Business, economy, investments

LITSHARES™

A strategy for global financing of

Lithuania’s development

Dedicated to Those Dead or Alive Whose Blood and Brains Made Free Lithuania Possible

By Valdas Samonis

ABSTRACT. Given the dangerous European and global economic and strategic predicaments, Lithuania (LT) needs to adopt very bold and innovative ways to “sell” to the world its extreme austerity sacrifices during the continuing period of global Great (D)Recession and its earlier periods of bold systemic transformations as well. This proposal is a new strategy to globalize LT financial-economic ties (optimal global integration) so that the nation is no longer badly cornered and unduly dependent on the moribund European Union (EU) which is distracted and disoriented by the cacophony of austerity/profligacy controversies, and actually rewarding free riders by default. By now it is rather clear that Europe alone cannot properly reward the financial virtue and sacrifice of the LT people for the sake of the future (investment) which is the most distinguishing trait of a responsible nation and a mature leadership; hence the need for LT to go before the entire “global village”. Globalization can provide huge and underappreciated benefits for a nation like LT. This LitShares™ or Lietakcijos™ (LTS) proposal is still to be developed to a greater detail and “hands-on” policy relevance. In the first instance, LTS would appeal strongest to LT residents, diasporas, and other FOLK (Friends of Lithuania of All Kinds); then they would catch up globally rather fast.  Litshares™, Lietakcijos™ or any other corresponding combination of ideas/concepts/countries/areas, etc, in any language is the Trademark owned by Valdas (Val) Samonis of Canada; all rights reserved & protected by the US laws (USPTO) and all corresponding laws globally.

Introduction and Attributions

The basic insight which gave rise to my Litshares™ (in short LTS) proposal for Lithuania (LT) stems from the Nobel level economist Robert J. Shiller who is the Arthur M. Okun Professor of Financial Economics at Yale University, USA, and the author of the just published book “Finance and the Good Society” (Princeton University Press) as well as the co-author (with Nobelist G. Akerlof) of my recently reviewed book Animal Spirits: How Human Psychology Drives the Economy and Why It Matters for Global Capitalism (Princeton University Press). I have gained a lot of inspiration and new understanding from my extensive discussions at The Institute for New Economic Thinking (INET), particularly interactions with the Reagan Era’s US Fed Chairman Paul Volcker and other top global experts at the INET Bretton Woods Conference in 2011. Research assistance by a doctoral student Ramune Samonis, University of Toronto, is gratefully acknowledged. For more, please see the Acknowledgements section below.

Right after the pinnacle of the disastrous financial crisis in 2008, The Queen Elizabeth II asked economists, “Why did no one see the credit crunch coming?” Three years later, a group of Harvard under­graduate students walked out of an introductory economics course and wrote, “Today, we are walking out of your class, ­Economics 101, in order to express our discontent with the bias inherent in this introductory economics course. We are deeply concerned about the way that this bias affects students, Harvard University, and our greater society.” What has happened? Rebellion from both above and below suggests that economists, who were recently at the core of power and social leadership in our society, are no longer trusted much. Not long ago, the principal theories of economics appeared to be the secular religion of society, writes Dr. Robert Johnson, Executive Director, The Institute for New Economic Thinking.

Nice Try, Europe!

Since 2007, in the five years of the continuing economic crisis, the European Union (EU) countries have been performing very badly: 22 of its 27 members incl. those from Central & Eastern Europe (CEE) have lost time as measured by several economic clocks (GDP levels, share prices, real estate values, etc). Asia has performed much more strongly but even it presents a mixed picture.  In particular, the long road back for global shares as measured by the most important indices according to data by Prof. R. Shiller, The Economist, and Thompson Reuters, see Chart 1.

Chart 1: The Long & Winding Road Back to Zero for Global Shares

The theory of economic integration was developed over half a century ago by Jan Tinbergen, Bela Balassa, and other prominent scholars of integration. However, the house of the European integration has been built on flawed fundamentals. While the European integration fathers (Schuman, etc) were understandably in a rush to rebuild Europe on a different model as quickly as possible so it avoids the repetition of the disastrous 20th Century wars, the art and science of “architecture” in building the European integration (United States of Europe) were not properly understood and used. Simply copying the USA does not work in Europe, as we abundantly know now. With these fundamental problems, the diagnosis and prognosis for Europe does not look good at all.

