Mr. Vjaceslavs Dombrovskis:

That is going back in history. The now popular John Maynard Keynes in his own time wrote the essay on the economic consequences of Winston Churchill, reciting the failure to leave the gold standard, the eurozone of the time. The gold standard was a system of fixed exchange rates which was widely criticised at the time. At the same time, that particular historian has noted that the failure to leave the gold standard, at least for Britain, has played quite a decisive role in the destruction of its industry, especially advances in radar and the aeroplane industry led to the weapons which helped Britain withstand the World War II. Latvia has paid a tremendous price for the internal adjustments. In whole figures, GDP fell, cumulatively by 25%, unemployment topped 20%, and 10% of the population left the country, therefore the price is high. At the same time there has been no denial about the effect on industry. Many people were forced to restructure, to look for new ways of doing things, as a result of which we now have a qualitative difference. The industrial sector is more oriented towards exports and has become much more robust, as a result of this gruesome experience. The answer to this is far from being settled as to whether one should opt out for the relatively painless way or whether we should opt for more suffering but which may do some good in the long run.

In regard to the banking system, the topic is quite controversial in Latvia as to the extent to which the Latvian taxpayers had to cover the risks of those players in the financial system who gave money to the commercial bank. I can only say that most likely the roots of this go back to the previous wave of crisis in east Asia, Indonesia and so on where it is well known that banks were allowed to fail effectively and the results were quite disastrous. Now it appears the pendulum has swung in a different direction in that there has been the risk of disruption to the financial system and the disruption to Ireland's economy was considered to be so high that the banks were saved. Whether in retrospect that will be judged to be the right decision is not for me to say at this moment.

Is austerity self-defeating? The answer to this depends on where one lives. For example, in a small country such as Latvia while at the moment not in substantial public debt, the trust of the international financial markets is quite important, otherwise it can get into the vicious circle of failure to regain the trust and being punished by higher interest rates - high interest rates mean the need for more austerity which we may fail to achieve resulting in a further erosion of trust and so on. If regaining the trust of that financial system is through austerity, that would strike me as the right way to go. For the large countries, the calculus may be might be quite different because the financial markets cannot invest on Mars, they would have to invest somewhere. There is going to be the same anchor of the central countries which, as we have seen recently in the case of Germany, are being paid to borrow, therefore, they will have to settle some way. Some large countries may have to use that to have a different kind of policy in order to help the other countries. Some countries will always be able to tap into the financial markets, unless there is the option to invest on Mars, which is still not available to the best of my knowledge.