Archive for November, 2012

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.