Commentators often portray the Baltic countries as laboratories for testing the effects of austerity under fixed exchange rates. Although they share many common traits, Lithuania, Latvia, and Estonia have each followed distinctive paths during the global economic crisis. Estonia maintained tighter fiscal discipline going into the crisis, helping it to win entry into the Euro. […]
Yesterday I argued that Latvia’s cost-cutting efforts are evident compared to a cross-section of European Union countries. Latvia’s efforts, while commendable, were very much a function of the emergency IMF loan in December 2008 and the ensuing recession in 2009. But I now see a very scary trend emerging across Europe, the fight for exports.
“Doom-mongers” – the Economist tells us – “are licking their wounds”. And why exactly are they licking their wounds? Well for two years now (apparently) they have been telling us that “the struggle to save the lat’s peg to the euro was bound to end in tears”. As you could imagine right in the very forefront of these so called doom-mongers is to be found yours very truly (and here), and of course Nobel Economist Paul Krugman (and here).
The conventional wisdom is that, when the seas get rough, it’s better to be in a big boat. But being in the European Monetary Union (EMU) hasn’t exactly been smooth sailing for all its members. On the contrary, as I argued in my blog posted January 21, the crisis has highlighted that sound policy frameworks are more important than ever.
I have an interview with Paul Krugman in today’s edition of La Vanguardia (in Spanish). Below I reproduce the English original. As will be evident, there are many topics about which Paul and I are far from being in complete agreement. But on one topic we are in complete harmony: the diffficult situation which now faces Spain, the need for internal devaluation, and the threat which continuing inaction on the part of Spain’s current leaders represents for the future of the entire Eurozone.
Edward Hugh: In your NYT article “How Did Economists Get It All So Wrong”, you state what I imagine for many is the obvious, that few economists saw our current crisis coming. The Spanish economist Luis Garicano even made himself famous for a day because he was asked by the Queen of England the very question I would now like to put to you: could you briefly explain to a Spanish public why you think this was?
Paul Krugman: I think that what happened was a combination of two things. First, the academic side of economics fell too much in love with beautiful mathematical models, which created a bias toward assuming perfect markets. (Perfect markets lead to nice math; imperfect markets are a lot messier). Second, the same forces that lead to financial bubbles – prolonged good news tends to silence the skeptics – also applied to economists. Those who rationalized the way things were going gained credibility until the day things fell apart.
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.
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.
“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 […]
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. […]
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 […]