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January 27, 2011

Lithuanian President Calls for More Urgent Financial Reform

As the pace of recovery grows, the opportunity to strengthen institutions like the International Monetary Fund and the World Bank is slipping by, says Dalia Grybauskaitė.

Jackson Hewett

The president of Lithuania, Dalia Grybauskaitė, has warned that another global financial crisis is becoming increasingly likely as countries lose the political will to enact critical reforms. Speaking at the Columbia University World Leaders Forum in December 2010, President Grybauskaitė said that as the pace of recovery grows, the opportunity to strengthen institutions like the International Monetary Fund and the World Bank is slipping by. “Global fallouts were not addressed globally enough,” she said, “and with each month of recovery, as economic tensions diminish, these kinds of discussions become less and less important.”

The president cited her own country’s experience as an example of how nations can successfully implement important structural reforms in the context of the global financial crisis. With its currency fixed to the euro, Lithuania was unable to adjust interest rates, limiting the government to a fiscal response to the meltdown. It drastically cut government spending, increased the value-added tax (VAT), and made deep cuts to social security. Ultimately, government expenditures dropped by 12 percent of GDP over two years. Grybauskaitė credited the move with preserving Lithuania’s fiscal independence.

“Some countries used the IMF as a shield because they were not able to [enact reforms] on their own . . . but I told my government we know what we need to do and we have enough courage to do it on our own,” she said. While the recession was particularly painful in Lithuania — GDP dropped by 15 percent compared to a 4 percent drop for the rest of the EU — the country has experienced a rapid rebound in growth and has earned the confidence of foreign financial markets. More importantly, Grybauskaitė said, structural reforms will benefit Lithuania in the long run. “We had a chance to clean up a lot of things. We reduced [the] very wide social net which [came] from the Soviet era. We were able, under the pressure of crisis, to persuade people to change.”

Grybauskaitė compared the Lithuanian experience to countries such as France, where reforms have been slower and public reaction swifter and more vocal. “You saw the reaction in France [to recent pension reforms]. Any kind of reform is difficult but crisis gives you the chance to do that.”

Citing her experience as the former EU commissioner of financial planning and budget, Grybauskaitė suggested that coordinated reform was essential to prevent a similar crisis. But she lamented the unwillingness of many governments to look beyond their domestic problems and address the spectre of what she believes will be increasingly global crises.

“No one can help globally but all together. The U.S., the EU, [and] China are trying to cope on their own. Global threats are not being addressed. Leaders should be clever enough to make secure sustainable growth for countries and regions and reduce such unexpected fallouts globally,” said Grybauskaitė.

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