Boom, Bust, Recovery: Forensics of the Latvia Crisis

Olivier Blanchard and colleagues presented a paper on this topic at the Brookings Papers on Economic Activity Panel – here.

6 replies on “Boom, Bust, Recovery: Forensics of the Latvia Crisis”

The paper shows, that the Krugmanites are intellectually bankrupt.

In contrast to Ireland and Greece (ca 100% GDP), Latvia did not enjoy many years or European largesse ( ca 17%),

before the intelligent and good character people there have gone through a trial by fire.

They did not go wobbly and are now again on a solid 4% growth path.

From Germany a headtip to the next new euro member:

„I am honored to have you with us“

”The Patriot“ (1 min 30 ) : – )

It is also ignored by Austrians and neoliberals like Francis that Latvians are steadily leaving the country.

This in part explains the unit of labor productivity statisticis since as the economy is bouncing off the floor, the population working is smaller for a given level of prodution.

Hence the secret for getting U.S. growth up to 4% is getting the unemployed to emigrate.

Sherparick says not so fast, and I think he’s near the mark. Latvia’s fundamental structural issue was always demographic. As such the overheating has been drained from the economy but the underlying issue remains unresolved. The current Latvian president believes that the country will be unsustainable as an independent entity before the decade ends. I think he is right. with 10% structural unemployment it is hard to see how they are going to attract immigrants. BGG mention Detroit. Could that be a role model? And if so how many other countries on the EU periphery might be facing a similar fate?

I was effectively saying all this back in 2007. Here’s an extract from the intro to my first long piece on Latvia. I think it is as true today as it was then apart from the fact that instead of overheating the economy is now shivering to death.

“It is generally recognised by most external observers that this malaise has its origins in structural problems in the Latvian labour market, and it will be argued here that these structural problems have their roots in recent characteristics of Latvian demography (namely high out-migration and a sustained low birth rate). As such there is no easy solution. Even in the longer run the position will inevitably be difficult, since demography almost inevitably casts a long shadow. This does not mean, however, that we should be complacent. There are steps which can be taken to address the issues which Latvia faces in the short term, and it is important that such appropriate measures are enacted. These measures clearly include policies to reduce the dramatic overheating which is taking place, but they also should include policies to loosen the labour supply, not only by encouraging increased labour market participation and mobility, but also by actively encourage inward migration. Such policies may be seen as short term measures which are vital to move Latvia away from an unsustainable and towards a sustainable economic path.”

@ MH of FinFacts et al
Apologies for change of subject but this issue was debated sometime back with respect to German intra-Eurozone trade and the thread is too far back. A number of people were interested getting to the bottom of the matter so I am posting on this thread.

As a short background to the issue I questioned the basis for Michael’s claim that German intra-Eurozone trade was in balance in 2012. He forwarded the following press release which appeared to confirm that view with just a €7bn surplus:

However, I raised this press report with Destatis to seek an explanation as to why it conflicted with their more detailed Euro Area trade statistics.

A Anke Markert of Destatis confirmed to me that the figures in the press release were determined on the “country of consignment” rather than “country of origin” basis which the more detailed stats that formed the basis of this report reflects.

She also confirmed that the actual intra-Eurozone German surpluses on a country of origin basis was as follows:

Exports: €411bn
Imports: €342bn
German EZ surplus: €69bn = 37% of German surplus of €188bn in 2012

As I believe another poster alluded to the Netherlands was the cause of the greatest gap in the figures with actual imports originating in China.

Consequently, without trying to be antagonist, the information recorded in MH’s report that was the source of a disagreement between us is misleading at least misleading in terms of the narrative it seeks to support:

The report claims:
“Like most economic issues, many issues are in play and myth can easily become conventional wisdom if enough of people sing the prevailing mantra. The key fact is that in 2012, almost 75% of the trade surplus was ex-EU27 and that was a positive situation for Europe.”

This we now know is untrue because in fact in 2012 65% of its trade surplus was intra-EU27 and 37% was intra-Eurozone when the data is properly interpreted.

It is important distinction because while the surplus has been in decline, it is still sizeable and in my view the imbalance has been one of the most significant contributors to the Euro crisis and highlights the extent to which Germany (even still) are significant beneficiaries and not the victims of the Euro crisis , nor are they its saviours which I fear is the myth that has taken on the greatest life.

The German export juggernaut relies heavily on an undervalued currency in a manner not dissimilar to China’s “manipulation” of the Yuan vis-a-vis the dollar. It is artificially low against non-Euro currencies and has managed to do so as a consequence of the peripheries woes and I also believe was the single greatest factor leading to the the Euro crisis when intra EU trade accounted for 90% of its surplus by 2007.

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