With the European Central Bank/euro acting as the "new" gold standard and the current totally confused austerity/profligacy debates, Europe is probably repeating the most horrible mistakes of the bloody past. In the 1920s, after experiences of inflation and then huge and uncontrolled capital inflows, Germany lost productivity advantages in part due to uncontrolled wage growth in the environment of heavy leftist/communist propaganda. Capital inflows suddenly turned to a trickle, governments and banks were squeezed for money and credit, bank asset fire sales started, followed by runs on banks, deflation, Great Depression; the rest is history. Under the regime of the fixed exchange rates of the gold standard, this history was the logical outcome. John M, Keynes wrote in his book The Economic Consequences of the Peace back in 1919:

“Very few of us realize with conviction the intensely unusual, unstable, complicated, unreliable, temporary nature of the economic organization by which Western Europe has lived for the last half century. We assume some of the most peculiar and temporary of our late advantages as natural, permanent, and to be depended on, and we lay our plans accordingly. On this sandy and false foundation we scheme for social improvement and dress our political platforms, pursue our animosities and particular ambitions, and feel ourselves with enough margin in hand to foster, not assuage, civil conflict in the European family”.

Since 2000, the risks are even worse because of toxic assets (mortgage backed securities, other derivatives, etc) that spread around the world in and nobody knows the true financial health position of counterparties. In the near European future, we are likely to see similar credit crunch spasms, catastrophic collapses of exports/trade, and Europe's Great Depression 2: economic and political disintegration, beggar-thy-neighbor policies, conflicts, etc. The history does not repeat itself exactly though.

The USA may follow the unenviable example of Japan but at least that is a slow and gradual decline that gives opportunities for new bursts of the US "animal spirits" and new turnarounds, e.g. via increased immigration, new and exports-oriented manufacturing technologies, etc.

Without getting here into undue larger debates, it is sufficient to sum up that conventional European approaches fail to provide remedies to the great majority of the economic Greek Tragedies that afflicted the continent and the world, incl. the current Great (D)Recession; this rather sweeping assertion is not even controversial in 2012. The reason it is so is that these standard economic theory approaches completely fail to account for the operation of “animal spirits”, a concept dating back to John M. Keynes. Animal spirits are our interpretations of finance, economics and the economy, our mental/psychological forces and constructs, spiritus animalis from the original Latin. They include: (non)confidence (with its Keynesian style multipliers), the issue of fairness in wage determination and other areas (like comparative pensions among nations), corruption and bad faith phenomena in the societies, money illusion that people usually operate under, and stories that are our practical and simplified ways of thinking about our economic and financial affairs.

Chart 2: The Vortex of Deflation and Depression in Europe and the Global Economy

Enter the Center: Lithuania

Located at the geographical center of Europe, Lithuania has been leading the postcommunist world in economic and political reforms, shedding development retarding legacies of the occupying power (USSR), and trying to re-join the global village after some half a century of the Soviet occupation and the resultant destruction of ties to the world. Since 1990 Declaration of Independence, LT has gained a unique global recognition, even admiration, for its valiant and peaceful freedom-seeking anticommunist revolution and thus amassed a lot of global political capital and global good will. In the interwar independence period that included the global Great Depression, LT had a second strongest currency in Europe, after the Swiss franc. The problem is that LT remains a very timid seller of its stamina, achievements, etc, seemingly resigned to sacrifices without getting much credit for them in this global village of ours.

Since the Annus Mirabilis 1989, the theory was that Central and Eastern Europe (CEE) would use its abundant and (relatively) educated labor force to grow faster and on a more sustainable and consumer-oriented  (prosperity) basis due to a decisive shift to markets and European integration. The EU integration was supposed to anchor market reform achievements and help secure new sustainable growth as outlined in the now almost forgotten EU Growth and Stability Pact.

What got in the way is the theory of (rational?) expectations?

True, CEE did receive a sort of a very modest version of Marshall Plan from the EU. True to four EU freedoms, Western Europe has been opening in fits and starts to labor movements (emigration) from CEE. So when new CEE policymakers were implementing pretty liberal market reforms, they should have anticipated some outflows of labor force to much higher bidders in Western Europe due to simple demonstration effect. Poorly understood legacies of communism are at fault here.

What got in the way is the law of unintended consequences in complex processes?

