Can Spain Achieve What Ireland And Latvia Did?

Ronald Janssen

Ronald Janssen

Advice from a ‘very serious European’.

Picking up on the IMF’s report on the Spanish economy and its call for a social partner agreement to cut nominal wages by 10%, European commissioner Olli Rehn raises the following question: “What if Spain yet can achieve what Ireland and Latvia did?”

In the Commissioner’s view, Ireland and Latvia are success stories because they showed a strong sense of responsibility in implementing economic reform and internal devaluation. His blog implicitly suggests that these measures, wage squeezes in particular, are paying off in Ireland and Latvia. Spain would therefore do well to follow their example and go for such a social pact cutting wages significantly.

So what exactly did Ireland and Latvia achieve?

A look at the change in employment since the start of the crisis (see first graph below) shows that employment performance in Ireland and Latvia has actually been disastrous. Since the start of the financial crisis, the number of jobs has fallen by 15 and 20% respectively.

p1

But perhaps Ireland and Latvia, thanks to their acceptance of structural reforms, still did better than other financially distressed countries? This isn’t the case either. Jobs destruction over this period has been similar, if not higher, in Latvia and Ireland compared to Greece, Spain or Portugal.

Moreover, the picture presented in the graph above is even too ‘optimistic’. Indeed, the collapse in the number of full time jobs has been bigger than the fall in jobs in general in all these countries. In Ireland, one fifth of all full time jobs has disappeared. In Latvia, it’s almost one third. Since full time jobs are what matters most when households have to guarantee the pay back of huge private and/or public debt loads, this does not bode well for the future. If the banks aren’t paid back in full, they get into even deeper trouble, dragging down the rest of the economy.

p2

There is nothing in these pictures to suggest that Commissioner’s Rehn assertion that those economies which embraced the agenda of structural reform and wage devaluation have done really better in terms of jobs performance. What Latvia and Ireland ‘managed to achieve’ was to destroy around one fifth of jobs. Spain would do well to stay clear from the type of reform measures the Commission and the IMF are trying to sell to economies in distress. In the best case, the reforms suggested are irrelevant and do not make any difference. In the worst case, these reforms may even push the economy and job performance further down.

  • Namejs Nameisis

    There are several major flaws in your analysis.

    First of all, the baseline employment that you’ve chosen is disproportionally high in the Latvian case. We’re talking about an economy on steroids fueled with cheap credit coupled with an enormous housing bubble and an influx of immigrants from Eastern Europe and even Germany and Finland.

    How is it relevant to use it as the baseline when the labor market at that point was completely crippled and the average salary had soared way over the actual productivity of the labor force?

    The drop in employment starting from late 2007 is much steeper than in PIGS. You don’t seem to mention that in your pseudo-analysis.

    How is it intelectually honest to state that the employment in Latvia is down ~22%, ignoring the fact that the initial drop in employment was 2 to 3 times higher than in Spain or Greece?

    What you should be looking at is the increase in employment (in the context of the Latvian demographics and the aging Latvian population) *after the austerity policies were implemented*. Makes sense, doesn’t it?

    The employment in Latvia is constantly increasing and the austerity policies have been highly succesful. Unemployment is down by 11%. It’s just half of what it was at the peak of the crisis and it is steadily decreasing.

    Latvian-Greek unemployment: http://www.tradingeconomics.com/charts/latvia-unemployment-rate.png?s=latviaur&d1=20110101&d2=20131231&URL2=/greece/unemployment-rate&type=line&title=LATVIA%20UNEMPLOYMENT%20RATE%20|%20%20GREECE%20UNEMPLOYMENT%20RATE

    Latvian-Spanish unemployment: http://www.tradingeconomics.com/charts/latvia-unemployment-rate.png?s=latviaur&d1=20110101&d2=20131231&URL2=/spain/unemployment-rate&type=line&title=LATVIA%20UNEMPLOYMENT%20RATE%20|%20%20SPAIN%20UNEMPLOYMENT%20RATE

    • ronald Janssen

      Yes,as you write on Latvia, “we’re talking here about an economy on
      steroids fueled with cheap credit
      coupled with an enormous housing bubble and an influx of immigrants”.
      But so is Spain, so it makes perfect sense to compare the two economies
      from this point of view.

      In fact, it is Latvia
      that was in a better position to coop with adjustment : Latvia enjoyed, what the IMF has
      called, a friendly banking system, with Latvian subsidiary banks being
      saved by their own foreign (mainly Scandinavian) head offices . Spain,
      on the contrary, has to pay for its banking sector itself, thereby
      opening the sovereign-bank doom loop. So, if anything, the comparison
      I’ve made is biased in favour of Latvia, not the other way around.

      “Looking
      at the employment performance after austerity has been implemented?”
      Now, it’s you who are being selective by claiming that one should only
      look at the period after austerity and ignore the jobs being lost during
      the period of austerity. And remember we are talking about real people here:
      Even if some of these jobs were ‘steroid jobs’ (as you put it), they represented real incomes for the persons involved, allowing somewhat better living standards.

