No Austerity Success and lessons from Latvia
Merkel managed squeezing the shorts late last week (and fixing the half year p/l for many). Austerity and bank bail outs will apparently save the “problematic” Eurozone countries. We have argued over the past weeks that the first “good” signs in Europe are seen, as the “elite” is at least acknowledging the problems. Our long Med countries vs short DAX recommendation a few weeks ago has performed well, but the EU phoria won’t last forever, and we expect the futures to start hitting some resistance levels shortly. 1400 is a big level in the SPX. Market reactions and the fundamental shape of the economy are two different things. Below are some lessons from the Latvian situation, by Sommers and Hudson.
Austerity’s advocates are declaring victory with Latvia’s battle against the European economic crisis and advocating it as the model for Greece & Spain to emulate. Curiously, Latvians have been declaring this “win” by exiting their country.
The “austerians” are celebrating Latvia as the plucky country that through hard work and discipline showed the way out of the financial crisis plaguing so many countries. For austerians, Latvia represents a veritable Protestant morality play demonstrating that austerity works. Indeed, they hope the Latvian example will retread Margaret Thatcher’s “there is no alternative” tire for a European-wide scale austerity tour. Few writing on the subject unfortunately have the time on the ground to evaluate the economic and social costs of the Latvian model. While the Latvian government chose austerity, most of its people have not. Feeling there is no acceptable political alternative available, many elect to emigrate.
The European Commission and the IMF declared this victory with a public event in Riga on June 5th celebrating the Latvian model. The IMF head, Christine Lagarde, proclaimed Latvia “could serve as an inspiration for European leaders grappling with the euro crisis.” The IMF’s chief economist, Olivier Blanchard, followed with a mea culpaadmitting initially he thought the Latvian peg and internal devaluation program a “disaster,” but now sees success. To better appreciate Blanchard’s remarks one must bear in mind Latvia is one of the few countries following the 2008 crisis that actually attacked the IMF from the right on economic and social policy. In effect, Blanchard and the IMF are declaring, “our policies were too cautious on austerity, long live austerity!” For the IMF it reprises a familiar chorus harkening back to their greatest hits of the 1980’s and 1990’s glory days of structural adjustment.
Full article here.