The question is: Are the Baltic states, especially Lithuania and Latvia which both have currencies pegged to the euro, proof that austerity can work? Are they “successes” as described by IMF Chief Christine Lagarde and some American conservatives? Most analyses of these have tended to focus on GDP. I will focus on employment.
The financial and euro crises had particularly brutal effects in these countries: GDP shrank almost 15% in Lithuania in 2009 and over 20% in Latvia between 2008 and 2010. The countries have had partial recoveries since, 3.5% annual growth in Lithuania since 2010 and over 5.5% annually in Lithuania since 2011. Each country will have lost about half a decade of growth.
Unemployment was massive in the wake of the crises. In 2010, Lithuanian unemployment peaked at 18% and Latvian unemployment at 19.8%. Unemployment has fallen significantly; by the end of 2012 it was “only” 13.3% in Lithuania and 14.3% in Latvia. There was no improvement, and even some worsening, during the second half of 2012.
These figures are “pretty good” given the scale of the collapse and, unlike the euro-periphery, at least there are plausible and significant signs of improvement. But what the unemployment figures don’t say is that they have not been achieved through job creation.
Annoyingly, Eurostat doesn’t have figures on the absolute numbers of jobs, however, we do have job growth, or the annual change in the absolute number of jobs.
The employment growth figures are dismal. In Lithuania, 6.8% of jobs were destroyed in 2009, 5.1% destroyed in 2010 and – after a small recovery with 2% job growth in 2011 – job destruction resumed in 2012 with 6.7% of jobs lost. In Latvia, 13.2% of jobs were destroyed in 2009, 4.8% destroyed in 2010, and 8.1% destroyed in 2011, only returning to tepid job creation of 2.6% in 2012.
Baltic “austerity success” has at best meant “jobless recoveries” characterized by GDP growth but no job creation.
How do we then explain the fall in unemployment despite catastrophic job destruction and jobless recoveries? The answer is almost certainly mass emigration. According to official figures the net migration rate (number of people entering the country minus number of people leaving the country) was an amazing -2.37% for Lithuania in 2010 and -1.26% in 2011, while for Lithuania the figure for 2011 is -1.12%. These are world records. In 2012, according to CIA figures, the few countries with higher net emigration figures than this include Syria and Jordan…
These migration figures are however problematic in the Schengen Area of free movement. In the absence of systematic border controls, EU governments have only a very imperfect idea of the extent of population movements.
An alternative measure is to look at change in total population as a proxy. There has been a demographic collapse in both Lithuania and Latvia over the past ten years. According to Eurostat, between 2007 and 2012, the Lithuanian population was reduced by 377,000 people or an 11.1% reduction of the total, in Latvia there were 240,000 less people, or a 10.5% reduction.
In fact, there is a statistical break in the data as both countries did their population censuses in 2011 for the first time in a decade, revealing a huge drop in the population. The authorities dramatically underestimated population decline up to 2011 and this decline estimated to have continued into 2012.
Given that there has not been a significant change in Latvia and Lithuania’s natural population change rates (births minus deaths, which tends to be a far more reliable figure than migration), this remarkable collapse is almost certainly due to emigration. It is impossible to say exactly during which period between 2000 and 2011 the emigration occurred, however it stands to reason that the detected increase in emigration of 2008-2011 onward corresponded to even bigger undetected movements and a proportionally larger part of the 2000-11 total emigration.
As Mark Adomanis shows, Russia, a country often alleged to be an economic and demographic disaster, is if anything a genuine role model compared to the Latvian “success story.”
The Baltic “austerity successes” look a lot less impressive if one takes this into account: How impressive would Lithuanian or Latvian unemployment figures be if over 10% of the population hadn’t been removed, apparently through emigration? In all likelihood, rather than the 13-14% unemployment of today, there would be 20 or even 25%, comparable with Spain or Greece.
Lithuania and Latvia can only be considered “models” of austerity or possible solutions if we consider exiling 10% of the population to be a desirable model for Spain, Portugal, Greece, Ireland et al. For the GIPS alone, this would mean moving, at a minimum, about 6.5 million people. This is an “economic model” characteristic of underdeveloped countries, those who export people more than things, typical for example of Caribbean nations like Jamaica or Martinique. In fact this is happening in Portugal, as hundreds of thousands emigrate, partly going to other European countries, but also to developing countries like Brazil, Mozambique and Angola.
Some will answer that the GIPS have “always” had high emigration, to which one can reply a qualified yes, noting however that this model of permanent underdevelopment is usually accompanied by high fertility. Europe is successfully creating a genuinely original model of permanent underdevelopment: massive peacetime emigration from countries that don’t have high population growth, but which in fact already have naturally declining populations due to sub-replacement fertility.
The EU is actively promoting this, notably with its “Youth on the Move” initiative, turning travel – normally a positive way to broaden horizons and foster exchange – into a crude band-aid for the dysfunctions of the single currency by sending the teeming masses of unemployed peripheral youth to the core, above all to Germany.
The inability to devalue within the euro remains a huge part of the problem. As Paul Krugman notes, despite austerity and mass unemployment, labor costs declined only slightly in Lithuania (-1.4%) and actually increased in Latvia (+1.3%) between 2008 and 2012. Locked in the euro-peg, over four years there has been only a slight relative increase in competitiveness, as eurozone labor costs have increased about 8%. This is a far cry from the speed and magnitude of competitiveness gains possible with a good old-fashioned devaluation (after 1992, Sweden overcame a similarly severe economic crisis with a massive devaluation of over 30%). It is likely a major factor in the complete failure to create jobs in both Lithuania and Latvia.
However, as Matt Yglesias argues, though the Baltic austerity stories cannot be sold as an economic success, they can be considered a political success depending on what objectives one has: “The Latvian government places more importance on securing independence from Russia than on the short-term trajectory of Latvian living standards.”
The Baltic ruling elites do not see any future for their countries other than clinging to Germany (and America) for safety and melting into the broader European continent. Perhaps, given their diminutive size, this is a reasonable objective, and membership of the eurozone is the symbol of its success.
The peoples of these countries, I think far more reasonably, are skeptical however. The Latvian government is on track to join the euro in 2014, even though a majority of the population is currently hostile. The Lithuanian government hopes to join in 2015, even though a recent poll found 57% of people opposed. Citizens should be warned: Once locked in the “euro-trap”, there will be no going back, and there will be no solutions to joblessness in future economic crises, other than to leave their country.