Latvia and the Euro: A Bet with No Upside

Ashok Mody writes here.

22 replies on “Latvia and the Euro: A Bet with No Upside”

Very illuminating. Ishocku Mody is settling into a contrarian rut. He states that 60% of Latvians are against Euro adoption. I tried to source that and all I could find was that only 4 out of Latvia’s 100 strong parliament support a referendum on the issue. It is clear that Latvians (at least those who understand the issues) are extremely keen to join the Euro, despite its obvious current woes.

Apparently Latvia was hit even worse than Ireland by the financial crisis but against fierce resistance stuck to its euro exchange rate. This is a country that had the choice of depreciation. They rejected it and are wild keen that never again will the temptation be put before them – next time the looneys might get their way.

This makes a lie of those who claim that Ireland’s Euro membership is denying it the panacea of a devaluation. The Euro may be one of the cause of our problems but our inability to escape is protecting us from the David McWilliams “exit and devalue” phantom silver bullet.

For small nations like Latvia and Ireland a fickle independent currency is potentially disastrous.

It is hard to assess the euro in purely economic terms when it is primarily a political project. If Estonians see themselves as being part of a greater Europe then it makes sense to join. After all, there is one currency area for over 1 billion in India and China while many small nations have currencies for populations of less than 50 million. An assessment of optimal currency area size cannot be calculated on an excel spreadsheet, it is determined by the mindset of the people in each region.

Excuse me; no upside? There is a windfall of [b]billions[/b] in euro denominated salaries and pensions for Latvian societies upper echelons. Why should they pass that up just because the majority of the population would suffer?

1. Reply to Carson: India, China, and the United States do not merely have a monetary union, but they have a Fiscal union. The Eurozone does not and it appears very unlikely that it ever will.

2. Reply to Carson and Brian Woods II: You seem to miss the most important point of the article, and what the example of Ireland, Spain, Cyrpus, and Slovenia make clear is the biggest danger for Latvian people (but perhaps the biggest opportunity for the Latvian elite) is the potential for “Bankers gone wild!!” created by joining the Eurozone, due to the lack of Eurozone wide bank regulation and capital controls.

3. Finally, with 12.5% unemployment and with 10% of its population emigrated after a economic collapse of 25% of its GDP in the 2008-2010 time period, it is amazing that Ollie Rehn considers Latvia a model, especially since the economic growth it does have may in part be based on racketeering.

A Latvian central bank economist has highlighted recent success in exporting but given how misleading Irish trade statistics are, caution is required.

The data does suggest that apart from the two other Baltic republics, most of the remaining exports are to non-euro countries.

Italy and Greece show that interest in maintaining the euro overtime spreads beyond the elite.

In Ireland for the elite and its insider advisers, membership of the EMU in these years of crisis, must have been a personal comfort, that understandably would reinforce their conservatism on policy action compared with the turmoil of a local currency and possible default.

Keep in mind that in contrast with Iceland’s reliance on its own natural resources, Ireland’s agriculture sector has been on a respirator for years – also keep in mind my recent statistic that the Netherlands with a land area equivalent to Ireland’s ancient province of Munster, is the second-biggest exporter of agri-food products in the world.

@ sherpatrick

I have been accused of being naïve to the machinations of elites. But I do find it particularly difficult to believe that the LE are looking forward eagerly to another even better bank disaster of their very own. Seems more likely that they believe that they can learn from others’ mistakes – remember the affected countries more or less made their mistakes at the same time and did not get the opportunity to learn.

I can see the strong political incentive just as in Ireland’s case. I can also see that joining the Euro is a partial protection against a future massive devaluation which would be much more damaging for some rather than others. Whether it the “elite” that feel so threatened, not sure, more likely the older generation who are always vulnerable to a devaluation based transfer of wealth from them to the economically active.

The real message is that Latvia are volunteering to join a club which many on this blog believe to be utterly failed and the road block to our salvation.

@ Brian Woods II

“The real message is that Latvia are volunteering to join a club which many on this blog believe to be utterly failed and the road block to our salvation.”

If we could deal with each other as reasonable people who might reasonably disagree: do you not think that the unemployment figures, for example today, show that there is something very wrong in the Eurozone: architecture, process and/or policy?

“Employment down by 0.5% in euro area and by 0.2% in EU27”

@ Gavin Kostick

I would suggest that were you to address even the sternest critic of the many errors committed by the politicians and experts in charge of the euro and ask them – the critics that is – whether they would prefer to continue to be paid in euros or a debased national currency, you would probably get a not entirely logical answer.


What empirical evidence do you have for this suggestion? Or is this is mere speculation without support? Have you identified and asked such people?

The last sub-clause is not clear to me: in what sense do you mean logical?

Overall: are you suggesting that critics of the architecture, policy, process of the euro are secretly driven by self interest? If so, why do you think that?

The value of the Euro lies largely in its stability which is now well established. Naysayers in general and in particular the US and UK have been predicting the imminent demise of the Euro since before it was established.

