The Baltic States as Role Models for Southern Europe?

In many discussions, when talking about the increasing number and violence of demonstrations in Greece, Portugal, Spain, Italy and other EU countries and these countries inability to reach the Troika-imposed objectives in terms of public sector deficit and debt ratios, the Baltic States are pointed out as models of how the crisis can be overcome.

And, to some extent this is true: real GDP growth in Lithuania, the current presidency of the EU, was 3.7% in 2012 and should be 3.5% in 2013, in Latvia, these growth rates are 5.6% and 2.8%, resp., and in Estonia 3.2% and 2.0%, resp., all growth rates of which most other EU and EZ countries can only dream. And all this before a background of a reduction in real GDP in 2009 in Estonia of -14.1%, in Latvia of -17.7% (!!), and in Lithuania of -14.8%. So, yes, the BIP growth rates of last year, and partially this year, are impressive, but these countries still have a long way to go to reach their pre-crisis output levels, let alone the output they would have reached had previous growth rates persisted: In the first quarter of 2013, Estonia is at around 90% of pre-crisis GDP level, Lithuania at 85%, and Latvia only at 80%. This compares with Poland at 110%, Greece at below 75%, Italy at 90%, Spain and Portugal at 95%.

Tough-minded austerity proponents have been saying to the Southern Europeans: look at how deeply your Baltic friends  has been affected, how significant structural reforms they have endured – without any demonstrations there occurring: why are you Sissies complaining and talking about “reform fatigue” and threat to the social cohesion?

At a second look, the picture of the Baltics is less heroic and more dangerous, even though significant differences exist between these countries: since 2011 all Baltics have reduced their investment expenditures in plant and equipment significantly, both private and public; in all Baltic countries, labor force participation has dropped significantly, more in Latvia and Lithuania than in Estonia; the unemployment rate in all three countries is significantly above 10% and not falling; the current account deficit in in all three countries is now at a modest 3% of GDP – but has come down from a significant surplus from before the crisis.

But, behind all these figures there are two very worrying developments. The first is historical: When the Soviet Union broke up and the Baltic States became independent, they fell into an extremely deep depression, over the years losing up to 50% of their GDP. The suffering of their populations was enormous. Now, 20 years later, these same people have suffered again a very deep crisis – to which they have responded in one of either ways. They have either left the country and followed their compatriots who preceded them after the opening of part of the EU labor markets in 2004 ff, or they resigned themselves to their fate once more, attempting to survive at all cost. Some observers say that for older people the previous repression during Soviet times (to some extent unfortunately replicated against ethnic Russians in the Baltics) was still strongly in their heads and prevented them from more open and widespread protest. Both Estonia and Latvia have about 1/3 of their populations being ethnic Russians.

From 1990 to 2011, Lithuania’s population fell from 3.6 million to 3 million, that of Latvia from 2.6 million to 2.o million, and Estonia’s from 1.5 million to 1.3 million. While the population of all of Europe is still growing, albeit slowly, until around 2040, that of Latvia will fall between 2010 and 2030 by 10%, that of Lithuania by 9% and that of Estonia by 4.5% (Eurostat estimates). Troubling for the pension and care system is the fact that the old-age dependency ratio during these 20 years is projected to rise from 25% to 36% in Estonia and Latvia, and from 23% to 35% in Lithuania. While still lower than in many “old” EU countries, this is still a growing problem, exacerbated by the fact that those emigrating from the Baltics are those of working age, the more mobile, the more innovative, the better educated (between a quarter and a third of the emigrants have university education). Falling birth rates and emigration also make the Baltic population older faster. While after the first wave of emigration after 2004, it stabilized between 2006 and 2008, but significantly picked up again in 2010 and thereafter.

Thus, while emigration might provide short-term relief for the labor market and prevent unemployment rates from reaching “Greek levels”, the medium to longer term prospects are problematic: a rapidly ageing population with fewer and fewer young people supporting (both directly and indirectly through their taxes and social security contributions) their seniors. What this means for productivity and innovation, for the attractiveness of the Baltics as an investment location, is only too clear.

Of course, one might add that this is not a “natural” phenomenon: both the initial “adjustment crisis” to a market economy and the concomitant loss of the Baltics “home market” in the old Soviet Union, and the more recent way to combat the financial crisis bear the trademark of market-oriented “shock therapy” a la the “old” Jeffrey Sachs. It is unfortunate that the politicians in the Baltics, but also in many of the other Socialist States, have become such ardent adherents of this most extreme form of neo-classical economics. The adjustment costs of dismantling institutions first and “shock and awe” the system by exposing it to developed market economies have been sufficiently criticized and described. But the more recent austerity paths which the Baltics have taken “so successfully” are in line with EU policy. The (too quick) accession to the Euro of Estonia and soon Latvia are more due to the (understandable) wish of lodging the Baltics squarely into the EU – and thus deter any economic-hegemonial threats from Russia. But the social and economic costs of going this way (and earlier through currency boards) are borne by the long-suffering populations. Many of them are voting with their feet and leaving the country. This is not what a role model to be emulated should look like. If only the oligarchs and the ones who are too old, too sick or too immobile to leave stay in the country, this country’s prospects are very, very limited. Greeks, beware of the Trojan horse which austerity propagandists are bringing!



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