When the British opened their labor markets to the East, they anticipated some 10-12 thousand immigrants from Poland, for example, what they got is some one million and rising. Who knows what the figure will be a longer time after Germany’s opening in 2011?

What got in the way is the paradigm of hard-to-calculate policy externalities?

The current Prime Minister Andrius Kubilius Government of Lithuania adopted a very ambitious (no IMF help even sought!) and a rather very harsh austerity modeled on the reigning traditional EU thinking in order to clean the Augean stable of Lithuania’s finance wrecked by the former Soviet nomenklatura hijacked governments that largely used “easy” EU money to place their cronies in plum jobs in LT and Brussels (to the exclusion of younger generation of course), “prikhvatize” real estate and keep it from any socially beneficial taxation, etc. The Kubilius Government’s harsh austerity policies (the so called internal devaluation) cutting public sector wages, social expenditures (by about one third) and increasing some taxes, etc, in a national fiscal belt tightening (“diet”) that has probably been the steepest in recent memory globally. Predictably, the GDP collapse was horrible at some 20%. The LT people have been pretty much resigned to the fate, in a stark contrast to Greece.

The Kubilius Government has been operating under the handicap of the currency board (CB) arrangement which is an alternative monetary arrangement to a central bank and a national monetary policy, e.g. using short-term interest rates.  Against a better advice, CB was introduced as far back as 1994, even though LT has had very good interwar comparative experiences with running the second strongest currency of Europe in a classical central bank formula that fits the responsible nation like LT very well. As opposed to the classical central bank, CB allowed no room for monetary easing while doing harsh austerity. For all practical reasons, LT currency has been hard pegged to euro resulting in a quasi Eurozone membership of LT. The formal LT membership of the Eurozone was denied by Brussels on the flimsy grounds of miniscule short-term inflation targeting problems, while France and other Eurozone core countries have been rather openly violating the EU’s fundamental Maastricht Treaty and the Growth and Stability Pact. As we know from the world history (e.g. Argentina), CB regimes can be very destabilizing (incl. runs on banks, etc) during the kind of deep turmoil periods that Europe is experiencing since 2008.   

Despite repeatedly proving the nation’s responsibility and sacrifice (investment) capabilities via austerity, etc, LT did not attract much European/Western direct investment so the productivity remained at low postcommunist levels at the time when emerging Asia provides a stiff global competition.

Thus, very unlikely EU countries, like the Soviet communist exploited and impoverished Lithuania, have long showed the way to Europe by adopting serious austerity policies that go almost to the point of "eating the dog food", to use a hyperbole. Unfortunately, this good model that Europe has been looking so desperately for (and could not find) is drowned in the cacophony of bureaucratic quarrels around bailing out Greece and other profligate countries that are, so far at least, the true winners in Europe.  Theoretically, if the nation like LT adopts a conventional, hard austerity policy, a serious “diet” designed to improve public finances and the resultant “crowding out effect”, the nation should get into the global position of substantially improved financial reputation, presumably also the much lower cost of its longer-term capital.

However, it all comes to empirics and experiential learning. Theoretically, you can think of a hypothetic success story of "expansionary austerity". It would be due to the removal or reduction of the crowding out effect (COE) that government profligacy usually causes. The removal of COE should theoretically lead to productivity increases on the strength of the argument that business can innovate/do business better than government does; vide long economic history of postcommunist countries and of the world in general. However, the problem is the time horizon. If austerity leads to the catastrophic collapse of GDP, then emigration of hard-to-replace human resources and capital flight usually follow. In short, austerity can work in the long run provided that the long run exists at all; that is if the economy is not dead by that time, to paraphrase Keynes. Ultimately, economic policy is about experiential learning, empirics that are. When a nation’s economy contracts, as LT did by some 20% or more, and its debt continues to grow, a big problem develops for the taxpayers. This is why Europe is in turmoil right now.  “Expansionary austerity” is an oxymoron, every bit as it sounds, in the mid-term at the very least.

Before they realized what is going on and who was robbing them, the Lithuanian people got clabbered by this new ambitious austerity policy and the younger ones started emigrating in catastrophic numbers, seeing no future in the country whose GDP was reduced (from a low post-Soviet level) by some 20% by the combination of the old nomenklatura rent-seeking policies and the continued global Great Recession. Lithuania is hollowing out, unfortunately.

