All the attention of the financial world has been focused on Greece. This is captured in one alarming statement made by the head of the German debt management agency.
"I think if one of the 16 members would default, it would be a collapse of the whole system," German Finance Agency managing director Carl Heinz Daube told a bond conference in London.
"If a country goes bankrupt, it will be the end (of the euro zone)," he told a panel discussion at a bond conference in London.
You would think that Greece is suffering from an epic economic collapse. In fact their economy has shrunk less than 3%.
Everyone seems to have forgotten about Latvia, despite the fact that its suffering is far worse. The economy has shrunk 24% since the start of the global crisis - a number that rivals America's experience during the Great Depression.
Even that number doesn't fully describe the suffering.
A full 26 percent of the population now lives in poverty, including 51 percent of senior citizens, according to the latest figures from Eurostat. Latvia's unemployment rate is the highest in the European Union....
The government increased taxes and fees, fired public sector employees, and reduced the wages of those remaining by 20 percent. It closed or merged more than 100 schools and cut teachers' salaries by a third. Now, it is shuttering hospitals. Public transportation ticket prices are up. Meanwhile, even those earning close to nothing must pay taxes. If you earn just $50 a month, you still pay $12 in taxes.
The rating agencies are saying that Latvia's economy has bottomed out. Yet the conditions of the people of Latvia are expected to get worse.
Joblessness will likely grow. Wages are still decreasing, as is household consumption....
Moreover, Riga is still facing a budget crisis. "For the budget for next year, we need [to cut] more than 400 million lats [$770 million]. I don't see any substantial position where we can cut this entire amount. It indicates that we will see some further tax increases, probably," Dainis Gaspuitis, an economist at Sweden-based bank SEB's Latvian subsidiary, said in an interview. "Some public employees will see further wage cuts. I don't know how much. There will be further staff cuts in the public sector."
One has to wonder how long the people of Latvia can continue like this without rioting.
The new Argentina?
I believe Krugman called it. How is Estonia? The reason I mention Estonia is it was proclaimed to be the "economic miracle" due to all of the endorsement of our classic bad trade, "free market" "reforms" and were pointed to repeatedly when trying to blast any sort of socialism aspects to France, Nordic, U.K. etc policies and why of course they should be torn asunder.
Greece now, U.K. next
Major investors see a decline in the Pound as inevitable.
not surprised
but the thing is always the dollar, right o, as if our debt to GDP ratio is so fantastic...
There is a post on Naked Capitalism, with the usual claim that "wages must be reduced dramatically, social safety nets cut and productivity must soar" in order to meet their "debt crisis".
Now on this meme, I'm getting pretty friggin' disgusted, esp. on the economics/financial blogs...
How about it's time to cut financial sector taxpayer welfare, it's critical that we shrink this sector globally and how about regulating derivatives and stop these "hide the debt" to sink a nation games by the banksters?
We never see the obvious call out on this, it's always "labor must be sent to serfdom" claims.
This continual claim one must wipe out 1st world nation's middle classes, seriously, con graphorama, w/ statomatic, be called out and put to shame.
I think what he is saying Spain is basically screwed
Government deficits = Private sector savings.
But because Spain as part of the EU cannot run a huge deficit & private sector already running a huge deficit - ie a ton of debt. The writer is saying what Spain's options are since gov't fiscal policy is NOT available:
1) Private sector has spend more & take on more debt; OR
2) Trade balance will have to improve tremendously BUT the only way to do that since demand for tradable goods is very weak is to for wages in tradable goods sector fall and productivity increases.
What Parenteau is showing is the horrible position Spain is in because it gave up its sovereign control over fiscal policy when it joined EU - his conclusion is that workers are basically screwed.
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still disagree
There is quite a number of policies, same as the U.S. that could be done immediately to improve the trade deficit without wage arbitrage. That's the problem here, the focus is always on wages and it's not wages that are the cure and even further, represses wages are a cause...
So, instead of looking at making it a requirement no offshore outsourcing of government contracts, as one example, to domestic sourcing, another example, to confrontation of currency manipulation, another example, to stop importing foreign guest workers, yet another example..
all of these would have an immediate impact on not only trade deficit, but actually raise wages as well...
So, the answer isn't to do a subtle sigh and say, oh well, need to sacrifice the middle classes.
His post isn't that bad, but all over the place, esp. in Greece, just like you saw UAW workers being attacked....
(come on $14/hr you cannot even pay rent on that!) it's actually a very small part of overall costs, esp. when you get into capital intensive sectors like manufacturing...
they won't look at global free flows of capital or say absurd interest payments on some funky currency swap or derivatives loan-lease deal that should simply be a hair cut or canceled...
I mean Spain is screwed, a host of nations are screwed, we're screwed too, but the #1 sector doing the screwing, yet isn't addressed, is the financial sector and esp. on these derivatives....
I've seen this, but I think that they're off.
The argument being made is that if Spain had control of a currency of its own it could devalue it to make their products more competitive. This of course assumes that the problem is that the crisis is in Spain's manufacturing sector, which means that the heart of that in the north (Navarra, Basque Country, etc) should be the areas where unemployment is peaking. In which case the cause of the crisis is that wages have become overinflated.
The problem is that the jobs crisis isn't occurring there, it's happening in the south where the housing boom occurred. So basically, the argument that slashing wages will bring back jobs doesn't play out. The problem was that the employment generated by the housing bubble (every bit as bad, if not worse than our own)wasn't sustainable.
The problem isn't the euro itself, it's that there was an asset bubble that burst. The truth of the matter is that the manufacturing the parts of the country that have developed industrial policies at the regional level have faired better than where the economy depended on building vacation homes.
It goes further than just currency
It goes to fiscal policy. Spain is very limited in doing anything with fiscal policy because of EU treaty.
The problem for Spain is that private sector is loaded with debt and government sector is limited because of EU treaty obligations.
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Trust me
the limitations are much less than what you think. The convergence criteria have a lot more bark than bite.
As far as debt, there's the same sort of reluctance to lend right now with the banks. The Cajas, basically large credit unions, don't have the same problem. Also, the government has just put together a direct lending program in which small business will be able to get credit from state. That should be effective in allowing expansion in the small shop manufacturing that supplies the renewable energy and other important sectors.
This is an example of how EU control over policy is less than you might think.
We will see.
I would not want to be in position of Spain, Greece, Italy, Ireland or Portugal.
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Spain before UK
UK still can issue debt in its own currency & it has sterling where as Spain doesn't have that flexibility. A weaker sterling may not be such a bad thing for UK exports.
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