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Monday, February 23, 2009

The Price Of Inaction On the Baltic Pegs

This morning I have been reading a story from Baltic Business News about the Estonian vegetable market. It seems recent devaluations among the Baltic neighbours (especially Poland and Ukraine, I suppose) are making imported vegetables much cheaper than the homegrown ones. This is a perfectly predicatble problem for those who understand a little economics. The issue is, how much structural damage to your economies are you willing to accept before you finally fold, as the article explains, instead of attracting investments to make a new, productive and highly profitable industry (what the proponents of the measured internal deflation option suggested would happen) whole sectors of Estonian economic activity - in this case agriculture - seem to be in danger of extinction. It is hard to see what can emerge from any of this that is positive, the debt defaults in euro loans will come just the same as wages fall and unemployment rises. It will take more time to get there, that is all.

Import vegetables have make up third of what is sold, but the amount of imported fruits exeeds the amount of local fruits ten times, Maaleht reports. “We’re in a silly situation – people have started to eat more vegetables and fruits, but there aren’t any domestic ones since small producers end operating for loss. So our markets are open for import products,” Kalle Reiter, the chairperson of Eesti Aiandusliit (Estonian Horticultural Union – edit) said. He said that horticultural activities may die if they won’t be supported at national level. The counterparts in other countries get support from the state.

Bloomberg has a reasonable article today summing up the state of play. Joaquin Almunia once more reveals that he understands very little economics:

European countries with currency boards “have to worry less” about the global credit crisis than those with floating exchange rates, European Union Monetary Affairs Commissioner Joaquin Almunia told Eesti Paeevaleht in an interview. “Regarding Estonia and other countries that use currency board systems, one has to say that a currency peg is a positive element,” Almunia was quoted as saying. “It ensures that the currency is stable, even in very volatile market conditions.”

While RBS analyst Timothy Ash shows he gets the message:

“Essentially, it’ll be a political decision that the pain of holding these regimes is just too heavy a cross to bear,” said Timothy Ash, head of emerging-market economics at Royal Bank of Scotland Plc in London. “Their positions are just becoming more unsustainable because everyone around them is just letting their currencies adjust.”

As has Danske Bank's Lars Christensen

Keeping the peg “will likely mean a number of years of very low economic growth,” said Lars Christensen, chief economist at Danske Bank AS in Copenhagen. “Wages and prices will have to fall to reestablish competitiveness.”

Exports and Imports Fall In December

Estonia’s trade deficit fell in December from November, led by shrinking imports of cars and machinery. The deficit shrank to 2.8 billion krooni, and a revised 3 billion-krooni deficit in November. This drop in the trade deficit is, of course, marginally positive for headline GDP, but is also consistent with a sharp drop in living standards.

Basically, there are three ways to close the current account deficit, one is to raise exports and drop imports, the second is to reduce imports and maintain exports constant, and the third is to try and drop imports more rapidly than exports. This last approach (which is the no-devaluation one the Estonian authorities are going for) is consistent with the greatest reduction in living standards, and this is what we are getting, since while exports fell an annual 6 percent in December, imports declined by 17 percent.

This section in the stats office report seems pretty relevant:

The share of the EU countries (EU 27) accounted for 70% and the share of the CIS countries for 13% of Estonia’s total exports last year. Compared to the previous year, exports to the EU countries grew 5% and the exports to the CIS countries nearly by a quarter. The main countries of destination were Finland (18% of the total exports), Sweden (14%) and Russia (11%). The biggest increase in exports was to Russia (by 2.7 billion kroons).

In total imports, the share of the EU countries (EU 27) was 80% and the share of the CIS countries 12%. Compared to the previous year, imports from the EU countries decreased 3% and imports from the CIS countries decreased 11%. The main countries of consignment were Finland, Germany and Sweden. During the year, imports from Russia, Finland and Sweden decreased significantly (by 5.1 and 3.6 and 2 billion kroons, respectively). During the same period, imports from Lithuania, Belarus and Latvia increased and that was mainly influenced by imported fuels.

Basically CIS countries have been increasing their share in exports, and losing their share in imports. Given CIS economic crises and devaluations it will be interesting to see how all this works going forward.

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