Monday, September 21, 2009

The Telegraph Folly

My sister (who lives in Brussels and does something with international labour law) asked me to comment on a link she was sent. I started writing a response, but it grew enough that I might as well post it here, for general consumption.

It's claptrap. The author mentions no economic theory to explain how the impending doom will actually come about. He begins with forced misdirection, using private debt figures in a context designed for public debt. He then mentions that the state "could" spend more, and that we have a remarkably low public debt figure. He assembles random scary soundbites, such as our economy falling twice as much as Iceland (Iceland's economy is fishing and geothermal-powered aluminium smelting, it has nothing to do with the financial crisis that killed the country). Essentially, it is a piece written to order. His editor asked for a thousand words on how the Estonian economy is fucked, and he assembled the best bits of trollbait and posturing that Google could provide.

As a rule of thumb, do not trust an Englishman with a double-barreled last name to be actually competent or knowledgeable about anything.

The rebuttal is the same it's been since 2007: the private debt is held by foreign banks, and is Sweden's headache, not Estonia's. Estonia has a reasonable personal bankruptcy law, and devaluation would simply result in massive foreclosures that would leave Swedish-owned banks with swathes of property they could never sell for anything approaching the value of the loans. Estonia's Euro accession is in the absolute, unequivocal interest of the parties holding the private debt, which is why the Swedish central bank has recently declared that they made billions of SEK available to the Estonian central bank, in order to maintain the EEK's stability.

The impressively tragic numbers describing the fall in real estate prices in Tallinn belie a virtual lack of transactions. As I've said a long time ago, the biggest realty discounts come from new-build projects, where developers are slashing initially astronomical margins on units that were built to the lowest cost. Lack of consumer confidence and prohibitive interest rates have destroyed demand, and the relatively small amount of desperate supply is available at fire-sale prices to those lucky few who can pay cash. There are damn lies, there are statistics, and there are percentages: you'll get a scary picture if you compare a buyer's market against the apex of an insane price boom.

In any case, it is almost unbearably ironic to be accused of high personal debt and unrealistic house prices by the British!

The motivations behind Estonia's behaviour in the current economic climate are quite difficult for outside observers to comprehend. Part of it is politics, yes: we are willing to sacrifice much in order to integrate ourselves with Europe's infrastructure to the extent that it will be cheaper to defend us than to throw us to the bear. But there is more to it. While the entire Western world is battling a recession with massive government spending, we are doing something that simply does not occur to Telegraph readers (or writers): living within our means.

It was Stockholm and Frankfurt's folly to pump cheap loans into Estonia, and we'd have been fools to ignore the opportunity - personally I am giddy with satisfaction at my mortgage payments, consisting of a contractually fixed tiny margin over a freshly bottomed-out EURIBOR. My apartment's worth less now than what I paid in the fall of 2006, but not less than I owe on it (because the local banks always demanded significant down payments, which the British, with their multi-generation home loans of 110% of the value of the purchased property, should really give a try). And if we really were that bothered by the size of the private foreign debt - which master Evans-Pritchard emphasizes is the second highest in Eastern Europe, though even in percentage terms it pales in comparison to that of the UK - then we would indeed devalue the kroon. Let SEB and Swedbank repossess all those Soviet tower blocks, while we once again become cheap labour, drawing off the last of Western Europe's skilled jobs; and five years from now, when the defaulted debts of a third of the country are wiped clean, we will simply buy all the property back from the banks at a fraction of the loan amounts. I wonder how surprised Ambrose Evans-Pritchard and other devaluation advocates would be if they saw the employment contracts of Estonia's competitive middle class, particularly the clause that guarantees a recalculation of salaries in Euros if the peg is lost!

Instead, we are being responsible, reliable allies of Western Europe, maintaining our obligations and dealing with the real world. Which is not something I would expect an Eton twit to understand.


Andrew said...

Great Post!

Cynic said...

He's taking a pot-shot at the Euro.

The article has very little to do with Estonia and an awful lot to do with UK euro-skeptic politics.

Giustino said...

Good job, Flasher. Ambrose has been writing pieces like this for awhile. I wonder what the geniuses over at Danske Bank think. They predicted the 'overheating' of the Estonian economy many months in advance.

antyx said...

You know what, I predict we'll have snow before April. That's about as useful.

Doris said...

Good post - you're at your best when annoyed, apparently.

Jim Hass said...

Love your post. There is a big tradition of advocating devaluation in the UK. since Churchill went back on the gold standard at the old rate back in the twenties. JM Keynes and others made a lot of political hay out of it for the next 50 years. Much of this debate has nothing whatsoever to do with Estonia and its people, the details of which they are only dimly aware.

Estonia is not perfect, and the Great Recession is not really over in the New EU states. The dramatic improvement in policy in the former communist countries lead to an influx of foreign funds that were used to reinvent much of the commercial and industrial sectors. As you all know, Estonia showed huge changes and improvements in that era, and much of the money was very well used.

However, the debt remains, much of the transition is over and the international situation is worse. Two years ago few people in the West thought Russia would invade a neighboring country any time soon. We now know that was wrong. Estonia is like a five star hotel on the edge of a bad nieghborhood--still great but a little less popular after dark.

A few points to consider:

Estonia kept a balanced budget until recently-- much better than most. Yet, inflows of funds drove up tax revenue, and most of that influx was spent. In some years perhaps 5 % of GDP. This lead to huge increases in spending, budget increases over 20% a year, after year. this cannot and will not continue. Sorry. Mart Laar warned of excessive optimism back in the last time he was peaminister, yet everyone forgot.

Estonia is not a low tax economy, unless you compare it to its really really high tax Nordic neighbors Sweden, Denmark Norway and Finnland. A smoker can save thousands of Euros a year by smuggling cigarets from Russia. Alchohol is much cheaper there as well, and smuggling is a problem. Labor taxes are huge, compared to the Russian ones as well. The public spending Estonia is willing to pay for is still limited to its income.

Best of luck to all you folks there. Great post man.


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