A New Normal for Eastern Europe

Most countries in Eastern Europe recorded almost unprecedented economic contraction and market recoveries while celebrating the twenty year anniversary of the fall of the Berlin Wall. It may therefore seem a little far-fetched to argue that Eastern Europe is normalising at the end of one of the most extraordinary years since the transition process started. […]

Italy vs. Greece: The Public Debt Race

A spectre is haunting Europe (coming from Dubai): the spectre of sovereign debt default.

Loaded with massive debts and crippled public finances due to the crisis, many European countries, such as Greece, Ireland, Spain, the Baltics to the Balkans, are now considered at risk by rating agencies as well as and markets. The concerns focus particularly on Greece, while Italy, at least for now, seems out of the spotlight. But is the sustainability of public debt really different in the two countries? Simple calculations show that there are many similarities, and some important differences.

How Do the Baltic Countries Cope?

It is time for an update on the economic developments in the Baltic countries. Official GDP numbers for the third quarter of 2009 have recently been published and a clearer picture emerges. I have been asked by many foreigners how the Baltic countries look these days. The foreigners ask whether unemployed and poor people hang around in the streets and whether people are gearing up to protest against the economic crisis and the actions of their leaders. I live in Estonia and travel regularly in the two other Baltic countries, so it is my hope that I can contribute with some personal experiences from the ground. I do not want to downplay the seriousness of the economic downturn, but I will argue that the situation in the Baltics might be less bleak than the statistics suggest.

Greece Risks Financial Armageddon While Ireland Makes Cuts

The Irish government announced draconian spending cuts of 6 billion Euros in order to stave off a debt crisis in the worst modern-day downturn in the nation’s history.  Even so, Irish government bond yields have been rising relative to German government bond yields, the benchmark for the Eurozone.  Over the past five years the spread had averaged about 40bps. Now it is 170bps. But, the Irish seem to be making the necessary cuts forced on them by lower tax receipts and currency union.

Total Eclipse at the Heart of Dubai’s World

Back in the heady days of 2006 some 30,000 cranes, roughly a quarter of total global capacity, were busy whirring away in Dubai. Today most of these devices have either left to find service in other parts of the globe, or lie silent, unused and unloved. In what is only the latest sign of the […]

Rebalancing in the Baltics – A Preliminary Assessment

“In my view … it is impossible to understand this crisis without reference to the global imbalances in trade and capital flows that began in the latter half of the 1990s.” Bernanke (2009) Executive Summary Compared with the average quarterly value of GDP in 2007-08, the first two quarters of 2009 are down in nominal […]

Latvia – the Insanity Continues

Marshall Auerback here.  I want to add a few thoughts on the situation in Latvia which Ed has highlighted on several occasions. His allusion to Argentina to describe the situation in the Baltics last July was on the money. I have a solution here out of the Argentine playbook. In Latvia, the neo-liberal insanity continues.  […]

Moody’s: Iceland, Latvia and Hungary in “Fragile Stabilization”

Today, Moody’s warned that Iceland, Latvia and Hungary were stabilizing but that their economies remained fragile. The problem is high debt levels, which is restraining consumer spending. Recovery in the Eurozone has been the main aid to stabilization, the report said. Absent this support, the outlook is considerably worse. Moody’s re-affirmed Iceland and Hungary’s ratings […]

Latvia’s Agony Continues In The Second Quarter – With Little Relief In Sight



Latvia’s economy shrank a revised 18.7 percent in the second quarter of 2009 over a year earlier in what was the second-steepest drop in the entire European Union (worsted only by Lithuania) according to detailed data released by the statistics office yesterday. The contraction, which is now the largest since quarterly records began in 1995, was revised down from a preliminary estimate of a 19.6 percent annual drop. And Latvia’s problem can easily be seen in the above charts which show the most recent movement in exports, and quarterly data for constant price imports and exports. The Latvian economy grew driven by domestic consumption and increased borrowing during 2006 and most of 2007, but then the country ran out of extra sources of cash, and so imports slumped, followed by exports as the global economy entered crisis. Now its time to pay back, which means the lines we see in 2006 and 2007 will now need to be repeated, only this time with exports on the top and imports below. Of course, really doing this will only be possible once the global economy recovers. But the key question is, will Latvian export capacity be ready when that critical moment comes, or will Latvia’s agony continue, stuck in a horrid “L” shaped “non-recovery”? The most recent data on foreign trade, which saw exports fall and the trade deficit once more widen suggest that the latter danger is far from being a mere theoretical one.

And I am not the only one to be raising it, since according to the latest report out from Nordea Bank, Estonia, Latvia and Lithuania, may well suffer deeper economic contractions than previously estimated as government austerity measures simply serves to sap domestic demand while export growth remains muted.

So well done Nordea! But please permit me to say that this discovery does come as a bit rich from analysts who have persistently remained in denial that the key to Latvia’s recovery was a substantial reduction in the price level in order to facilitate exports (on my view better achieved by formal devaluation, but by the express desire of the elected political leaders of the Latvian people now being carried out via a convoluted and painful process known as “internal devlauation”).

Still, it is interesting to see mainstream analysts starting to question the current orthodoxy that fiscal prudency will (due to the impact on investor confidence) lead to recovery in Eastern Europe, while here in the West our leaders have just re-affirmed the need to maintain fiscal stimulus, given the fragility of even those earliest signs of recovery.

In the following monthly report I will examine just what evidence there is for the idea that Latvia’s economy has actually bottomed out.

The Fall In GDP Continues


Latvia’s economy shrank an annual 18.7 percent last quarter, following a drop in gross domestic product of 18 percent in the first quarter. The charge downwards was lead by a decrease in private final consumption which fell an annual 23.21% (year on year – see chart). Government final consumption dropped bya mere 6.9%, but expenditure on gross capital formation (which includes the critical investment item) crashed by 38.1% – with construction (which forms part) down 29.5% (see chart below). Goods exports (63.6% of total exports) was down by 19.1% and the export of services by 15.7%. The slump in imports was, of course) even worse with the volume of goods imports (78.8% of total imports) down 39.4%, and the volume of services imports by 38.2%.



But Slows On A Quarterly Basis

Summer Vigour

After having corrected somewhat in June, stock markets across Eastern Europe developed very positively in July. But the picture is not uniform and a few interesting observations emerge when analyzing the performance during the past month and the first half of the year. The most obvious conclusion is that Turkey outperformed during the first half […]