Even though Valdis Dombrovskis has been Prime Minister of Latvia for only four months, he is about to take his second pay cut. He will share the strong medicine that he is asking his fellow citizens to swallow in a desperate attempt to save the Baltic country from bankruptcy.

Mr Dombrovskis, 38, a former MEP, has probably the toughest job in the European Union, although his wife is not having a much better time of it. She is an estate agent in a country where property values have halved in Europe’s most spectacular national crash, with GDP contracting by 18 per cent — Iceland is down by a mere 10.6 per cent — and unemployment set to rise by 50 per cent.

In less than a year of crisis management, the Government’s response has been to cut public salaries by 15 per cent, then by a further 20 per cent and soon, under emergency measures to secure crucial loans from the International Monetary Fund (IMF), by at least a further 15 per cent, combined with redundancies. If it does not work, economic implosion could trigger a domino effect in Eastern Europe that would leave large EU states having to reach for their chequebooks.

“The situation is on the edge, really,” Mr Dombrovskis said on a visit to Brussels to secure support from the European Commission for its latest emergency budget. “And now comes the third round of budget cuts, which is even more serious than the first two. We are talking about additional budget cuts of some 500 million lats [£615 million].”

This is the price demanded by the IMF for the release of its latest loan instalment, part of a €7.5 billion (£6.4 billion) rescue package for Latvia to help it to meet deficit payments. But Latvia has staked everything on pegging its currency to the euro with an eye to eventual membership. Fears that it might be about to devalue led to the failure of a bond issue last week and wobbles in several Eastern European currencies. Shares plummeted in Swedish banks that are heavily involved in the region.

Mr Dombrovskis, who has already served as finance minister, is adamant that there will be no devaluation, des-pite growing scepticism from analysts. “Analysts tend to differ in their opinions,” he said. “There are analysts who are in favour, there are analysts who are against.”

Thousands of Latvians who took out large low-interest loans in euros to finance car and apartment purchases during soaring domestic inflation have much to lose from devaluation. So, too, do neighbouring governments, which fear that depression could sweep the region.

Mr Dombrovskis said: “Our macroeconomic stabilisation programme is based on the stability of lats, a gradual reduction of the budget deficit to 3 per cent of GDP to meet the Maastricht criteria. We have it as a medium-term strategy and we should reach budget deficit below 3 per cent of GDP in 2011.”

Given the depth of the crisis in Latvia, where bartering is returning to some areas because cash is running out, it seems ridiculously optimistic. However, in his position, Mr Dombrovskis has to be optimistic.

He said: “It [the 2011 target] is not very long, but we have to reduce the budget deficit because we need to finance it, anyway. And to finance the budget deficit, you need it to be sustainable so the markets will trust you again. We cannot rely on international loans all the time.”

The forthcoming pain of more layoffs leaves the EU’s youngest prime minister worried about social unrest, and he has engaged for week in talks with trade unions on the latest cuts. He said: “It is now easier to start protests than to stop them.”

Mr Dombrovskis said: “When I meet the Estonian and Lithuanian prime ministers, it is the same discussion. It is budget cuts, all the time.”

Despite the gloom, he believes that Latvia is about to turn a corner. “There are some positive signs,” he said. “We used to have a huge current account deficit, about 20 per cent of GDP, and now it is positive. Exports are doing relatively fine in foodstuffs, pharmacies and services.

“Really, there is a feeling we could be at the bottom of the crisis, that it is not getting worse.”

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