by Prof Michael Hudson and Prof. Jeffrey Sommers
from GlobalResearch Website
A spectre is haunting Europe:
Bankers and the financial press are asking governments from Greece to Ireland and now Spain as well:
The answer is, they can’t - without an economic, demographic and
political collapse that will only make matters worse.
But the financial press and neoliberal policymakers
counterattacked, using the “Baltic Tigers” as an exemplary battering ram to
counter Keynesian spending policies and the Social Europe model envisioned
by Jacques Delors.
On politics, the
standard narrative (as recently rolled out in The Economist) is that
Latvia’s taciturn and honest prime minister, Valdis Dombrovskis, won
re-election in October even after imposing the harshest tax and austerity
policies ever adopted during peacetime, because the “mature” electorate
realized this was necessary, “defying conventional wisdom” by voting in an
Most recently, Charles Doxbury advocated Latvia’s internal devaluation and
austerity strategy as the model for Europe’s crisis nations to follow. The
view commonly argued is that Latvia’s economic freefall (the deepest of any
nation from the 2008 crisis) has finally stopped and that recovery (albeit
very fragile and modest) is under way.
Latvia’s model is not replicable. Latvia has no labor movement to speak of,
and little tradition of activism based on anything other than ethnicity.
Contrary to most press coverage, its austerity policies are not popular. The
election turned on ethnic issues, not a referendum on economic policy.
Ethnic Latvians (the majority) voted for the ethnic Latvian parties (mostly
neoliberal), while the sizeable 30% minority of Russian speakers voted with
similar discipline for their party (loosely Keynesian).
economies can draw upon similar ethnic division as a distractive cover,
political leaders pursuing Latvian-style austerity policies are doomed to
As government cutbacks in education, health care and other basic
social infrastructure threaten to undercut long-term development, young
people are emigrating to better their life rather than to suffer in an
economy without jobs. Over 12% of the overall population (and a much larger
percentage of its labor force) now works abroad.
Given a 25% fall in GDP over during the crisis, this growth rate would take a decade to just restore the size of Latvia’s 2007 economy.
Is this “dead
cat” bounce sufficiently compelling for other EU states to follow it over
the fiscal cliff?
Critics of this economic “miracle,”
built on foreign currency loans financing property speculation and
privatization buyouts, were dismissed as naysayers. Without missing a beat,
these commentators have branded the present Latvian option of austerity as
policies for other nations to adopt.
and EU neoliberals want other countries to adopt Latvia’s version of China’s
colonial “Open Door” matched with a Dickensian welfare system. Openness to
economic penetration is the standard on measure, and the Balts have this in
spades, ergo, they are “successes,” regardless of how well or bad their
economy serves its people’s needs.
Much of its population has evacuated the country, leaving many children with relatives or to fend for themselves. Neighboring Belarus, with few of Latvia’s geographic advantages (ports and beaches) or high-tech background, has a per capital GDP not too far behind Latvia’s. Belarus had a boom with double-digit growth before the crisis, and kept its economy at full employment during the crisis rather than collapsing by the 25 percent rate that plagued Latvia.
Belarus also has a
(inequality) roughly on par with Sweden, while Latvia’s is closer to the
widening inequality levels that now characterize the United States.
The CIA’s World Factbook reminds its readers that Belarus’s performance occurred,
This is the standard characterization of Belarus. But one needs to
ask to what degree its success may reflect its central planning. Latvia has
produced greater political freedom for dissidents, but Belarus has less
economic inequality and foreign debt.
Yet win or lose on economic outcomes, Latvia and the Starving Baltic Tigers will be declared the winners, while Belarus always will be declared the loser on economic performance, regardless of achievement. You will not see a measured look at both nations’ economies to examine objectively where they are succeeding and failing (including by sector) with an eye for what lessons might be derived from such an investigation.
Economic comparisons are
Latvia’s people have suffered from the ravages of two World Wars and two occupations, capped by neoliberalism dismantling its industry and driving it deeper and deeper into debt - indeed, foreign-currency debt - since it achieved independence in 1991. Neoliberalism has delivered poverty so deep as to cause in an exodus of Biblical proportions out of the country.
To call this a forward economic step and a victory of economic reason reminds one of Tacitus’ characterization of Rome’s imperial military victories, put in the mouth of the Celtic chieftain Calgacus before the battle of Mons Graupius:
In the several years that we both have been visiting Latvia we have seen an industrious and talented people, with many displaying integrity despite being immersed in a corrupt environment.
Our aim here is to explain why the failed “Latvian model” should be seen as a warning for what other countries should avoid, not a policy to be imposed on hapless Ireland, Greece and other European debtor countries. In fact, we both have worked to encourage a policy reversal in Latvia itself.
What now is at stake, after all, is the
future of European social democracy and the continuation of peace in a
region plagued by war for a millennium prior to the 1950s.
