses, recessions and fiscal deficits. In reply, the Baltics decided to stick to currency pegs and embrace austerity.