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Latvia provides no magic solution for indebted economies
While the economic crisis was deep enough to drive even Latvia's depoliticized population into the streets in the winter of 2009, most Latvians soon found the path of least resistance to be simply to emigrate. Neoliberal austerity has created demographic losses exceeding Stalin's deportations back in the 1940s (although without the latter's loss of life). As government cutbacks in education, healthcare and other basic social infrastructure threaten to undercut long-term development, young people are emigrating to better their lives rather than suffer in an economy without jobs. More than 12% of the overall population (and a much larger percentage of its labor force) now works abroad.
Children (what few of them there are as marriage and birth rates drop) have been left orphaned behind, prompting demographers to wonder how this small country can survive. So unless other debt-strapped European economies with populations far exceeding Latvia's 2.3 million people can find foreign labor markets to accept their workers unemployed under the new financial austerity, this exit option will not be available.
So what about the much-quoted 3.3% growth rate? Projected for 2011, it is often cited as evidence that Latvia's austerity model has stabilized its bad-debt crisis and the chronic trade deficit that was financed by foreign-currency mortgage loans. But the real question to ask is whether 3.3% is really enough. Given a 25% fall in GDP during the crisis, such a growth rate would take a decade to just restore the size of Latvia's 2007 economy. Is this "dead cat" bounce sufficiently compelling for other EU states to follow it over the fiscal cliff?
The method by which the EU's creditor nations and banks would like to resolve this crisis is "internal devaluation": lower wages, public spending and living standards to make the debtors pay. This is the old IMF austerity doctrine that failed in the developing world. It looks like it is about to be reprized. The EU policy seems to be for wage earners and pension savers to bail out banks for their legacy of bad mortgages and other loans that cannot be paid – except by going into poverty.
So do Greece, Ireland and perhaps Spain and Portugal understand just what they are being asked to emulate? How much "Latvian medicine" will these countries take? If their economies shrink and employment plunges, where will their labor emigrate?
Fiscal and wage austerity is economically self-destructive. It will create a downward demand spiral pulling the EU as a whole into recession. What is needed is a reset button on the EU's economic and fiscal philosophy. Bank lending inflated its real estate bubbles and financed a transfer of property, but not much new tangible capital formation to enable debtor economies to pay for their imports.
How Europe handles this crisis may determine whether its history follows the peaceful path of mutual gain and prosperity that economics textbooks envision, or the downward spiral of austerity that has made IMF planners so unpopular in debtor economies.
http://www.guardian.co.uk/commentisf...rope-austerity
While the economic crisis was deep enough to drive even Latvia's depoliticized population into the streets in the winter of 2009, most Latvians soon found the path of least resistance to be simply to emigrate. Neoliberal austerity has created demographic losses exceeding Stalin's deportations back in the 1940s (although without the latter's loss of life). As government cutbacks in education, healthcare and other basic social infrastructure threaten to undercut long-term development, young people are emigrating to better their lives rather than suffer in an economy without jobs. More than 12% of the overall population (and a much larger percentage of its labor force) now works abroad.
Children (what few of them there are as marriage and birth rates drop) have been left orphaned behind, prompting demographers to wonder how this small country can survive. So unless other debt-strapped European economies with populations far exceeding Latvia's 2.3 million people can find foreign labor markets to accept their workers unemployed under the new financial austerity, this exit option will not be available.
So what about the much-quoted 3.3% growth rate? Projected for 2011, it is often cited as evidence that Latvia's austerity model has stabilized its bad-debt crisis and the chronic trade deficit that was financed by foreign-currency mortgage loans. But the real question to ask is whether 3.3% is really enough. Given a 25% fall in GDP during the crisis, such a growth rate would take a decade to just restore the size of Latvia's 2007 economy. Is this "dead cat" bounce sufficiently compelling for other EU states to follow it over the fiscal cliff?
The method by which the EU's creditor nations and banks would like to resolve this crisis is "internal devaluation": lower wages, public spending and living standards to make the debtors pay. This is the old IMF austerity doctrine that failed in the developing world. It looks like it is about to be reprized. The EU policy seems to be for wage earners and pension savers to bail out banks for their legacy of bad mortgages and other loans that cannot be paid – except by going into poverty.
So do Greece, Ireland and perhaps Spain and Portugal understand just what they are being asked to emulate? How much "Latvian medicine" will these countries take? If their economies shrink and employment plunges, where will their labor emigrate?
Fiscal and wage austerity is economically self-destructive. It will create a downward demand spiral pulling the EU as a whole into recession. What is needed is a reset button on the EU's economic and fiscal philosophy. Bank lending inflated its real estate bubbles and financed a transfer of property, but not much new tangible capital formation to enable debtor economies to pay for their imports.
How Europe handles this crisis may determine whether its history follows the peaceful path of mutual gain and prosperity that economics textbooks envision, or the downward spiral of austerity that has made IMF planners so unpopular in debtor economies.
http://www.guardian.co.uk/commentisf...rope-austerity