24 February 2018
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Opinion: JP Hochbaum, Chicago

The austerity trap
of the Eurozone

The effects of the austerity medicine that Lithuanians
have been forced to swallow is brutal

Lithuania is in an economic conundrum.  The politicians want to be a part of the EU to become more viable economically and to separate from Russia.  At least that is what I take from this as a United States citizen, as I can only speculate from what I read and what other Lithuanians tell me.  But the entrance into the EU takes away the ability for countries like Lithuania to control their own economy. They are forced to go through austerity and dismantle their energy output, in order to please the EU powers that be.  It is time for Lithuania to set a shining example for Eastern Europe and become an economic power in their own right by shedding the shackles that the EU imposes on them.

Lithuania would be wise to separate from the EU and to remain a sovereign country, both monetarily and governmentally.  Being monetarily sovereign would allow Lithuania to control their economy and not be strong armed by the EU into implementing further austerity.  Monetary sovereignty eliminates the risks of a debt crisis and could be used to quickly eradicate recessions and joining the EU eliminates that option and ability.  So in order for Lithuanians to avoid further austerity they need to remove the powers that are forcing it on them, the EU.  Austerity has led to large emigration, wage reductions, and an increase in poverty.

From 2001 all the way up to 2009 Lithuania’s population was declining on average by around half a percentage point.  Then in 2010 that number jumped up to 1.5- an increase of 200%.  This population decline is a direct result of austerity, and has become worse because the options for Lithuanian citizens to better themselves are reducing.

The effects of the austerity medicine that Lithuanians have been forced to swallow is brutal.  Eironline wrote:
“Without consulting the trade unions, the government decided on 17 June 2009 to cut the basic monthly salary in the public sector. The basic monthly salary is applied as a reference to determine the salaries of public sector employees such as tutors, social workers, librarians and cultural workers. The basic weekly salary was to be reduced accordingly from LTL 128 (about €37 as at 30 July 2009) to LTL 115 (€33). The pay cut was due to enter into force on 1 August and would have affected about 230,000 public sector employees, most of whom are already relatively low paid.” 

As Eironline show, you don’t improve an economy by reducing its citizen’s ability to buy and save. That just makes the economy worse.

Lithuanian suicide rates also tell us about the real effects of austerity.  During the worst economic collapse in recent history Lithuania’s suicide rate peaked at 61.3 per 100,000, and then dropped the next year to 53.6, which is expected after a sharp decline in the economy.  Typically things bottom out like and then improve.  But since then we have seen the suicide rates (post austerity) creep up again and the rate stands now at 54.6.  If austerity is supposed to work why are suicide rates rising?

In order for Lithuania to expand and get back to a growing population, rising wages, and higher employment, they have to experience some inflation to get there.  But the EU won’t allow them to remain with a rate of inflation above 4.2%.  So this means that Lithuania has to slow down the growth of their economy, while still in a recession, in order to meet EU requirements.  The two countries that are growing the fastest, China and Argentina, are also experiencing double digit inflation.  But they are reducing poverty levels and increasing the size of their middle class.  The EU doesn’t realize that growing an economy occasionally results in some “healthy” inflation.

Many of the EU leaders and other politicians are trying to take Lithuania as a shining example of austerity by pointing out their declining unemployment rate.  There is a reason why only politicians see this, they are better at selling their ideas than they are at analyzing data.  A great site for economic news and information, New Economic Perspectives, debunks the myth that austerity helped the unemployment rate:
“Contrast anemic IMF economic growth forecast for the next 6-8 years with disastrous social consequences of internal devaluation policies.

Consider that Lithuania almost tripled its level of unemployment in Lithuania from 5.8% in 2008 to 17.8% in 2010. Although by 2011 unemployment began to decline to 15.6%, this happened not as much because of creation of new jobs, but because of mass outmigration from Lithuania.
Public sector wages were cut but 20-30 and pensions by 11 percent, which in combination with growing unemployment let to dramatic increasing in poverty.

