“All We Have to Fear Is Fear Itself” - and the Eurozone

ECR Vilnius 8 November 2012

Morten Hansen

Head of Economics Department

Stockholm School of Economics in Riga

morten.hansen@sseriga.edu

Economic growth in the Baltics Q1 2010 – Q2 2012

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

2010Q1 2010Q2 2010Q3 2010Q4 2011Q1 2011Q2 2011Q3 2011Q4 2012Q1 2012Q2

Estonia

Latvia

Lithuania

- and with some comparator countries

-10.0

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

2010Q1 2010Q2 2010Q3 2010Q4 2011Q1 2011Q2 2011Q3 2011Q4 2012Q1 2012Q2

Estonia

Greece

Spain

Latvia

Lithuania

IMF forecasts: Continued growth in the Baltics

-8

-6

-4

-2

0

2

4

6

8

10

2010 2011 2012 2013 2014 2015

Estonia

Greece

Italy

Latvia

Lithuania

Spain

But creditless growth Latvia – annual growth of credits

-20.0

-10.0

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

IV VII X I IV VII X I IV VII X I IV VII X I IV VII X I IV VII X I IV VII X I IV VII X I IV

2004 2005 2006 2007 2008 2009 2010 2011 2012

What should make you happy! Rapid growth of household consumption in the Baltics

-10.0

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

2010Q1 2010Q2 2010Q3 2010Q4 2011Q1 2011Q2 2011Q3 2011Q4 2012Q1 2012Q2

Estonia

Latvia

Lithuania

Export growth, %, year-on-year Competitiveness seemingly not an issue

-25

-20

-15

-10

-5

0

5

10

15

20

25

30

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Estonia

Latvia

Lithuania

Thus Estonia, Latvia and Lithuania are in no way or form Greece, Spain, Italy or Portugal….

Economic growth in the eurozone - back into recession

Failure…

Eurozone unemployment rate – all-time high… Failure…

But the eurozone is where Estonia already is and where Latvia is heading… And Lithuania?

Population reduction, past decade

0%

2%

4%

6%

8%

10%

12%

14%

Estonia Latvia Lithuania

Joining the Eurozone is advantageous for Latvia and Lithuania

Inside or outside the Eurozone: Similar impact on economic development

Problems lie in labour markets…

Unemployment rates, Baltics and Denmark Utter waste of resources! Risk of bottlenecks

0.0

5.0

10.0

15.0

20.0

25.0

200

1Q1

200

1Q

3

200

2Q

1

200

2Q

3

200

3Q

1

200

3Q

3

200

4Q

1

200

4Q3

200

5Q

1

200

5Q

3

200

6Q

1

200

6Q

3

200

7Q1

200

7Q

3

200

8Q

1

200

8Q

3

200

9Q

1

200

9Q

3

201

0Q

1

201

0Q3

201

1Q

1

201

1Q

3

201

2Q

1

Denmark

Estonia

Latvia

Lithuania

Example: Latvia Labour force and employment (1000s)

700

750

800

850

900

950

1000

1050

1100

1150

1200

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2011Recal

2012

Labour force

EmployedQ4 2007: 1,106,600 employed

Q1 2012: 1,001,600 in the labour force

A few conclusions

Broad-based growth – But eurozone development

Creditless growth – Thus slower

The labour market is the main obstacle

– Way too high structural unemployment

– Far too little has been done

– Companies should be more proactive in this process!

Thank you for your attention! Questions and comments are welcome

Stockholm School of

Economics in Riga

Founded 1994