While the Lithuanians made huge sacrifices and so “invested” in the future, the Greeks have been continuing the party here and now until the last bottle or perhaps they can get another one, and another:).

In the current state of European affairs, Greeks won, Lithuanians lost! This is the tale of two integrating nations: they are even related since ancient times according to a Greek Palemonas legend.

Litshares™: The Novel Conceptual-Analytical Framework for Globalizing Lithuania’s Sources of Growth & Development

Despite some serious problems with the first stage of globalization, it can provide huge and so far very poorly understood benefits for a responsible, thousand-year nation like LT. How about developing an innovative strategy to get some hard earned respect and actual long-term financial capital for sustainable development of LT from the global markets? Below is my proposed case for litshares or litakcijos (LTS) for LT.

Writing in the Harvard Business Review (HBR, January-February 2012), Prof. Robert Shiller suggested a simplifying assumption that a nation can be treated as a corporation from an investment and developmental point of view. Corporations use both debt and equity to finance their investments and operations; nations use only debt.

The logic goes that nations like LT should replace much of their existing national debt with shares in the “earnings” of their economies. This would allow them to better manage their financial obligations, present themselves better before global markets, and could help prevent future financial crises. It might even lower a nation’s borrowing costs in the longer run. LT paid something like 10% as a cost of capital in the recent past, usury really.

National shares would function much like corporate shares traded on stock exchanges of the world: London, Frankfurt, NYC, Hong Kong, Toronto, etc in the case of LTS. They would pay dividends regularly. Ideally, they would be in perpetuity, although a nation could always buy its shares back on the open market. The price of a share would fluctuate from day to day as new knowledge about a nation’s economy came out and have been digested by global analysts. The opportunity to participate in the uncertain economic growth of the new issuer nation (esp. “hidden gem” like LT) might excite investors, just as it does in the stock markets around the world.

Helped by Dr. Mark Kamstra, Prof. Shiller developed some insights on how these new national shares could work. In my proposed case of LT, these litshares (LTS) could pay a quarterly dividend equal to exactly one-billionth of the nation’s quarterly GDP (some 30 billion LTL in Q4, 2011), the simplest measure of national earnings. The fractional value of LTS could be different of course; but the important consideration in case of LT is to attract all the global investors, even smaller ones. The payoff would vary of course, depending on how well the nation like LT does, what the GDP growth is (over 100 billion LTL in 2011). If the economy surprised the investors on the upside, dividends would go up; if it declined, dividends would fall. The global markets would determine the price of an LTS which would be normally volatile. It would depend not only on the most recent dividend but also on the investors’ expectations for the future, which can change for the better precisely because of austerity “investments” by LT or any other nation, as opposed to profligacy of other nations, etc. There is s some evidence that a LTS might often be expensive relative to the dividend, which would be good for the national issuer. Prof. Shiller observes that shares of many US corporations and 10-year US Treasury notes sell for over 50 times their annual dividend. Since the growth rate of the real US GDP has been higher than that of real S&P 500 earnings in the past (3.1% annual GDP growth versus 2.5% annual S&P 500 growth over the past half century), such shares might sell for a multiple higher than 50.

Economic growth dynamics is sometimes subject to hitherto rather unexplained statistical laws. For example, the so called 72 rule used by statisticians of growth says that the time it takes in years to double the economy in size is equal to 72 divided by the specific annual growth rate. So at 1% (e.g. EU) growth rate, economy (or income) doubles in 72 years; at China’s usual 10% growth rate, economy doubles in roughly 7 years. This gives a measure of the great power of the new convergence processes as well as a measure of the opportunity cost of development retardation due to totalitarianism, endemic corruption, etc. Many less developed countries, especially small and/or landlocked ones, spend long periods of time languishing in a low growth mode due to these factors. This “low equilibrium”, that is not unlike a gravitation pull, must be broken by a decisive leadership and then shifted to a new sustainable pattern via a new strategy like LTS.

Litshares™ Could Be Attractive Investments amidst Debt Induced Financial Collapse in Europe and Globally

The advantage of keeping LTS equal to a billionth part of the economy is that people will know exactly what they are getting: one-billionth of a thousand-year old nation like LT is real and easy to understand for global investors. Such shares based on GDP have the great merit of being really clear, simple, and understandable to investors globally. Other measures of national earnings might seem to some analysts more appropriate than GDP but would sacrifice the great virtue of simplicity, clarity, transparency. This kind of simplicity and clarity encourages the development of badly needed confidence and trust that governments will not shirk their obligations at any time in the future. This is much better confidence and trust building strategy than any heavily advertised “magic” mechanisms like currency board that LT adopted against a better advice back in 1994.

