Bloomberg News

Baltic Exodus Tests Austerity Champion Tag After Cuts

March 23, 2012

Old Town, Vilnius, Lithuania. Photographer: Walter Bibikow/Getty Images

Old Town, Vilnius, Lithuania. Photographer: Walter Bibikow/Getty Images

When a Vilnius car dealer offered Eugenijus $1.86 an hour to sell high-end vehicles, he decided it was time to get out of Lithuania. The wage was a third what he’d made before the Baltic region’s worst recession in two decades.

“It was the last straw,” said the 27-year-old, who declined to give his last name because emigration can be viewed negatively in Lithuania.

He headed for the U.K., where the 6.25 pounds ($9.91) per hour he now makes washing dishes covers living expenses for his music studies at Derby University.

Estonia, Latvia and Lithuania are being hailed by European Union leaders as examples of how austerity can lead to surging growth because they all cut budget deficits in the aftermath of the 2008 financial crisis.

The reality is that workers are pouring out of all three countries, seeking to regain purchasing power that even the EU’s fastest growth rates haven’t restored. The Baltic nations have the EU’s fastest emigration rates, while people are still flowing into Greece.

‘Negative Demographic Tendencies’

A continued exodus could make it harder to find workers to manufacture goods whose foreign sales have driven expansion. Lithuania, for instance, needs to increase productivity to counter “negative demographic tendencies,” Swedbank AB said in a March 2 research report.

At present, Ericsson AB (ERICB) makes wireless-network equipment in Estonia and Mexico’s Cemex SAB (CX) produces cement in Latvia. State finances are also at risk from lower tax revenue, adding to strains on the public purse as pensioners grow as a share of the region’s 6.6 million population to the highest levels in the EU.

“What we can see now is hardly a successful outcome” for the Baltics, Liza Ermolenko, an economist with Capital Economics in London, said by e-mail. “Given their aging populations, the loss of young educated people clouds the economic outlook further down the road.”

The Baltics’ stock markets are shrinking as well. In the past 12 months, the Estonian and Lithuanian (VILSE) benchmark indexes have fallen about 20 percent and Latvia’s OMX Riga Index is down 9 percent. The Stoxx Europe 600 is down 3.2 percent.

Highest Emigration Rate

At 23.7 people per 1,000, Lithuania’s emigration rate is the EU’s highest, according to Eurostat. About 80,000 Latvians departed in 2009 and 2010, according to estimates by Mihails Hazans, an economist at the University of Latvia. More than 14,350 Estonians sought new lives abroad from 2008 to 2010, statistics office data show. Greece and Spain, by contrast, enjoyed net immigration, according to Eurostat.

About 53,900 Lithuanians emigrated in 2011, while 15,700 returned, the statistics office in Vilnius said today in a statement. Eighty-two percent of the emigrants were unemployed for a year or more before leaving, it said.

Lithuanians and Latvians have moved to countries such as the U.K. and Ireland, while Estonians prefer neighboring Finland, according to the three countries’ statistics offices. About half the region’s emigrants, who are permitted to work anywhere in the EU, are from 20 to 34 years old.

Facebook Plea

Estonian (TALSE) President Toomas Ilves has attempted to stem the flow via his Facebook Inc. page, by asking people to list the reasons that make living in the country worthwhile. Among the more than 1,000 responses: “We have a mild nature” and “The wit, actions and perseverance of a person count more here than their age, origin or hierarchies.”

Lithuanian President Dalia Grybauskaite was more downbeat, saying in a Feb. 3 statement: “Every third young person doesn’t have a job. The situation is only worse in Greece and Spain.” Youth unemployment “is one of the key reasons for emigration.”

Lithuania will lose almost 8 percent of its workforce by 2016 as emigration outpaces immigration, birth rates remain low and the population grows older, Swedbank estimates. That will contribute to “downward pressure” on economic growth, while a smaller proportion of workers will have to finance the budget, putting strain on government benefits and other functions, it said. No specific estimate was given.

“The key downside of emigration is that the economies are losing their working-age populations,” Swedbank economist Vaiva Seckute said March 7 by phone. “A shrinking labor force will become a big challenge for future economic-growth potential and may pressure the government to continue raising taxes to maintain a stable social-security system.”

More Retirees

Compounding matters, the proportion of Baltic retirees is poised to grow. By 2060, fewer than two working-age Latvians will remain for each person aged 65 or more, down from four to one at present, according to Eurostat.

That equates to an old-age dependency ratio of 68 percent, which would be the EU’s highest. Lithuania’s ratio will reach 57 percent from 23 percent now, while Estonia’s will jump to 56 percent from 25 percent, Eurostat predicts. Both would be higher than the projected EU average of 53 percent.

The Baltic nations suffered more than anywhere else in the 27-member EU as the collapse of Lehman Brothers Holdings Inc. (LEHMQ) triggered the end of a debt-fueled property bubble, shut off inflows of credit and closed export markets. Governments reduced spending and raised taxes by as much as 15 percent of economic output in 2009-2010 in response, compared with Greek plans that amount to about 16 percent.

Economies Rebound

The three countries opted not to devalue their currencies, maintaining pegs to the euro, which Estonia began using in January 2011. Lithuania and Latvia plan to adopt the currency as early as 2014.

The EU’s fastest growth followed as the three economies rose an average 6.3 percent last year. Still, after shrinking by a fifth from 2008 to 2010, output remains below its pre-crisis level and unemployment hasn’t fully retreated.

While Lithuania’s jobless rate dropped to 13.9 percent in the fourth quarter from a peak of 18.3 percent in the first three months of 2010, it’s still more than three times the pace recorded at the end of 2007. Latvian unemployment was 14.3 percent compared with 5.3 percent pre-crisis.

Latvia’s pain, and the subsequent gain, has been billed by the European Commission as an example of successful austerity.

“We desperately need good stories and not only the difficult ones that dominate the news right now,” said Marco Buti, head of the commission’s economics department, at a Brussels conference on Latvia’s international loan program on March 16. The program was a “success.”

His praise holds little appeal for Tiia Vaeinola, 55, who moved to Finland from Estonia 16 months ago to join her husband. She earns money as a waitress in the Vuokatti Sports Institute in central Finland after “barely making ends meet” in her 15 years as a dressmaker back home.

“In Finland, the social safety net really doesn’t let anyone fall hard when they lose their job,” she said March 14 by phone. “A person isn’t left on their own. The government in Estonia doesn’t care about workers’ wellbeing.”

To contact the reporters on this story: Milda Seputyte in Vilnius at mseputyte@bloomberg.net; Aaron Eglitis in Riga at aeglitis@bloomberg.net; Ott Ummelas in Tallinn at oummelas@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net


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