Introduction

After several years of very strong economic growth, the Baltic countries have witnessed one of the deepest recessions in the world. In an historical context, the expected cumulative output loss associated with this Baltic recession is almost twice the size of the losses suffered by the hardest-hit countries in the 1997–8 Asian crisis, and in the case of Latvia comes close to the size of the US output decline during the Great Depression.

Despite many similarities in structural characteristics (including fixed exchange rate arrangements) and macroeconomic developments prior to the crisis, the Baltic countries have shown clear differences in their ability to cope with the common negative shocks associated with the global economic crisis. Estonia has been more successful than its Baltic neighbours in withstanding the impact of the financial crisis, and will join the euro area from 2011. Resilience to the crisis has been weakest in Latvia, which is dependent on financial support from the International Monetary Fund (IMF) and the EU and has a more uncertain economic outlook.