Mad Latvia defies its own people to join the euro

EU finance ministers have just given the go-ahead for Latvia to join the euro in January 2014.
No matter that the latest SKDS poll shows that only 22pc of Latvians support this foolish step, and 53pc are opposed.
This is a very odd situation. The elites are pushing ahead with a decision of profound implications, knowing that the nation is not behind them. No country has ever done this before.
The concerns of the Latvian people are entirely understandable. Neighbouring Estonia found itself having to bail out Club Med states with a per capita income two and a half times as high after it joined EMU.
Latvia may find itself embroiled in an even bigger debacle if the contractionary fiscal and monetary policies of the eurozone push Slovenia, Portugal, Spain, and Italy over a cliff, and push Greece and Cyprus into yet deeper crisis.
Latvia has become the poster child for the EMU policy of internal devaluation – ie wage cuts. It is cited time and again by EU leaders, and by EU bail-out chief Klaus Regling, as the clinching evidence that austerity a l'outrance ultimately pays off.
But let us be clear about what Latvia has achieved, and not achieved, and whether it offers any meaningful example for the Club Med pack.
It is worth reading the European Commission's report earlier this year on poverty and social exclusion.
Latvia stands out – with Bulgaria – as the country that has seen worst increase in "severe material deprivation", with the rate surging from 19pc to 31pc since 2008. (Bulgaria also has a fixed exchange rate, by the way). Poland did far better with a floating Zloty through the crisis.

While Latvia's unemployment rate has dropped to 11.7pc from a peak of 20.5pc, this is not the full story. Another 7pc have dropped off the rolls (one of the highest rates of discouraged workers in the EU). Roughly 10pc of the population has left the country.
The blue collar working classes have borne the brunt of the deflation strategy, while the affluent middle class with foreign currency mortgages have been protected. Policy has been shaped for the class interest of the elites (sorry to sound like a Marxist, but Marx was good at spotting this kind of abuse). Many who lost their jobs in the crisis – often Russian ethnics – have not found work, and may never do so again in Latvia if they are over 50.
This is how internal devaluations work. They break the back of labour resistance to pay cuts by driving the jobless rate to excruciating levels. The policy is a moral disgrace. Mussolini pulled it off in 1927 with his Blackshirts to secure the Lira Forte, but is that supposed to be a pedigree?
The Latvian economy is growing briskly again but, as you can see from the IMF chart below, it has recouped just half of the 22pc collapse in GDP after the EMU bubble burst in 2008.

Real output is still 10pc below the peak even today. This is not a "success story". Latvia should be a post-Soviet tiger economy with turbocharged rates of growth. It should be 10pc above its 2008 peak by now.
What Latvia has achieved is to survive its deflation ordeal without losing its democracy – though the government did play the race card against ethnic Russians to clinch the last elections. It has held its pre-euro exchange rate peg in the ERM. Congratulations.
This may be a desirable political and strategic outcome, if your objective is to lock into the EU system as deeply as possible to protect against Vladimir Putin. But it is not an economic success.
Latvia's entered the crisis with public debt of just 17pc of GDP in 2008. It never faced a debt-deflation threat. It could deflate without the risk of exploding debt dynamics.
This is entirely different from Italy or Portugal, with debts above 120pc, or Spain with debts nearing 100pc (including arrears). If these countries succeed in carrying out an internal devaluation, they more or less guarantee that their debt ratios will rise even faster. It is the infamous "denominator effect". The debt rises on a contracting base. They are damned if they do and damned if they don't.
You can have deflation. Or you can have high debt. But you can't have both. This is a point that seems to elude the EU officials, with calamitous consequences. I would recommend posting Irving Fisher's 1933 "Debt Deflation Theory of Great Depressions" on the doors of the Berlaymont and the ECB's Eurotower in Frankfurt for mental improvement.
In any case, Latvia has an open economy with a high trade gearing. Exports make up 60pc of GDP, compared to nearer 30pc for Portugal, Spain, and Italy.
Overall export growth has been stellar, as you can see from this chart from the Latvia central bank:

Latvia is sui generis in all kinds of ways. Swedish banks own much of the banking system. It is surrounded by Nordic countries and by Poland, an oasis of growth in the Europe's economic desert.
The country's recovery does not vindicate EMU austerity doctrine in any way at all. It merely shows that states with low debt and high exports can survive such a policy.
A low bar, surely?
As for joining the euro, you must be mad.