Anyone who has been in a foreign country trying to pay in an out of favour currency will appreciate the strength and value of the Euro. Currency speculators love to play games with the currencies of weak (small) countries. Exports can implode and inflation can explode as a result of speculative currency trading.

We should all be down on our knees thanking someone for the stable and predictable currency climate we are now enjoying. We need good Gov’t to truly enjoy the benefits but in the fullness of time fate will unfold as it should.

@ Gavin Kostick

The most recent opinion polls for the worst case i.e. Greece suggest that six out of ten Greeks support continuing with the euro, down from seven out of ten.

I have absolutely no problem with criticisms of the management of the euro. Indeed, I often indulge in it myself. However, when it reaches a completely dismissive level, the logic of that criticism is that there is no point in continuing with membership of the euro. I respect the position of those who come to that conclusion. However, as in the case of Greece, I suggest that their numbers are smaller than the general noise level would suggest.

@michael h

It seems to me that there maybe historical reasons why agriculture is more advanced in Holland ( capital rich & former colonial power)than in our own green isle.

And in the other corner…..
Last time I was there they were using/taking US dollars but.but….sound familiar yet they just told creditors to go..
“Financial mismanagement, a shrinking population, a dwindling tax base and other factors over the past 45 years have brought Detroit to the brink of financial and operational ruin,” Orr said in a statement.”

The reason Holland has a highly productive agricultural sector is due to the fact that Holland is covered 50% by rich alluvial soil. Replenished annually by soil washed down from Germany. Flood control up river has resulted in settling ponds which reduces the soil load during flooding. Two things struck me about Holland one was they leave their living room curtains open after dark and the second was the large number of window boxes that contained vegetables and herbs.

Having lived next door to a Dutchman whose occupation was in medicine I was surprised at his in depth knowledge of Horticulture. He was light years ahead of me and I am no slouch on the spud, cabbage, mangel, sugar beet, barley, wheat and oats front.

@ Gavin Kostick

Like you I am not a professional economist. Countries like Spain, Portugal, Greece even Ireland were traditionally characterised by unemployment and persistent devaluations of the currency – basket cases in other words. The Euro was meant to blow all that away – seemed to be working for a while but got seriously derailed by the financial crisis, may yet come good.

I was making a narrower point. For a small country like Ireland a strong external currency discipline is a good thing. If it had been easy to exit and devalue as some (DMcW) were urging – it would have been a disaster IMHO. The fact that Latvia with its eyes wide open to the fault lines in the system is taking the plunge further undermines the validity of that supposed silver bullet.

There may well be ‘historical’ reasons why Dutch agriculture was more productive but it doesn’t explain why Ireland couldn’t have caught up.

About 5 years ago I had to call to a guy in the deepest Midlands who was going to do some carpentry work in my house. He was busy when I called so I said I’d wander around his garden for a few minutes. He had a large polytunnel (absolutely nothing special – standard polythene and some light steel supports) and it was a veritable cornucopia of exotic fruits and vegetables. He had a large kiwi fruit plant and he told me kiwis grow very well in Ireland and he has a large crop in December each year. He also showed me a peach tree and named the number of kilos of peaches he gets each year. He grew all the ‘standard’ Irish vegetables as well as bell peppers, tomatoes, and other exotic fruits and vegetables I couldn’t even name. He said he was self sufficient all year around in fruit and vegetables and even traded food with his in-laws for helping him out in his carpentry workshop from time to time. He wasn’t using any special soil or fertilisers either. If I had not seen the plants with my own eyes I would not have believed it. Mind you, I don’t know if his kiwi and peach trees survived the very harsh winter of a few years ago.

So, if this ‘amateur’ in the Midlands can be self-sufficient in food and self-sufficient in fruit and vegetables that I did not think could be grown in Ireland, just think what could happen if thousands of acres in the golden vale and the East coast were turned into more productive uses. But of course you’d have to start taxing agricultural land to get rid of all the hobby farmers (I have three such in-laws who probably own in excess of 300 acres in total) and the people who buy land as a store of value.

Thanks for the interesting and illuminating responses guys, certainly a land tax sounds like it would be a good idea. I can’t imagine it happening though.

On the question of the euro , it’s seems to me that the average person doesn’t pay all that much indepth attention to economics. Most people -at least the ones that I meet- presume that money is still backed by gold, and the general operative assumption is the finances of a government are quite similar to that of an individual or household . So perhaps in that context it’s not surprising that people are generally supportive of the euro, since (unfortunately ) people generally buy into a quite conservative world view about money and the economy .

One of my relatives is a prof at UCC specialising in Horticulture. He owns and operates a plastic tunnel type operation as well as the more traditional glass house. He also does outreach at numerous agricultural shows every year.

There are two problems in Irish horticulture one is the market is small and two is the imports are cheap. We do not have cheap Dutch gas or Canary Islands warmth and sunshine. Another problem is frost as late as June.