LTS may appeal to international investors even more than corporate shares do because LTS would avoid the problem of the so called moral hazard. Here is the reason that Prof. Shiller stresses. If international investors ever acquired a good fraction of a nation’s corporate shares, the nation would have an incentive to raise the corporate profit tax on those shares or regulate them to reduce their value. If a nation did so, like the Kubilius Government rather erroneously did in LT, it would benefit without technically violating any promises. The issuance of LTS, however, would involve a strong and easily understandable promise of share in the value added (GDP) to global investors. If the shares paid dividends in the nation’s domestic currency like LTL, it would eliminate another moral hazard associated with the traditional debt. If the national shares strategy is adopted, the nation could not reduce its real obligations by creating inflation (e.g. via devaluation, as is already happening in some CEE countries), as they can with conventional government debt, because their nominal GDP would increase in proportion to the inflation thus created.

Speaking of Greece, Prof. Shiller asks what effect could national shares have had during the Great Recession and its aftermath? Greece’s real GDP fell 7.4% in 2010. If its shares were leveraged substantially, e.g. five to one, then the dividend paid on them would have fallen by about 40%. This would have done much to alleviate the crisis, making it easier for notoriously rebellious Greek taxpayers to bear. It would have given Greece a bailout without any scandal-ridden international controversies, loss of face and reputation or broken promises. After the fact, investors in Greek national shares would have been unhappy. But they still might have been willing to buy them, considering the very possible upside of such a leveraged investment. Global investors eagerly buy leveraged corporate stocks, so it is plausible that they would buy leveraged national shares as well. Global markets for national shares would fundamentally change the economic atmosphere (and confidence) in a nation like Greece or LT. An immediate market response would accompany every new governmental plan (strategy) affecting the future of the economy and society, generating discussions, free publicity, and a broader knowledge of each nation’s development plans, as well as much more energetic flows of global resources towards nations with plans that passed the transparent global markets test. This is much simpler and easier to understand for investors than the obscure and at times obviously disreputable work of traditional credit rating agencies or corrupt analysts. There are over $600 trillion of badly designed derivatives sloshing around the world in 2012; so all kinds of investors are on the sharp lookout for opportunities to exit these toxic assets and buy something much more transparent and solid instead, something backed up by genuine efforts at economic improvement like in Lithuania.

In Lieu of Conclusions

With national share prices going up and down, LTS or other such shares might look to some analysts as an unwelcome extension of financial capitalism. Financial industry is in deep disrepute globally for causing this Great (D)Recession. But, in fact, the thoughtful implementation of disciplined financial capitalism has been the story of every successful nation in history. LT has made a very good headway. We should have real global markets for nations like LT; such “macro” markets would track their successes much more accurately and justly than stock markets usually do. And LTS would do the necessary justice to serious efforts and results of structural reforms and financial discipline like in LT. Stock markets trade only in claims on corporate earnings after corporate taxes, which is an unreliable measure of a nation’s success. We can do better, concludes Prof. Robert J. Shiller who was among the very few experts to have predicted this Global (D)Recession. He argues that, rather than condemning finance, we need to reclaim it for the common good. He makes a powerful case for recognizing that finance is one of the most powerful tools we have for solving our common problems as mankind, and increasing the general well-being of people. We need more financial innovation and more globalization that would be developed in the policy environment of proper risk and knowledge management. The acute need for modern risk/knowledge management arises because global markets do an excellent job of nurturing financial innovations that people want (rather than need); but they are much less useful for planning for when things go wrong, like in this Global (D)Recession.

With regard to my LTS proposal, in the first instance, LTS would appeal strongest to LT residents, diasporas, and other FOLK (Friends of Lithuania of All Kinds); then they would catch up globally rather fast. My LTS proposal is to be developed to a much greater detail and “hands-on” policy relevance.

Valdas Samonis

INET and SEMI Online

Toronto-New York City-Vilnius

Literature Consulted:

Samonis, V. (2012), Riding Modern Recessions: Experiential Learning for Governing Risks. Toronto: Amazon and SEMI Online, 2012.

