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Why the Baltic model of austerity is broken

JOHN FOSTER recommends a book showing how the EU programme of cuts in Estonia, Latvia and Lithuania are anything but an example to be followed elsewhere

The Contradictions Of Austerity: The Social-Economic Costs Of The Neo-Liberal Baltic Model

Edited by Jeffrey Sommers and Charles Woolfson

(Routledge, £80)

The Baltic republics are small. Lithuania has only three million people, Latvia two and Estonia one. And they are shrinking. Estonia has lost 5 per cent of its population since 2000, Latvia 10 per cent and Lithuania even more. 

The Contradictions Of Austerity explains why. It also sheds important light on the wider impact of EU austerity policies and provides an analysis that is of great importance for trade unionists in Britain.

In 2011 the economic performance of the Baltic republics was held up by EU commissioners as an example of the effectiveness of austerity. 

They had imposed stringent cuts as early as 2009 and now economic growth, albeit moderate, had resumed. 

The contributors to this book, all social scientists and economists who have worked in the Baltic republics, tell the real story — one of “internal devaluation.” 

Being outside the eurozone, these countries could have devalued their own currencies when the financial crisis broke in 2008 as Iceland did very successfully. Instead, their governments chose to devalue wages, welfare, health and education. 

In Latvia real wages were cut by over 15 per cent in a year and public-sector employment by 10 per cent. GDP fell by an unprecedented 25 per cent. It fell also, though by somewhat less, in Lithuania and Estonia. The World Bank commented that “Latvia has achieved years’ worth of difficult structural reforms in just a few months.” 

As the authors make clear, the crisis was created politically and used politically. It derived from the terms of accession to the EU — free movement of capital and labour between economies of massively different potential. 

As a result speculative capital, mainly from Scandinavian banks, flooded into the republics and created a property boom which collapsed in 2008. The response was equally political. The Scandinavian banks were themselves in difficulty and wanted their money back in full. 

The internal oligarchs wanted eurozone membership and did not want their own fortunes devalued either. The EU-imposed settlement secured this, with an austerity programme of unparalleled severity.

The longer-term result has not been recovery but emigration. Wages in the Baltic republics are now a quarter to a fifth of those just across the sea in Sweden. 

Workplace rights and collective bargaining have all but disappeared. Up to 30 per cent of employees now exist within a black economy in which workers have no rights whatsoever. The skilled and educated are leaving.

This, the authors conclude, is the future not just for the Baltics but for all other second-rank economies in the EU — and the consequences will inevitably, through migration and pressure on wages, impact on conditions and wages in the countries of the EU core. Indeed, this was just what was envisaged in the Cecchini report on the single market in 1988. 

In his foreword to the book James K Galbraith ends by posing a question. If the people of these countries could have seen forward half a century, would they have chosen the EU or the USSR in 1991? 

He prompts an answer as he runs the clock on to 2030, where he foresees “an elderly remnant in their own country, their society in tatters, their children in economic exile, their homes abandoned or in hock and eventually their economies and governments permanently subordinated to new elites — local and foreign.”

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