Employment around the Baltic Sea and the lasting scars of hard money policies: the case of Latvia

Is Latvia a lodestar for other distressed countries, like Greece? Has, after a very severe shock, the economy returned to normalcy? Should Greece follow the Latvian example? Chirstop Schmidt, a Brussels based journalist who writes for the Dutch journal Trouw, seems to think so. In an article in last ‘Trouw’ about the recent financial top in Riga (the capital of Latvia) he inserts a ‘box’ with as a title (my translation): ‘Latvia, a guide?’. In the article he states that, after a severe dip, the Latvian economy is in robust health, again (actually, the Dutch ‘blakend’ or ‘glowing’ is even stronger than ‘robust’). But he’s wrong. It’s not. It’s not even catchng up… 

Even compared with the other two Baltic economies, Lithuania and Estonia, it does pretty badly. Schmidt could not have chosen a worse example (though I suspect, without any direct evidence, that he’s just repeating the story of a spin doctor). All three Baltic economies still have to regain quite a bit of lost ground. But when it comes to employment, the Latvian economy is in fact loosing ground, again. And the development of the Latvia 15-39 age segment of the labour force can, thanks to the combination of an already shrinking population in combination with austerity induced out-migration, hardly be called anything else then ‘disastrous’. Minus 20% in six years…

Maybe not a mortal blow, but any way an event that will change the country for decades to come. Mind that the development of employment in Sweden, compared with developments in Denmark, and in Poland, compared with the Baltics, has been much more favourable. Mind that catching up is very limited absent. The difference between these countries? Soft money policies! During the 2008-2009 turmoil both Sweden and Poland devalued its currency (or allowed it to depreciate, to enable lower interest rates), an option not open to Denmark respectively the Baltics, which had their currency pegged to the Euro. Though Poland of course also did not have a massive property bubble, like the Baltics, which made it quite a bit easier to ward of the blow. While the dismal development of Latvia is of course also caused by developments in its main trade partner, Russia. The point: there is more between heaven and earth than monetary policies. But in this case, these seem to have been pretty decisive.

All data: Eurostat.

Wonkish: this information is consistent with the literature about PLOG (Prolongued Large Output Gaps), though it is in fact about PVLOG.