Austerity Cripples Growth, Latvian PM Warns

Latvia was one of the first European countries to introduce austerity measures almost two years ago as a condition of tapping the International Monetary Fund for emergency funding.

Now the Eastern European country's debt ratio is stabilizing, but Latvian Prime Minster Valdis Dombrovskis told CNBC that introducing huge budget cuts during a recession made matters worse.

"Certainly it makes things worse for an economy if you go into huge budget cuts during a recession," Dombrovskis said.

"It was really very painful measures we had to do in order to get the budget deficit under control… those kinds of measures, tax rises and expenditure cuts, are never popular," he said.

- Watch the video above for the full interview with Valdis Dombrovskis.

The Latvian economy contracted 6 percent in the first quarter of this year, which is a significant improvement from the near 17 percent contraction in the fourth quarter of 2009.

Roger Nightingale, strategist at Pointon York, agreed with Dombrovskis' claim that cutting the deficit comes at the cost of growth.

"The therapy that these organizations propose for an economy usually make things worse. They take a sick guy and they make him sicker," Nightingale said.

"The thing you want to do is have a good, efficient, competitive economy because if you get that, all other problems go away," he said.

"The fiscal deficit is pretty unimportant, what is important is the country's capacity to grow," he added.

Nightingale thinks the growth prospects for Europe as a whole are limited because the region is inefficient and uncompetitive.

The European Debt Crisis - See Complete Coverage
The European Debt Crisis - See Complete Coverage

Dombrovskis thinks that Europe's current debt problems are partly caused by the fact that euro zone members didn't stick to the Maastricht criteria after they were admitted. The criteria are the rules countries must follow in order to adopt the currency, such as keeping a budget deficit below 3 percent of gross domestic product and public debt below 60 percent of GDP.

"The real problem was that hardly any euro zone countries were following Maastricht criteria so that's why we are now in that kind of emergency austerity measures," Dombrovskis said.

"Should the euro zone have followed their own rules … we wouldn't be in this situation in the first place," he said.

  • Watch Roger Nightingale interviewed here