Analytics, Economic History, Economics, EU – Baltic States, Modern EU

However, as we know, before uniting it’s always better to look at owns potentials and so-called “starting positions”. In particular, as it concerns the growth per capita, own resources and, last but not least, “help” from the EU. 

 

= Estonia with its 1.315 mln inhabitants (in 2013 there were 1.294 mln, it’s well worth remembering as in Latvia, for example, population is decreasing) the GDP is $ 38,7 billion, or about 20.5 billion in euros. It makes about $29,5 thousand per inhabitant (correspondingly little less in euros), which is 42nd in the world.

 

Support from European Union to Estonia is at the level of 3,5% of national GDP.

 

= Latvia with presently about 1,9 million inhabitants (more than 250 thousand less than 25 years ago) Has a GDP of about €24.4 bln and about € 12 thousand per head, the lowest among the three states; the latest data for 2016 is $22.6 thousand.

 

EU’s financial support to Latvia is at the level of 4.45% of GDP.

 

= Lithuania is more comfortably situated among the three states: with population of 2.866 million people (in 2015 it was 2.921 mln), it has GDP of €43 billion, which makes it about €15 thousand per head (49th in the world).

 

EU’s support for Lithuania is at the level of 5.36% of GDP.  

 

Latvian situation: past and present

 

Then, as soon as Latvian situation seems more “uncomfortable”, I would like to provide a closer look at the development.    

 

EU’s Eurostat had acknowledged in 2002, that Latvia’s GDP per head was about 35% of the EU’s average; in 2001 it was even less - 33%, and in 1995 - 26%.

 

After joining the EU in 2004, the Baltic States’ GDP has grown in 2006 by 11.2% in Estonia, 11,2 % in Latvia and by 7.5% in Lithuania.

 

In 2001, Latvia’s GDP per capita has been the lowest among the new candidate-members to join the EU. However, already at the end of 2009, Latvian GDP per capita was at 57% from EU’s average, and in Estonia at 67%. With such extraordinary growth rate these states were described at that time by some as the “Baltic tigers”.

 

Global economic crisis has hit all three states (in 2009-10 they were among five worst states in the world in GDP’s dynamics), but most fiercely hit was the Latvian economy, where GDP had fallen by more than 20%.

 

Former PM V. Dombrovskis announced emergency situation in the country at the time of European crisis followed by drastic reduction of pensions and social security payments; then followed the plea for EU and international financial assistance. Latvia was the only state in the Baltic region that asked for financial support; the country got credits at €7,5 billion from EU, World Bank and other lenders, which saved the situation.  More on this periodin Latvian history see in: "Анатомия латвийской политэкономии" Юджин Этерис международный редактор,БК, Рига/Копенгаген, 20.06.2016.

 

However, there are some positive signs in Latvian economic growth: it’s GDP increased by 17,4% during 2010-14, which was the best growth-rate in the EU.

 

However, most vital economy sectors are in decline, compared to pre-crisis period: in construction by over 20%, in financial sector by about 5%. Besides, the income differences between rich and poor are growing: on average such difference stretches by 6-7 times.

 

Swedbank-LV opinion

 

On Swedbank’s account (the bank covers about 20% of Latvia’s lending market), the country’s economy continues to grow, which is reflected in gradual growth in lending. The economic growth in Latvia is driven mainly by household consumption (bold mine, EE): hence, new financing granted to private individuals has increased by 27% year over year. Corporate lending is also on the rise; however it is hindered by the high level of shadow economy and delayed availability of EU structural funds, coupled with overall cautiousness currently exacerbated by the outcome of the Brexit referendum.

 

At the same time, said Māris Mančinskis, ex-head of Swedbank Latvia, that lending volumes grew by 5% on a year-on-year account (yoy); corporate lending increased by 6% and private lending increased by 4% supported by the acquisition of Danske Bank’s retail banking business. Swedbank Latvia loan-to-deposit ratio is 80% in 2016. https://www.swedbank.lv/en/zinas/21.07.2016/

 

Export-import “puzzle” and others  

 

Consumer’s situation has been worsened by joining euro-zone; it’s better for the countries (Poland, Czech Republic, Hungary, etc.) where adjustable monetary policy can “speed up” budgetary resources and support export… EU states are less and less accountable for Maastricht principles (except some cases). 

 

It was expected that export shall be the driving force of Latvian growth. But government statistics show that for in the first quarter of 2015 export accounted for about € 3,3 bln, at the same period in 2016 it was € 3,1bln (the loss of €197 mln or 5,7%). Thus, EU sanctions against Russia have hit hard the Latvian export: important market for Latvian products and services has been lost and it’s difficult to compete on the western one …   

 

And such is the decline in Latvian import –by € 320 mln or 7,8%; it means that people in the country would consume less (it’s seen above that household consumption is a driving force in economic growth). Besides, as official figures show, to the pleasure of ministries, the level of unemployment is slightly declining; but that’s due to still growing number of Latvians leaving for good… The number of working people has reduced during April 2015-April 2016 by over 2 thousand (there are presently about 785 thousand in employment). These and other figures are taken from Jurij Baltgailis in: “Большой секрет маленького латвийского ВВП” Юрий Балтгайлис, Dr. oec, специально для БК, Рига, 08.08.2016.

Industrial production is not connected to export; there is a drastic decline in transit: Latvian ports’ turnover reduced by 20-25%. And there seems no alternative to substitute for the losses, as industry is in decline too!  The general EU requirement is that the share of manufacturing and other industrial sectors in the EU member states shall be at the level of 20% in the total value added process; in Latvia it’s presently 14, 2%.

 

For the conclusion

 

Latvian economic situation is the worst among the three states. Main problem lies in the fact that economic crisis is not over, it’s just frozen. Since joining the EU, situation in the country has been better (plus over € 7bln in credits) with the EU’s financial assistance, which as we seen above is at the level of 4,5% GDP. But due to present EU crisis connected to Brexit this “source of supply” is going to be reduced.

 

Sanctions against Russia are having its negative imprint too; some argue that Rail Baltica is not going to make an expected difference…

 

What is left to do? To rely on well-known and very simple development factors – available capital, workforce and productivity! Unfortunately, none of the three are in place and not so easy to provide for… 

 

Foreign direct investments are low, unemployment is at the level of 10% and deficit in foreign trade still goes on.

 

To strive for the higher grade in EU’s average level –up to at least 80% - Latvia has to show growth at the level of at least 4-4,5% yearly! So far it’s far from any governments projections.

Bottom-line: the country urgently needs a new economic policy with education oriented on future needs in workforce, as well as adequate facilities for growth based on new guidelines for manufacturing (as soon as industrial production is in decline), SMEs and start-ups.