Samonis, V. (2012), Prudential Regulation and Governance from the Macro and Systemic Risk Perspectives in Long (Kondratieff Type) Cycles: Towards Modern Experiential Learning Approach, Transnational Corporations Review (TNCR, Ottawa-Beijing), 2012.

Samonis, V. (2012), Beyond Hands Visible or Invisible, TNCR, 2012.

Samonis, V. (2012), Alternative viewpoint on austerity measures and Poland’s economic miracle, Interview with V. Samonis, Lithuania Tribune (LT: Vilnius), 2012.

Samonis, V. (2012), The Business of Convergence: Strategies for Modern Global Growth (With Special Reference to Emerging Markets), a virtual course for graduate students.

Samonis, V. (2012), The New Business and Financial-Economic Thinking for the 21^st Century: The Experiential Learning from the Global Recession 2007-2012, a virtual course for graduate students.

Samonis, V. et al. (2012), Aid and Good Governance for Africa, The African Capacity Building Foundation (London-Harare), 2012.

V. Samonis (2011-12), Scholarly Contributions to The Institute for New Economic Thinking, NYC: http://ineteconomics.org/search/node/Samonis

Acknowledgements

I owe a lot of enlightenment and uncommon inspiration to Stanford Economic Transition Group (SETG), a high-profile research team led by 5 Nobelists in Economics/Finance (Leontieff, Tobin, Arrow, Klein, Solow); I worked as a member of SETG. Most prominently, another Nobelist and this course textbook's Author Prof. Michael Spence chaired

The High Level Commission on Growth & Development:

(http://www.growthcommission.org/index.php)

who concluded its work recently. As a Fulbright Scholar at Indiana University (IU), I immensely benefitted from the exposure to the 2009 Nobel in Economics winning work by the IU Professor Elinor Ostrom; She passed away this Summer 2012, unfortunately. In doing research, knowledge management, planning/structuring this LTS Project, I benefitted enormously from the comparative and integrative (holistic) experiential learning as a knowledge entrepreneur while working/living long periods of time in many emerging markets (close to 50 incl. LT, LV, ES) as well as advising private and public sector organizations in a “hands-on manner”, especially in the last three decades of unrelenting transformational change in Eurasia, Africa, Latin America as well as North America. I therefore dare to claim that I experienced management, economic, and financial processes not just through the lens of academic theories but, primarily, through the eyes of many local, national, regional, and global business, academic, and governmental agendas, failures, and successes; through the confrontation of theories with the realities of “hard-to-read” frontier-type changes: global experiential learning in short. So I dare to claim that I stand “virtually on two legs”: theory and “hands-on” practice. As well, I gained a lot of unusual inspiration and original insights from my long, extensive research/discussions (online & onsite) at The Institute for New Economic Thinking (INET: London-New York City), particularly interactions with the Reagan Era’s Fed Chairman P. Volcker, Nobelist G. Akerlof, Prof. Larry Summers, Harvard, and other top experts at the Second Bretton Woods Conference in 2011. Also, of great help were countless interactions over years with the Canadian Finance Minister J. Flaherty and Ms. J. Dixon, The Superintendent of Financial Institutions, Canada, on the real-life workings of austerity and the conservative capitalism (state and market) of that country, now widely recognized No. 1 system in the world. My ideas were also inspired by the new Global Risk Institute in Financial Services, Toronto. I want to gratefully acknowledge these important influences without attributing any errors of commission or omission to anybody but myself.

For more of V. Samonis relevant publications, please consult:

V. Samonis Author Page on Amazon.com

http://www.amazon.com/Valdas-Samonis/e/B0031SF300/ref=ntt_dp_epwbk_0

and/or search for the name Samonis (Val or Valdas) in Google.com.

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.

Lithuania remains
BBB rated by S&P

Lithuania’s sovereign credit rating was this week affirmed by Standard & Poor’s (S&P), which cited the nation’s commitment to budget policies that promote sustainable economic growth.

S&P kept its stable outlook on Lithuania’s BBB rating, its second-lowest investment grade, on par with Russia and Bulgaria.

“The Lithuanian government has made significant progress in consolidating the public finances,” the ratings company said. “We expect fiscal deficits to continue declining over the medium term and for consolidation efforts to be helped by a forecast return to strong economic growth.”

