Here is a pamphlet I was commissioned to write for the Irish Congress of Trade Unions. It examines the recent economic experience of Latvia, Lithuania and Estonia, seeking to draw lessons for the Irish case.
The so-called Baltic Miracle has been held up as a shining example for Ireland and others to follow. Unable or unwilling to devalue their currencies when the financial crisis struck, the Baltics implemented the latest shock-therapy whizz: internal devaluation.
True enough, the Baltics are growing again, and their exports are booming. It is hardly surprising that they are growing again, however, when one considers that their economies contracted by up to a fifth due to the combined impact of the financial crisis and internal devaluation.
Given that the Baltics are among the poorest members of the EU, it is also to be expected that their trend growth will be higher than Ireland’s during a period of convergence.
The jury is still out on whether ‘internal devaluation’ was worth the extreme economic and social pain in the Baltics. Neither is it clear that they are in any way appropriate comparators for Ireland and other peripheral Eurozone members.
It remains to be seen, moreover, whether an ‘internal devaluation’ strategy is politically sustainable over anything but the very short term. Irish unit labour costs have adjusted. It’s real exchange rate is no longer over-valued. In Greece, however, it may take a decade or more for wages and prices to adjust, even with moderate inflation in Germany and the core.