For Ireland, Softheaded Advice From Hard-Money Enthusiasts

Thursday, 13 January 2011 12:01 By Paul Krugman, Truthout | name.

For Ireland, Softheaded Advice From Hard-Money Enthusiasts

As Ireland attempts to overcome its economic difficulties, European hard-money types are proposing Latvia as a model for Ireland to emulate. Their argument goes like this: Sure, Iceland, which devalued the krona after the crisis struck in 2008, has begun to recover — but so have Latvia and Estonia, even though they kept their currencies firmly pegged to the euro.

To quote from Charles Duxbury’s commentary, which was published online by The Wall Street Journal on Dec. 10 (bluntly titled “Irish should look to Baltics, not Iceland”): “Both Estonia and Latvia revised up their third-quarter G.D.P. figures Thursday, leading analysts to pronounce that, as for Iceland, a corner had been turned … So the good news for Ireland is that adding zeros to your bank notes is not the only way to beat a crisis.”

But, Mr. Duxbury explains, “the bad news is that both options mean you have less money left once you’ve bought the basics. It doesn’t matter if your hand is down the back of the sofa feeling for kroons, lats, kronur or euros, it still chafes.”

See, it’s all the same! Except it isn’t. Latvia and Estonia have done much worse than Iceland as far as employment is concerned. And jobs are only part of the story. Iceland, as even the International Monetary Fund has admitted, was able to “preserve the Nordic social model” after the downturn in 2008, meaning that because safety nets for the unemployed were preserved, there has been a lot of distress but not much extreme hardship.

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Meanwhile, the impact of the economic crisis on Baltic society has been devastating. Budgets for education, health care and social programs have been slashed, and in Latvia more than 12 percent of the population now works abroad since many of its young people, seeing no future, are emigrating, according to an article published in The Guardian newspaper in late December.

Yet it is true that the Baltic countries have been able to maintain their fixed exchange rates.

My question: Why is this crucial? The idea that Latvia’s experience can be hailed as a policy triumph — a country that suffered a 25 percent fall in gross domestic product, a 20 percent drop in employment and that is now experiencing mass emigration — boggles the mind. But policy makers like Klaus Regling, chief executive of the European Financial Stability Facility, consider Latvia a success story, even suggesting in the Financial Times on Dec. 16 that “outside ‘experts,’ who always seem to know what is good for Europe, should take note.”

A few more such successes and Latvia will have no economy at all. 

Backstory: For Latvia, Tough Times

No country has been harder hit by Europe’s economic crisis than Latvia. According to the International Monetary Fund, Latvia shed 25 percent of its economic output during 2008 and 2009 — more than any other nation.

With the Latvian economy in tatters, in 2009 the government reached out to the International Monetary Fund for a bailout but insisted on keeping its currency, the lat, pegged to the euro, which is a requirement for Latvia to join the euro zone in 2014. Instead of devaluing the lat in order to restore competitiveness to the nation’s export market, the government adopted the starkest of austerity programs and implemented internal devaluation, or the decreasing of salaries.

Now, at least on paper, the government’s painful approach has led to a much-touted turnaround: G.D.P growth for Latvia may hit 3.3 percent this year, and the country remains on course to join the monetary union in 2014. In October Latvians even voted to keep Prime Minister Valdis Dombrovskis in office, despite the suffering wrought by his fiscal policies.

Some financial pundits point to the Latvian turnaround as evidence that austerity works and propose that Greece, Ireland and Spain follow suit. Others are not so sure. They say Latvia is not like its neighbors, all countries with strong labor movements that would oppose such brutal austerity measures. Also, many Latvians have chosen to emigrate to European nations with less-damaged economies, which is not an always an option for other populations.

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Paul Krugman joined The New York Times in 1999 as a columnist on the Op-Ed page and continues as a professor of economics and international affairs at Princeton University. He was awarded the Nobel in economic science in 2008.

Mr Krugman is the author or editor of 20 books and more than 200 papers in professional journals and edited volumes, including "The Return of Depression Economics" (2008) and "The Conscience of a Liberal" (2007).

Copyright 2010 The New York Times.

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Last modified on Thursday, 13 January 2011 13:57