Lithuania plans to narrow this year’s budget deficit to within 3 percent of gross domestic product from 5.5 percent in 2011. After expanding 5.9 percent last year, the economy will grow 3 percent in 2012, the central bank predicts.

The yield on Lithuania’s 2022 dollar bond fell 4 basis points to 4.15 percent as of 1:25 p.m. in Vilnius.

There are “significant risks” that this year’s fiscal shortfall will be “marginally” higher than the government’s target after the first-half deficit reached about 2.4 percent of full-year estimated GDP, S&P said.

“Fiscal prudence is particularly important for Lithuania as its currency board affords it no meaningful monetary or exchange rate flexibility,” it said.

S&P, which also raised the country’s short-term foreign and local currency rating to A-2 from A-3, warned that rising gas and heating prices may spur price growth, hindering plans to meet inflation criteria for euro adoption.

“Whatever the case, we believe that Lithuania’s authorities may hesitate to apply for euro-zone membership for as long as the economic and debt crises in the euro zone persist,” the ratings company said.

Good news, bad news for Lithuania's economy in the nearest future

A main risk is related to the economic policy path that will be chosen by
the new government after the parliamentary election* on 14 October, where
the six political parties / leaders over are likely to gain support as shown
according to a poll from June on the website www.delfi.lt

Swedbank is out with a new ‘Economic Outlook’. These are some of their forecasts for Lithuania in 2012 – 2014:

• A main domestic risk is related to the economic policy path that will be chosen by the new government after the parliament election on 14 October.
• Annual growth has bottomed out and will pick up slightly in the second half of this year.
• Lowered forecast for 2013 by 0.2 percentage point to 4.1%, mainly due to the bleaker outlook in the euro area, which will be a drag on Lithuanian exports.
• Lithuanian economy to return to close to potential only in 2014, when GDP will expand by 4.5%.
• Slightly higher inflation next year, mainly due to an increase in regulated prices.
• Unemployment forecast estimated to 13.2% for 2012, 11.5% for 2013 and 9.3% for 2014.
• Domestic demand has in 2012 been supported by non-labour income – pensions were increased by 9.3% – and this effect will ebb next year.
• The monopoly Lithuanian Gas has decided (and the regulator has agreed) to increase gas prices for households by about 22% as of July 1 this year. This decision was due to higher oil prices (the import price of gas is directly indexed to the price of oil); however, this increase now seems excessive, considering the steep decline of oil prices during the past few months. Our estimates show that this will add about 0.35 percentage point to annual inflation. The price of heating in some major cities will go up in the second half of 2012, and public transport will become more expensive.
• Although it is still possible that Lithuania will meet the price stability and budget deficit Maastricht criteria in the spring of 2013, the prospects of adopting the euro in 2014 are dim because the government has not yet designated this as an official national target.
• The budget deficit will decline further in 2013 and 2014, to 2% and 1% of GDP, respectively.
• Tax revenues as a share of domestic demand (and GDP) have disappointed somewhat and remain close to 15%, well below the pre-crisis average of 18.3%. The government has implemented a number or reforms aimed at reducing tax evasion and the size of the shadow economy, but so far these have brought limited success.
• The Nielsen “empty-pack” survey shows that in the second quarter the share of smuggled cigarettes dropped to 29.3%, down from 34.6% a year ago and a stunning 43.0% from the end of 2010. The measures taken thus far – the rotation of customs officers, taxation of goods once a person has crossed the eastern border more than five times, implementation of cashiers in covered markets – all these represent a positive progress towards a more transparent economy but have not solved the large-scale corruption and smuggling problem. The continuation of these reforms should remain the priority of the new government.

To read the full Swedbank report, go to: http://www.swedbank.lt/lt/previews/get/3199/1345536465_Swedbank_Economic_Outlook_(August_2012).pdf

* Parliamentary elections will be held in Lithuania on 14 October 2012, alongside a referendum on the construction of the new nuclear power plant. All 141 seats in the Seimas are up for election. The last elections in 2008 led to a centre-right coalition government between the Homeland Union – Lithuanian Christian Democrats, National Resurrection Party, Liberal and Centre Union, and Liberal Movement. The National Resurrection Party has since merged with the Liberal and Centre Union.There will be 34 political parties participating in the elections.