Message To Ilmars Rimsevics

Hi,

"devaluation is a poison" and that "only pseudo-economists suggest Latvia devalue".

In this regard, it might be appropriate to consider the analogy with a pile of sand presented by the science journalist Mark Buchanan in his book Ubiquity: Why Catastrophes Happen. As a child, almost everybody has been building sand castles. We remember quite well that initially every single grain of sand which is added to the pile makes it bigger. In time, however, a certain point is reached, where the next grain causes a landslide instead of adding to the size of our edifice. Moreover, it is important to note that it is next to impossible to predict either which particular grain of sand will cause the landslide or how great and significant it will be. The author has a theory that this unpredictability is related to the instability that is unavoidable in the development process of any system. According to this theory then, even the most important events do not have special or extraordinary causes. These events can result from any, even the most insignificant of causes: a mere grain of sand that under different circumstances would probably be totally inconsequential and harmless.
Opening Remarks by the Governor of the Bank of Latvia Ilmars Rimsevics, Conference hosted by the Bank of Latvia - Latvia on Its Way to Prosperity: Growth Potential and Development Prospects, October 18, 2006.

I have one simple question. Given the latter, how can you be so sure of the former?


More opinions today.

Baltic Business News quotes economic analysts Hardo Pajula to the effect that the EEK has already effectively devalued, sinceit has lost its value since if a person loses half of income, "it’s the same as devaluation" (is this so hard to see, Edward).

“Devaluation is worsening of everyone’s standard of living at once and we have no escape from that in the near future. EEK has devalued for many of us since their incomes are smaller. Currently the devaluation moves from an individual to individual,” Pajula said.

Also Erkki Raasuke, Swedbank Baltic CEO has warned that "if the state cannot make the necessary cuts we’ll all go bankrupt".

“If Estonia can’t go necessary cuts, we’ll go bankrupt. There are examples to take and one should mostly look at Iceland. Problems are different, but it still should be terrifying enough to discipline us,” Raasuke said. “One option is devaluation here and not with all its destructive after-effects. Then we have that option politicians currently try to do – through deflation, decreasing the costs. Here the first question is discipline – are we capable of doing it? If we hesitate, we should pick the first option,” Raasuke said.

Please feel free to paste more "pseudo economic" opinions in comments if you find any.

Are Baltic labour markets really so "nimble", Maive Rute, SMEs’ competitiveness director at European Commission doesn't seem to think so:

“The relative inflexibility of the labour market is an issue that decreases the entrepreneurs’ readiness to create jobs and that especially affects the potential investors, who are interested in the attractiveness of the area. Our current legislations are rather inflexible compared to that of the EUs,” said Rute about the Commissions’ recommendations at that time.

Also Latvia's president Valdis Zatlers said on Tuesday that the country may fall deeper into recession than the 5 percent downturn currently forecast. If this is correct, then Latvia's situation would seem to be more critical with every passing day. Latvia's problems as a result of Parex (and related items) seem to be much more serious than Estonia's (ie it would be technically easier for Estonia to devalue), and the threat of credit downgrades and government debt which may be pushed over 60% of GDP put the eurozone 2012 exit strategy increasingly at risk. I think instead of talking about pseudo economists it would be better to come up with some practical solutions which have some hope of success. I think it reasonable to ask everyone to make sacrifices in a situation like this, but only sacrifices for a programme that can bring results.


Update

Erkki Raasuke, head of Swedbank Baltic unit also said that Estonia needs to cut state spending by 30 percent or face “bankruptcy.