      FInally,
      what does it mean when “unemployment has halved since the peak of the
      crisis” whereas employment since that same moment (from Q12010 until
      now) did not increase at all? It means many people, out
      of sheer desparation, have simply withdrawn from the labour market,
      with many of them (hundred thousands) leaving Latvia to look for a means to survive elsewhere. Depopulating a country is certainly useful in cleaning up unemployment statistics, but it is not be seen as a measure of success, on the contrary.

      • Dan Crawford

        Ronald,

        May I repost this article at http://angrybearblog.com ? I will ask Rebecca Wilder to take a look as well.

        Best,

        Dan Crawford

      • http://www.social-europe.eu SocialEurope

        Hi Dan,

        as long as Ronald is fine you can repost this on Angry Bear if you note it was first published on SEJ and put a link back to the original piece in…

        Best

        Henning

      • ronald Janssen

        I’m fine with this

        Ronald Janssen

      • Dan

        Thank you. You might be interested in this post by Kenneth Thomas, http://angrybearblog.com/2013/08/austerity-sinks-all-boats.html

        AND Paul Krugman’s post in the NYT on Ireland pointing to Kenneth’s post on Irish emigration as well….
        http://angrybearblog.com/2013/08/ireland-krugman-kenneth-thomas.html

      • Namejs Nameisis

        Sorry, but you’re not looking at the bigger picture here.

        The emigration rate in Latvia has been very high since we joined the EU open labor market almost 10 years ago. When one lives in a relatively poor country (at least in an EU context), it is rational for a lot of the inhabitants of that country to move to a different place in the EU, if they can get a significantly higher salary there.

        That’s especially the case, considering that almost everyone below the age of 35-40 is able to hold a conversation in English or German in Latvia, which isn’t the case in other parts of Europe with lower salaries than in Western/Northern Europe, which further increases labor mobility.

        Another factor to consider is that a little below 40% of the population of Latvia are ethnic Russians, which has a separate – Russian national identity, and has a lot less that ties them down to the Latvian state than ethnic Latvians do. Patriotism plays a large role here. Consequentially, the emigration rates are particularly high for this Russian-speaking part of the Latvian population.

        So, all in all, looking at austerity as the main cause of emigration is ridiculous. True, the economic crisis intensified emigration, but the baseline emigration was high before and will remain high until we’ll catch up with Western Europe in terms of quality of life, which isn’t going to happen in the next 10 or 15 years.

        What you have to look at is the emigration rate after the austerity and, once again, the emigration rate has returned to its baseline rate during the last year or so.

        Implying that we’re experiencing depopulation due to austerity is a completely deluded view.

        It also doesn’t make any sense to ignore the fact that Latvia has one of the lowest fertility rates in the world and the population is aging rapidly. It has nothing to do with austerity either.

        As the total population decreases, the ceiling of the potential absolute employment decreases accordingly.

        Which is why it is much more relevant to look at the % of people employed rather than the absolute number of jobs in the country. Unfortunately, you’ve completely ignored that in your article.

        Manipulating statistics is not the way to go.

    • Javi Javierez Alipro

      “we’re talking here about an economy on
      steroids fueled with cheap credit
      coupled with an enormous housing bubble and an influx of immigrants”……… In Spain the influx of inmigrants has as high as 5 million.

  • Endell Maynard

    The degree of difficulty can only gets harder Spain must not neglect what they have comitted to in being a Eurozone member especially being an indebted member.
    The fiscal bleeding must be stop the Bundestag and the ECB have already implemented the way out for the Spanish economy in their bid for bailout loans.
    The Spanish government must adhere and perpare new fiscal programs with it’s new fiscal platform to compliment Eurozone integration.
    Can the Spanish finance ministry and it exuctives provide the trokia and the EC with recaptalization mechanisms to nurse it’s inbdebted banks and banking system out of bankruptancy and solvency.
    The German Chancellor Angela Merkel suggested direct methods and reforms that would create and boost Spain’s chances to ignite the injection of stimulus in EC grants and special loans providing a structured methods would allow Spain to meet it financial commitments to the ECB.
    Spain must give in to the ground breaking policies that bent on austerity by the ECB and EC.
    Lowering ECB banking rates to accomidate Spain’s bailout loans isn’t feasible well Spanish borrowing rates aren’t shored up with the right investment strenghts required Spain’s credit rating disqualifies them form requesting a direct emergency bailout loan from the ECB.
    The Spanish economic shape isn’t consolidated enough the debt to GDP data back this claim heavily.
    The Spanish books has to be reviewed by it consultants and analyist with core future Eurozone commitments ensuring special consideration be given to the Eurozone investment markets.
    Spain must ensure Mario Draghi,Christine Largade, and Angela Merkel that the European markets is working for Spanish growth and investment.

    TO: Ronald Janssen and Cristobal Montoro

  • billcstf04

    the issue is that you start with the ridiculous observations of, the “always correct major world famous economist” Olli Rehn he is doing what all politicians do declaring victory when faced with utter defeat because of failed policies they have advocated. The lessons of Macroeconomics learned in the school of hard knocks since 1932 does not seem to have sunk in to him or any other of the EU elite.