Home > debt, financial crisis, The Economy > Why Poland and Sweden escaped the crisis, to an extent, and some other Baltic states didn’t

Why Poland and Sweden escaped the crisis, to an extent, and some other Baltic states didn’t

from Merijn Knibbe

Introduction: the real lesson of the graphs below is that ‘investment booms’, induced by large flows of (international) capital, have to be prevented.  And they can be prevented. Poland seems to have managed this by having an ‘outdated’ financial system, which disabled the free flow of foreign capital (and yes, according to graphs 2 and 3 a land tax might help, too).

Paul Krugman recently  published graphs on wages in Iceland and Latvia. The regular reader of this blog however already knew that Latvian wages did not decline too much, compared with for instance Poland, despite austerity. See my posts of June 20 (together with Jesse Frederik) and June 25. As, thanks to yours clumsy, the graphs of these posts were not ‘permanent’ and disappeared it’s time to repost them, together with a new graph which shows that the situation is slightly more complicated than suggested by Krugman – Latvia and Estonia did not manage to decrease nominal wages, Lithuania did (but to no avail…).

Note: graphs 4, 5 and 6 compare the Baltics (total population: 7 million) with neighbouring Poland (total population: 38 million) instead of, like Krugman does, with tiny Iceland (0,4 million) as the size, culture, history and technological level and geographical situation of the Baltics are much more comparable with Poland then with Iceland, while the economic fate of the Baltics and Poland could at the same time not have been more different, post 2007. The Baltics experienced the deepest slumps of all western countries, Poland was about the only country which did not experience a decline of GDP.

The graphs:
June 20, graph 1: a Tsunami of international capital…

June 20, graph 2, led to a fast increase in domestic debt…

June 20, graph 3, which in its turn led to asset price inflation (and subsequent deflation).

Note: asset prices declined again – but the debt didn’t! Which is of course one of the reasons for the present problems. We need debts which are linked to the value of the assets…
Note: graphs 1 and 2 seem to indicate that the credit tsunami continued after 2007. But the increase of indebtedness after 2007 is caused by the epic decline of GDP, not by an increase in debt: debt deflation in action. And mind how fast the bubble inflated – a mere two to three years!

June 20, graph 4: The ‘credit crunch’ after 2007 led to very high interest rates in the Baltic countries, as the EU forced them to maintain their europeg if they wanted to be bailed out… the spike in the interest rate no doubt aggravated the situation. In Poland, to the contrary, the Zloty was devaluated which enabled the Polish to lower the interest rate, which of course softened the crisis.

New graph: the crisis forced the Baltic countries to devaluate – but as external devaluation was ruled out (literally) they had to take recourse to internal devaluation. According to Krugman and others this is very difficult to achieve,  but it seems that though Estonia and Latvia did not succeed, Lithuania managed to lower wages, though this did not lead to any kind of superior Lithuanian economic growth. Unemployment still is far into the double digit rates, production still is far, far below potential (about 30% or so, assuming 5% growth of potential GDP per year). Poland, however (which, true, did not know any kind of asset bubble to begin with, as an ‘old fashioned’ banking system institutional barriers prevented a fast run up of debt) did not see any kind of decline of GDP and it’s unemployment (though still quite high) stayed level.

June 25, graph: when we compare Denmark (europeg, mild internal deflation since quite some time) with neighbouring Sweden we see the same pattern: Sweden had the best performance of all rich EU countries during the past year and a half, Denmark had the worst of all Northern European ones.

It’s important to note that Sweden and Poland continued to do well when their euro wage-levels bounced back.  Aside: according to the newspapers, Denmark has bailed out ten of its banks, at the moment. And according to Eurostat it’s government budget went from +5% of GDP to -3 in only wo years (2007-2009). While Sweden did not need to bail out banks and has a minute government surplus, at the moment. The non-austerity country is the one with the surplus…

Technical note: to get rid of differing seasonal patterns I used a four quarter moving average, especially important as the more flexible part of wages (bonuses and the like), which are most likely to be slashed first in the case of austerity, are often paid only once a year but at different dates in different countries.

  1. No comments yet.
  1. No trackbacks yet.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.