Comparing Apples to Oranges: The Baltic States and Greece

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By Jeffrey Sommers. Sommers is an associate professor at the University of Wisconsin – Milwaukee and visiting faculty at the Stockholm School of Economics in Riga. His book with Charles Woolfson, The Contradictions of Austerity: The Socio-economic Costs of the Neoliberal Baltic Model is available from Routledge.

It has become increasingly fashionable to compare the results of Greece and the Baltic States’ response to the financial crisis of 2008, most recently last month with the Financial Times’ column with John Dizard. This, however, is a classic textbook case of comparing apples to oranges. Greece’s crisis was chiefly a public debt crisis enabled by membership in the eurozone and the cheap loans extended to the state this enabled that amounted to 107.4 percent of GDP in 2007 in the run up to the crisis. By contrast, the Baltic states had paltry public debt to GDP ratios of only 4.4, 10.7, 18 percent respectively in Estonia, Latvia and Lithuania in 2007, before the financial shock. Their crisis was a private sector one as banking capital ran for the door after creating a property bubble that burst.

Greece and the Baltic states did share one common feature. Tax evasion has been the national sport in their respective countries. For the Baltics states (especially Latvia) and their offshore banks, this is big business which their economies depend on. The Syriza government in Greece is attempting to tackle this pernicious problem, albeit with unknowable results at present.

Additionally, there was a wide gap in wages between Greece and the Baltic states following the crisis. For example, in 2009 Latvia’s per capita purchasing power (PPP) was $14,307 (in 2013 adjusted dollars). By contrast that year in Greece it was $29,512. Thus, given the ultra-low wages paid in the Baltics, there was much incentive for investors to take advantage of wage arbitrage opportunities. The real wage gaps were larger still, given that Baltic inequality is more extreme than in Greece. Now that wages have increased in the Baltic states to levels close to Greece’s, economic growth is flatlining as the wage arbitrage between them and Greece is no longer significant.

Oil prices rebounded quickly after the 2008 shock and by 2009 CIS offshore cash was racing into the Baltics from the east. More still came in as problems emerged in Cyprus’ offshore banking industry in 2012 and 2013. Now that oil prices have declined offshore financial flows to the Baltics have declined and with that (and the EU sanctions against Russia) their economic growth has dramatically slowed. So the jury is still out on the longer-term economic consequences of the kind of brutal austerity that Greece and the Baltics share in common.

Read more: http://www.nakedcapitalism.com/2015/04/jeffrey-sommers-comparing-apples-oranges-baltic-states-greece.html