Wednesday, July 1, 2009

Baltic Rise And Fall

Reading Edward Lucas's article "The Fall and Rise and Fall Again of the Baltic States" I am reminded of the old adage - you can see evidence for Eastern Europe's demographic crisis everywhere, except in the columns of the Economist staff writers. I have before me as I write these lines an article from the Estonian newspaper Aripaev, which informs its readers that nurses, doctors and health workers are currently being actively recruited by health systems in Spain and the UK, and with unemployment in this small country running at 70,000 and rising, while euro-membership induced health cuts are numerous, applicants will not be hard to find.

Plenty of debate has taken place in recent weeks about the desirability or otherwise of Baltic devaluations, but what I would like to stress here, is that the Baltic problem is long term and based in the demographics. As Edward notes, the Baltic economies rapidly started to overheat after 2005 due to the "tight labour market". The labour market was tight for essentially demographic reasons - the current economic shock having been preceded by a much larger and deeper demographic one twenty years earlier. The slump in fertility, and the bleeding outmigration, which followed the fall of the Berlin Wall in one country after another across the CEE has cast a long shadow.

And the big worry with the current crisis is that the "U" shaped internal devaluation could rapidly become "L" shaped long-term stagnation. I am tracking the monthly birth figures for Latvia as a leading indicator for the future. It is remarkable how the drop in the output of children tracks alomost symmetrically the drop in industrial output - but with a nine month lag. To paraphrase Robert Zoellick, twenty years after the fall of the wall, it would be a tragedy if all that magnificent potential so ably described by Edward Lucas were to be flushed down the plughole of history by ill-informed and short-sighted policies which fail to understand and get to grips with the real problems.

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