Latvia- eurozone

Small Baltic state –  Latvia decided to apply to join the eurozone in 2014. Latvia pegged its currency to the euro after joining the European Union in 2004. Small and limber economy – Latvia should slide more easily into the currency bloc than larger states like Poland and the Czech Republic and have remained keener on joining throughout the banking and debt crises. 

Many Latvians’ mortgage loans are in euros  – meaning a switch would decrease currency risk and most see the currency as a lesser long-term risk than the lat. They are also keen to entrench their links with western Europe to keep former imperial master Russia at arms length.

But while the country’s leadership is keen on the project, polls show much of the population are worried that a currency switch will drive prices higher and take control of the economy out of Latvian hands.

To join the euro zone, Latvia needed to ask for an assessment by the European Commission and European Central Bank of its readiness to switch currency.

At the moment of writing Latvia fulfills all five Maastricht criteria and should thus be set for adopting the euro on 1 January 2014. True, besides the five quantitative criteria (on inflation, exchange rate, long-term interest rates, budget deficit and government debt) a country is also supposed to be evaluated on the basis of ‘sustainability’ of e.g. low inflation but that never seems to have played a major role. (Estonia was invited to join at a time of negative inflation, which is hardly sustainable). For all the recent newcomers, Slovenia, Malta, Cyprus, Slovakia and Estonia, it seems to have been the case that fulfilling the five means you’re in and I do not envisage this to be different in the case of Latvia.

“This is a day that will enter Latvia’s history,” Finance Minister Andris Vilks told reporters when he, Prime Minister Valdis Dombrovskis and central bank chief Ilmars Rimsevics signed the application.

The application will be handed over in Brussels. A report on Latvia’s euro hopes will be prepared by the European Commission and the European Central Bank. Finance ministers are expected to take a final decision in July.

Latvia says it meets all the economic criteria needed to be accepted into the euro zone. The criteria relate to levels of debt, deficit, inflation, long-term interest rates and having a stable peg to the euro.

Dombrovskis said after the signing that the euro would benefit Latvia in terms of increased investment, lower currency.

The Eurozone may bring many benefits to the Latvian economy but economic development still rests with the Latvians and economic convergence is not automatically guaranteed by the euro. Thus the hard work does not end on 31 December 2013 – it begins on 1 January 2014.

Enthusiasm for the euro waned across much of eastern Europe after Greece’s problems emerged in 2009 and drove the currency bloc into a series of sovereign bailouts which has split its members economically and raised questions of its broader viability.

The Czechs and Hungary remain far more skeptical while Romania and Bulgaria are still far from fulfilling the Maastricht criteria for joining.

Latvia kept its peg to the euro even when some economists said a devaluation would have helped ease its downturn in 2009 and the government had to slash public sector wages and hike taxes instead.

Despite its current relatively high growth rates, at 5.1 percent year-on-year and 1.3 percent quarter-on-quarter in the last three months of 2012, the country remains one of the poorest countries in the EU along with Bulgaria and Romania.

Latvia will become the 18th country to join the euro area, and the second Baltic state to do so. 

/By Andrea Blažević, Antea Božić, Kristina Piene and Agita Sarkane/

Sources:

http://www.ir.lv/2013/4/29/latvia-in-the-eurozone-lots-of-work-ahead

http://www.euronews.com/2013/03/05/latvia-applies-to-join-the-eurozone/

http://www.reuters.com/article/2013/03/04/us-latvia-euro-idUSBRE9230EK20130304

 

Spain’s labour reforms

Now Spain is facing with labour market reforms. Madrid’s labour market reforms are unlikely to contribute to improved economic performance, despite recent claims An old spectre is returning.  Spain’s labour market reforms are the basis of the country’s improved economic performance. By limiting possible wage claims and negotiating flexible working conditions, companies in the car industry and beyond have become more competitive and boosted their exports.

Spain’s unemployment rate now is 27,2%, and not falling particularly rapidly. Comparing with the previous year april unemployment rate raised by almost 3 %.  The current account deficit is falling, less as a result of increased exports and more because imports fell dramatically as domestic demand collapsed in the wake of the housing and financial crisis. It is unclear if growth will pick up enough in the short run to avoid a rise in the debt-GDP ratio. Meanwhile official figures in France also showed a fresh record high in unemployment. Some 3.2 million people are now searching  work in the eurozone’s second-largest economy.

The total number of unemployed people in Spain has now passed the six million, although the rate of the increase has slowed. Spain’s labor costs have been falling, because businesses are taking advantage of their new found freedom “fire” and “hire.”

The key reason, of course, why even the tiniest shimmer of light has to be greeted with jubilation is that wages are always seen as the problem – even in a financial catastrophe-induced economic crisis. For policy-makers, austerity is ultimately self-defeating: current accounts are outcomes, not policy tools, and competitiveness is difficult to target, consisting, as it does, of price and quality relative to what others do.

Workers and skills may have to be matched more closely  – may be good grounds to reform labour with the demand for them.Spain may have a particularly nasty dual labour market – with well-protected insiders and weak, usually unemployed, outsiders – which requires adjustment so that more unstable work will lead to stable jobs.

