Wednesday, 12 December 2012

"Ubi solitudinem faciunt, pacem appellant"

The FT article that appeared yesterday under the name of Olli Rehn, the European Commissioner for economic affairs, could have been written by a fairly unsophisticated economic cliche-generator: "we must stay the course..light at the end of the tunnel."  What caught my eye (and those of others, including Paul Krugman here and Kevin O'Rourke here) was that Mr Rehn and other eurozone policymakers have been saying the same things for the last two years (so indeed have policymakers in the UK, but that's a different story) and have yet, as Brad Delong would put it, to "mark their beliefs to market". 

I reproduce my letter to the FT in response: 

Sir, The EU commissioner for economic affairs brings us good news: “Since last spring, Greece has demonstrated a remarkable commitment to economic stabilisation – one certain to yield lasting returns. Spain is now also pursuing a broad reform agenda.” Indeed, “Europe’s recovery in the real economy has taken hold and is becoming self-sustaining.”
So the Commission’s strategy is working, it seems.  Except those quotes aren’t from Mr Rehn’s most recent article on your Comment page (“Austerity is working – Europe must stay the course”, December 11, 2012). They are from his article of two years ago: “New reforms can break Europe’s debt cycle”, January 11, 2011.

In this week’s piece, he said: “There is light at the end of the tunnel . . . confidence is returning . . . we need to stay the course . . . ”.  What about the realities of actual economic developments in the eurozone over the last two years? If Mr Rehn had changed a couple of dates, he could probably have saved himself the trouble of writing a new article and simply resubmitted the old one.

What has actually happened in the intervening period? Unemployment in both Spain and Greece has risen to over 25 per cent. Even in Latvia, the Commission’s favourite “success story”, where growth has returned, the falls in unemployment (from a very high level) have largely been the result of mass emigration; employment in Latvia remains about 20 per cent below its pre-crisis peak.  
"Ubi solitudinem faciunt, pacem appellant."  [NB: the FT chose to translate and attribute the quote, but I have more confidence in my readers!]. 
 I thought I'd just clarify the point about Latvia, since both the Commission and the IMF have pointed to it as an "economic success story".   I'm not an expert on Latvia, and I don't want to get into the wider argument about the precise economic strategy followed by Latvia in very difficult circumstances (see here for a detailed challenge to the Commision/Fund line). What I would point out - and hence the Tacitus quote - is that while Latvia is now, after a very deep and painful recession, seeing moderate growth and some job creation, this has been achieved at the cost of mass emigration of young and skilled Latvians.  As the chart shows, employment in Latvia peaked at about 1.15 million; it has recovered to only about 900,000.  

[Source: Latvian Central Statistical Bureau. Note that revised population estimates after the 2011 census mean there is a series break, but this probably reflects underestimated emigration in 2008-11, so wouldn't affect the peak-to-trough fall much].  
Unemployment, however, hasn't risen nearly as much as the fall in employment. So where did all the people go?  The answer is that many left.  We know from the UK National Insurance number registration data that fully 70,000 Latvians - more than 3 percent of the population - registered for work in the UK alone in the 2009-11 period; we also know from other research that the vast majority of those will have been young and relatively highly skilled.  For comparison, imagine that the UK pursued economic policies that led to 2 million young graduates moving to Australia. 

Now, as I've argued before, I think that free movement of workers within the European Union - and in particular the UK's decision to allow free labour market access to the new Member States who joined in 2004, including Latvia - has been a success, with economic benefits for both the UK and the new Member States.   But there is a big difference between migration driven primarily by labour demand, the state of the economic cycle, or individuals perceiving that in the short-term they have greater opportunities elsewhere; and migration driven by a collapsing labour market. 

That doesn't mean either Latvia or the UK would have been better off without these migration flows - they provided a useful safety valve - but it is difficult to see how any economic strategy that has led to this outcome can possibly be described as a success. 

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