This is a nice summary of Latvia’s recession or, perhaps more accurately, depression, which thus far has seen a decline in GDP of more than 25 percent. The Latvian example is interesting both because of its parallels with Ireland because of the fixed exchange rate with the Euro and also for its differences due to the problems associated with having a fixed but not “irrevocable” exchange rate.
11 replies on “Latvia’s Depression”
“The goal of adopting the euro has been one of the main arguments for making the sacrifices”
All that human misery just because a politico somewhere decided they wanted something and if they didn’t get it they would scream and scream and scream until they did get what they wanted.
It’s been said so many times before, but seems so politically unpalatable that no one is discussing the elephant in the room. Ireland should seriously consider leaving the Euro (maybe temporarily, maybe pegging (or pegging to the USD or RMB)) – and perhaps defaulting on sovvie debt.
And please no one mention our ‘reputation’ with ‘international markets’…
@Foolish Penny
How is that the “elephant in the room”? It’s not politically palatable because it would be a complete over-reaction to the current situation. Like burning down the house because you don’t like the wallpaper (or, in this case, the loan repayments).
Furthermore it would be patently unfair on the majority of Irish people who are not over-leveraged and are already suffering job losses or the prospect of higher taxes as a result of the mistakes of the minority.
Peonage and serfdom.
Latvia left the Soviet Union with no debts twenty years ago. They looked to Europe with longing gazes and wanted to be like them; liberal democracies with high living standards and happy people.
When they left the USSR, the Latvians had no banks either. However, their kind neighbors, the Swedes had plenty of banks and would be only to happy to lend the Latvians any monies they needed to build up their economy.
And that is what happened. The cheap money flooded in. Instead of investing in industry and infrastructure, education and training, the Latvians built houses that magically doubled in price every three or four years.
The Swedes new what they were doing. The lending was predatory and designed to bust Latvia. And Estonia. The English and Americans did for Iceland. (Max Keiser has an interesting anecdote gleaned from his fact finding trip to Iceland just before the bust there, where he meets a couple of Goldman sharpshooters in a bar in Reykjavik. They confide that they will bust Iceland and get really rich doing it.)
For Latvia, behind all these events lay the unspoken truth that they must pay all debts to the foreigners. The truth is it cannot pay these debts and it should not pay them. In order to save itself it must default. It should re-denominate all its debt in Lats and then brake the peg to the Euro. The Lat will fall like a stone. This devaluation will give back some competitiveness to the Latvians and if they have the determination they will fight there way back. As it is now they are like the walking dead.
The EU and the ECB particularly, does appear to be on the hook for all our woes. While the bureaucrats could see that it would be useful to have a good crisis for the NWO and to federalize Europe, they appear to have underestimated the likely consequences. Or else they have been led up the garden path?
Now who would do that and why?
Fiat currency is again implicated. Best get diggin’ fer Gold! Or adopt the sort of discipline for which Korea is famous. North Korea.
In my opinion, Latvia clearly should devalue and Ireland clearly should not leave the Euro. There is a big difference between trying to hold on to a now-inappropriate fixed exchange rate (Latvia) in the midst of an extreme downturn versus the wild over-reaction of dropping the Euro in Ireland in response to a medium-term cyclical downturn. Dropping out of the Euro would not even help — it would hurt Ireland’s medium and long-term prospects.
Latvia wants to join the Euro.
It maintains the peg to boost its chances; but by maintaining the peg it is ruining its economy, its public finances, and its chances of joining the Euro.
Devaluing the currency will cause problems at 89% of debt is denominated in Euro, but an internal devaluation causes the exact same problems.
@Foolish Penny
Latvia already has its own currency, and could probably de-peg overnight.
If Ireland wants to leave the Euro it will take months of preparation in terms of printing new currency, adapting ATM machines, and all the hassle we had 8 years ago (it took us over 3 years to fully adopt the Euro). During those months of preparation myself and anyone else with money in Ireland will get it out of the country and have it safely tucked away in a different country.
This capital flight will ruin the country.
Looking at it from a Labour Force Survey perspective, the main way in which Latvia is an outlier within the EU is its stunning loss of manufacturing employment – down 29% between Q1 2008 and Q3 2009, compared with an EU average drop of 8% over the same period. It doesn’t look like it is slowing down either – by far the worst quarterly change was between Q2 and Q3 2009. For me, this says that there is a serious exchange rate problem, which is so big that it probably dwarfs the impact of any other policy choices the Latvian government makes.
There is, of course, also an Ireland-like collapse in construction employment, although not quite as bad as what we have been going through. I don’t imagine that it is any more amenable to policy interventions than the Irish construction crash.
I’ve been regularly in latvia since 1999.
Back then it seemed to my dublin-1980’s-school-leaver eyes to be a post-soviet 2nd-world wreck.
In a decade they went absolutely twisted on credit and growth, with no real industry to speak of.
Amber, some logging, tariffs on a gas pipeline. Everyone semed to really believe the dreams had come true. Even the hoary old afghan veteran alcos were finding nixers.
Then there’s the phenomenon of the milionaires. hundreds of them, big houses in Jurmala. money from .. nowhere. The mafia (russian variety) control any money-making opportunities closely.
But Latvia (other ex-sov states similar) is vulnerable to being recaptured by the russian sphere of interest, bringing ethnic-russian leaders to power. It is a faultline of the old east/west roman empire divide, which strangely still shapes politics (greece another example of a pro-russian euro state, partly because of religious sympathies).
They’re hanging on to the euro as tight as they can.
I think a better solution would be for the eurozone as a whole to devalue somewhat, to preserve cohesion (with the new Lisbon powers!).
And I think the collapse of the euro is about as likely as the germans abandoning the zollverein.
Just going by the Eurostat, as of 2007 Latvian manufacturing industry employed 157,000. Food/beverages, wood/wood products, pulp/paper/printing/publishing and textiles/clothing accounted for almost 60% between them. I presume that the 7.7% in were mostly at the pulp/paper end of the value chain.
So there was significant manufacturing industry, relative to the size of the country, but it was weighted heavily towards natural resource-based activities.
As a Latvian born citizen, I had no idea about what are you all talking about…
The mentioned numbers/reasons/potential outcomes pretty much turned on the lights in a dark room. Now I can see how much was the decision to join Eurozone and use all this cheap lending politicized.
To be honest, I was wondering about all this myself… rich people popping out of nowhere, an illusion of hope with nothing to back it up with… Had to end one day.
Can’t say I was really surprised about the crisis. Better off, I’m not surprised the government didn’t predict this, either.