But it is naive to think labour market reforms will lead to growth, or even to falling unemployment – except, perhaps, in a very narrow margin. Aggregate unemployment falls, all other things being equal, when economic growth outstrips productivity growth. And with productivity rising fast (possibly, or probably, as a result of the crisis, which may have weeded out the very weak companies, thus pushing up average productivity), and growth limping behind, that is not going to happen soon.

By Andrea Blažević, Antea Božić, Kristina Piene and Agita Sarkane

Source:

http://www.guardian.co.uk/commentisfree/2013/feb/17/spain-labour-reforms-wont-bring-growth

http://www.bbc.co.uk/news/business-22290422

http://www.tradingeconomics.com/spain/unemployment-rate

Employment developments at sectoral level in EU

Without doubt economic crisis affected many countries  – and country’s employment sectors. While manufacturing and construction have driven the fall in employment, job creation in services, namely non-market services, mitigated these big drags on employment in a large number of countries. After two years of negative growth, job creation resumed in 2011 in industry and construction in most Member States.

Employment growth in different sectors: 2008-2011 (%) 

Source: Commission services.

In some countries, the construction sector has also been a major drag on employment and in fact the sector that recorded the most dramatic consolidation. The number of employed in construction nearly halved in Ireland, Spain and the Baltic countries – Latvia, Estonia and Lithuania over the latest number of years, with construction alone amounting to around half of the total job losses in these Member States. Even in other Member States with much milder employment reductions, construction jobs have fallen by large margins. Only in a minority of countries, employment in the sector has actually risen and almost always by small margins.

Declining jobs in industry have contributed the most to rising unemployment. For the EU as whole, the sector accounted for slightly more than half of the net job destruction. In fact, jobs in industry have declined in every single Member State barring Luxembourg (where it has little weight on employment) since the beginning of the crisis; cumulated job falls close to or beyond the double digit mark were recorded in half of the Member States, most severely in Spain, Lithuania and Greece. However, in many industrialised countries employment in manufacturing has been declining since well before the 2008-2009 recession as a consequence of shifts of production toward developing countries.

Market services had a mixed employment performance, with around half of the Member States recording net employment growth – notably, Poland, Malta and Germany)and the other half net employment losses -Latvia, Ireland and Greece.

Non-market services, notably the public administration, was the only sector where net employment gains were recorded in most countries. Unlike other sectors, employment in non-market services lost momentum in 2011, reflecting public finances consolidation dynamics also over the government wage bill.

By Andrea Blažević, Antea Božić, Kristina Piene and Agita Sarkane

Source:

http://ec.europa.eu/economy_finance/publications/european_economy/2012/pdf/ee-2012-5_en.pdf

The Impact of Automation on Global Labour Market

Automation is the use of machines, information technologies and control systems.  The correct incentive for applying automation is to increase productivity, and quality beyond that possible with current human labor levels. Automation plays an increasingly important role in the world economy and has been responsible for the shift in the world economy from industrial jobs to service jobs in the 20th and 21st centuries.

It is obvious that automation has many benefits, such as increase in productivity, quality and consistency of output. One more advantage is reduced direct human costs and expenses. But increasing automation leads to an increase in unemployment because human labour is replaced by machinery.

There is a book regarding this topic from 1995 written by American economist Jeremy Rifkin: “The End of Work: The Decline of the Global Labor Force and the Dawn of the Post-Market Era”. He predicted devastating impact of automation on blue-collar, retail, wholesale employees and the growth of third sector.

According to the International Federation of Robotics (IFR), global sales of robotics increased by 38.0% in 2011. China, Germany and the USA are the major drivers of this growth, though the biggest users of robotics are Japan and South Korea. The increased use of robotics in these markets has helped to contribute to a sharp rise in labour productivity in some of them. China saw its labour productivity more than double between 2007 and 2012.

Labour productivity in selected countries: 2007 – 2012

Source: Euromonitor International from International Labour Organisation (ILO)/Eurostat/national statistics

Automation can save money on wages paid to staff, and also on labour taxes paid to the government. This can increase profits and competitiveness and it can be used to fill labour shortages: China is rapidly increasing its use of automation to counteract the predicted decline in its labour force due to the effects of its one child policy. It can also improve countries’ competitiveness by boosting labour productivity. The growing use of robotics and automation can contribute to long term structural unemployment, which means unemployment that can often be long term as it is part of a fundamental shift in the skills needed by an economy. This can weaken consumer spending and consumer confidence levels.

The use of automation and robotics is forecast by the IFR to increase in all regions by 2015. Asia/ Australasia is set to see the biggest increase and this will primarily be driven by an increase in China.

Estimated Operational Stock of Multipurpose Industrial Robots by Region: 2010, 2012, 2015

Source: The International Federation of Robotics

The forecast increased use of automation could contribute to an increase in unemployment rates globally, as the working age population aged 15-64 is set to grow from 4.6 billion in 2012 to 5.0 billion by 2020. Many of the increased numbers of the economically active global population may be competing for a reduced number of available employment opportunities as a result of automation.

By Andrea Blažević, Antea Božić, Kristina Piene and Agita Sarkane

Sources:

http://blog.euromonitor.com/2013/04/the-impact-of-automation-and-robotics-on-the-global-labour-market.html

http://en.wikipedia.org/wiki/Automation

http://en.wikipedia.org/wiki/The_End_of_Work