If in 2008 there were 420 thousand or 12.7% of population living in poverty, by 2009 poverty rate increased to 20.6%. Although by 2010 there was a .4% decrease in the number of poor to 670 thousand, the decrease was caused mostly by downward change in measuring the poverty.

Various measures of quality of life and well-being deteriorated even further indicating prevalence of deep pessimism, loss of social solidarity, trust, and atomization of a society.”

If Lithuania were to depeg their currency and become monetarily sovereign, they would be able to hire their entire unemployment population via a job guarantee bill, invest heavily in their own energy (so they aren’t forced to import it from Russia), and become an economic power in their own right.

Category : Business, economy, investments / Featured black

  • […] said, no, never. Read the whole interview HERE… __________________________ Related articles: Opinion: JP Hochbaum, Chicago The austerity trap of the Eurozone __________________________ The economic argument is over, Krugman won Lithuania’s former […]

    May 29 2013
    • JP Hochbaum

      GDP is going to grow when things drop nearly 20%.

      November 05 2012

      • An interesting and informative article. I have also advocated that Lithuania may be better off in leaving the EU. However, it would have little chance of survival if left to go it alone. I also agree that austerity measures have had their deleterious effect on the populace. However, Lithuania's GDP grew at roughly 2.5% in 2012, and is projected to grow at 3.4% (Bank of Lithuania projections) in 2013. Therefore, the much criticized austerity measures appear to have enabled Lithuania to turn the corner economically. Also, the presumption that Lithuania would have more funds for investing if it can divest itself from EU spending constraints may be erroneous. As a stand alone nation, without partners, the cost of remaining competitive would become more of a burden than it is currently experiencing. There also must be the realization that Lithuania is in its formative state, and the cost of changing government and revamping its bureaucracy will remain high for years to come.

        November 04 2012

        • Yeah. Austerity for what ? Papandreou should get a good kick in the pants. Kick the bums out of offcie. The greek government is illegitimate. They only thing that would save Greece is a toppling of the government and long prison terms to the bums that ingineered the paper frauds all these years. And saying to the creditors to go hang themselves. By the way I think Goldman Sachs is still operating in Greece and the sun of bitch in charge of the greek central bank is an ex director of you guest it, Goldman Sachs. What’s wrong with these Greeks ?

          November 17 2012

          • Ya, Australia & China did huge stimulus packages & they have the best economies while others that tried austerity burned (Latvia, Estonia, Greece, Portugal, & UK & Ireland did austerity & all worsened)

            November 02 2012
            • Gene Christianson

              This is one of the most informative articles I've ever read on the subject of what's going on in the Lithuanian homeland today. If I were wearing one, I'd tip my hat to Mr. Hochbaum.

              November 02 2012
              • Boris Bakunas

                The British pound is not pegged to the euro, and the UK is an EU member state. Several non-EU countries peg their currencies to the euro. So I don't see why not.

                The best solution, in my opinion, would be for the European Union to end its ill-conceived austerity measures. Don't the Germans understand that they will suffer as well if their customers, the countries that buy goods manufactured in Germany, go broke?

                November 02 2012
                • JP Hochbaum

                  Is there a way for Lithuania to have the protections of the European Union and not have to adopt the Euro or peg their currency to the Euro?

                  If there is, that would be the way to go. Enjoy the protections of the treaty and also keep their sovereignty.

                  November 02 2012
                  • Brit

                    "In the UK, many conservative MPs are openly demanding a referendum on continued EU membership."

                    That's true, Boris, but it's not because they oppose Europe's austerity. Unfortunately our Conservatives are as determined as Merkel (if not more so) to see austerity through to its logical conclusion, whatever that may be. A significant proportion of British Conservatives oppose EU membership and always have done – mainly for nationalist, xenophobic reasons by my reckoning.

                    November 26 2012

                    • Very good article and an excellent reply. Lithuania is a small but smart and strong country. It raised its voice against the Soviet oppressor and came out on top. It can and should use its intelligence and strength to make itself stronger and also make the EU stronger.

                      November 04 2012


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