Hobbyists can get a good crop and lots of satisfaction but profits are elusive. Ireland is making the best of what it has and that is grass in abundance. With mechanisation it is risky to grow wheat or barley due to lodging caused by rainfall and wind as the crop ripens. In the old days there was abundant labour that could salvage crops using sickle and scythe. Nowadays if you gave a sickle and scythe to a worker you would be convicted of reckless endangerment. The times they have changed, in most cases for the better.

Could anyone translate this: Fenery cuttin the fate.

@ Crunchy

I said elsewhere a few weeks, it’s not that we can emulate the Dutch but on the spectrum from a typical West Cork farmer depending on Brussels for the majority of his income, for even watching the grass grow, who visits Tesco in Bandon to buy imported vegetables, to the other end: successful Dutch growers exploiting a natural resource, there is surely room for improvement.

@ Bunbury

When I was young in Bandon, I used to sometimes help out in the garden of a retired garda superintendant who had a Victorian style house.

He had an extensive greenhouse for tomatoes and he also grew lettuce under glass. He also had apple trees.

The smell of the tomato stem still conjures up true nature for me like the scent of brine on the seashore.

We used to pick blackcurrants and strawberries for the nuns at the local convent and we would collect blackberries on the country roads for my mother to make jam.

@ Mickey Hickey

There are more farmers over 80 than under 35 in Ireland.

A lot of Irish land is idle.

There will always be a demand for food and Nestlé the world’s biggest food company has over 5,000 in R&D, adapting to taste and trend.

It’s interesting that from the start Henri Nestlé (born Heinrich Nestle in Germany), who had done an apprenticeship in a pharmacy, began his company in Switzerland, selling baby food formula, Farine Lactée, that won a reputation In Europe for reducing infant mortality.

Who would have thought that a gin maker would have demand for Irish milk?

The country is on the ropes and geniuses like Micheál Martin and Richard Bruton bought into the delusion that it was worthwhile to wait for eureka moments in nanotechnology research.

Where is the value added?

The wheel doesn’t have to be reinvented

There was a scene in an episode of the American Mafia family TV series The Sopranos, where two of the characters end up in a coffee shop.

“Espresso! cappuccino!” one of them exclaims. “We invented this shit!”

They happened to have been in a Starbucks.

While Howard Schultz introduced Americans to Italian-style expresso bars, Gaggia SpA is the best known Italian manufacturer of coffee machines for professional and household use.

The company was founded in 1948 by Achille Gaggia, the man to whom we are indebted for the success of espresso coffee all over the world: it was he who on September 5th 1938 filed patent no. 365726 with which the modern steam-free coffee with cream machine may be said to have been born.

The brand was purchased in 1999 by the Saeco International Group, which is itself a subsidiary of Philips, the Dutch group.

The typical high growth firm isn’t in high tech.

@Michael Hennigan

I have a Rancilio Silvia which produces good coffee and which is easy to repair. My German relatives have the all singing all dancing Juras’ which are expensive to buy and very expensive to repair.

There is very little land not being used in Ireland. The land of 85 y.o. is being rented out usually for pasturage or a specific crop annually. Not many Irish people let money flow down the drain.

Here in Kerry we have one of the most productive food multinationals on earth. Kerry Group as well managed a company as you are ever likely to see. If every county had as well managed a company most of our problems would be over.

I know both sides of the vegetable business . If you operate a shop you can get a reliable supply of cheap vegetables delivered to the premises weekly. Most of it will be foreign produce. In season there will be plenty of the old reliables available locally, usually cabbage, green onions, lettuce, carrots parsnips, turnips and of course spuds. The local suppliers are not reliable as many do not time their plantings for continuous supply in season. This means a glut with rock bottom prices or a famine alleviated by foreign produce.

Some very bright people in Kerry have studied New Jersey and Holland Marsh (north of Toronto) market garden operations and tried hard to replicate them in Kerry with little to no success. A combination of expensive energy and late (June) frosts are the major barriers. Add to that low sunshine, too much rain, mould, funguses and on and on. We could continue on to the type of contracts the major retailers like to enter into. Delivery of given amounts twice weekly, year round, with a penalty for shortages or poor quality.

There is not a hope in hell that Irish Horticulturists can put the Dutch out of business.

It would be a mistake to assume that there are profitable opportunities that Irish farmers have not tried. I know Kerry farmers that truck produce to farmers markets in Limerick and Cork city as well as Tralee, Killarney and Listowel, none of whom are making a decent living at it.

The Irish agricultural advantages that stand up to scrutiny are grass, cabbage and Kale. Even in potatoes we are poor sisters to Pomerania and Prince Edward Island (look up Cavendish Farms). A lot of Irish thinking about Irish produce reminds me of a primary school teacher who went on vacation to France and came back to tell us that French food was so bad they had to drench it in sauces. Unlike our excellent Irish bacon, potatoes and cabbage which needed only HP sauce. This actually happened, I remember it clearly.

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