The Collapse of Latvia

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"The Collapse of Latvia"

I’ve mentioned the economic meltdown in the Baltic countries a couple of times, mostly to tweak right-wingers whose favorite economic models largely seem to have washed away in the Panic of 2008. But it’s worth pointing out, as Paul Krugman does, that what’s unfolding in Latvia is a genuine disaster in terms of human welfare. Mark Weisbrot and Rebecca Ray have a report on the matter which starts with the observation that this is the worst economic collapse ever:

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The culprit is hard money. When a small country like Latvia takes a large negative shock, the normal response is for the value of its currency to tumble. Suddenly everyone is poorer. But by the same token, all their stuff is now cheaper for foreigners to buy and their workers are cheaper for foreigners to hire. So even though everyone is way poorer than they were pre-crisis, they can hit the floor relatively quickly and start moving back up. Latvia, however, has been maintaining a peg of its currency to the value of the euro preventing this kind of adjustment.

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