Marshall Plan aid, accompanied by capital
controls and government investment to encourage economic development and
monetary independence, enabled Western Europe’s national economies to buy
imports from the United States while building up their own export capacity
and raising their living standards. The system was not without fault, but
the desire to avoid the previous half-century cycle of economic depression
and war (and mounting Cold War concerns) led Western Europe’s economies to
develop and pave the way for subsequent continental integration.
In contrast what was done
after World War II, sustainable structures were not put in place to make the
latter economies self-sustaining. Just the opposite outcome was structured
in: foreign currency debt, especially for domestic mortgage loans, without
putting in place the means to pay it off.
The Baltics and East European countries have financed their trade deficits over the past decade mainly by Swedish, Austrian and other banks lending against real estate and infrastructure being sold and resold with increasing debt leverage.
This has not put in
place the means to pay off these debts, except by a continued inflation of a
real estate bubble to sustain enough foreign-currency borrowing to cover
chronic trade deficits and capital flight.
Their neoliberal planners have slashed consumption - not to create capital for investment, but to pay down debts to bankers. This is how they are adjusting to the cessation of capital inflows from foreign banks now that real estate Bubble Lending has dried up (the Bubble Lending that was applauded for making their property markets “Baltic Tigers” to the banks getting rich off the process).
Bankers and the financial press depict this austerity program
to pay back banks as the way forward, not as sinking into the mire of debts
owed to creditors that have not cared much about how the Baltic economies
are to pay - except by shrinking, emigrating and squeezing labor yet more
To cap matters, euro-denominated debt for associate members was secured by income in their own local currencies. Worst of all, banks simply lent against real estate and public infrastructure already in place instead of to increase production and tangible capital formation. In contrast to the Marshall Plan’s government-to-government grants, the ECB’s focus on commercial bank lending simply produced a real estate bubble.
Bank lending inflated their real estate bubbles and financed a transfer of property, but not much new tangible capital formation to enable debtor economies to pay for their imports.
Just the opposite:
So it was inevitable that this house of
cards would collapse.
These arrangements served the major EU exporters but did not develop European-wide stability based on more extensive economic growth.
looming threat of war or political threat from Russia, Europe’s richest
nations pushed for trade liberalization and privatizations that accelerated
de-industrialization in the former Soviet bloc. Southern European members
were brought into the Eurozone with its strong currency and strict limits on
government spending that failed to enable these countries to develop their
manufactures in the way that Western Europe (and the United States) had
And as in colonial regions, the West became a destiny for capital flight as property was sold on credit and the proceeds moved out of the post-Soviet and southern European kleptocracies and oligarchies.
The foreign currency to
pay banks on the loans that were bidding up real estate prices was obtained
by borrowing yet more to inflate property prices yet more - the classic
definition of a
Ponzi scheme. In this case, European banks played the role
of new entrants into the scheme, organizing the post-Soviet economies like a
vast chain letter, providing the money to keep the upward-spiraling flow
The expanding debt
pyramid had to collapse, as no means of paying it off were put in place.
This is the old IMF
austerity doctrine that failed in the Third World. It looks like it is about
to be reprised. The EU policy seems to be for wage earners and pension
savers to bail out banks for their legacy of bad mortgages and other loans
that cannot be paid - except by going into poverty.
The EU policy seems to be for wage earners and pension savers to bail out banks for their legacy of bad mortgages and other loans that cannot be paid - except by plunging their economies into poverty.
The traditional path is for mixed economies to provide public infrastructure at cost or at subsidized prices.
But if governments “work their way out of debt” by
selling off this infrastructure to buyers (on credit whose interest charges
are tax-deductible) who erect rent-extracting tollbooths, these economies
will fall further behind and be even less able to pay their debts. Arrears
will mount up in an exponential compound interest curve.
Presidential candidate William Jennings Bryan decried crucifying labor on a cross of gold in 1896.
It was the problem that England earlier experienced after the
Treaty of Ghent ended the Napoleonic Wars in 1815. Aside from the misery and
human tragedies that will multiply in its wake, fiscal and wage austerity is
economically self-destructive. It will create a downward demand spiral
pulling the EU as a whole into recession.
How Europe handles this crisis may determine whether its history follows the peaceful path of mutual gain and prosperity that economics textbooks envision, or the downward spiral of austerity that has made IMF planners so unpopular in debtor economies.
There is an alternative, of course. It is for creditors at the top of the economic pyramid to take a loss.
That would restore the intensifying GINI income and wealth coefficients back to their lower levels of a decade or two ago. Failure to do this would lock in a new kind of international financial class extracting tribute much like Europe’s Viking invaders did a thousand years ago in seizing its land and imposing tribute in the form of land.
Today, they impose financial charges as a post-modern neo-serfdom that threatens to return Europe to its pre-modern state.