Taking stock: The euro and GDP per capita

Movements or lack of them – worth mentioning

Latvia has now enjoyed (?) the euro for just over half a year and the latest, i.e. 2013, figures for GDP per capita are in. Time for a bit of reflection on both. The GDP numbers are shown below. Of course they don’t change much on a yearly basis but there are still some movements – or lack thereof – worth mentioning.

Source: Eurostat

Relatively strong growth in recent years has pulled Latvia ahead of Hungary and who would have believed, in the early 1990s, that Hungary would be behind the Baltics and the rest of Central Europe? Latvia is still behind the two other Baltic countries. Nothing new there, but Lithuania is now for the second year in a row ahead of Estonia (and for this year IMF data agree).

What is worth observing here is that Poland, praised so often by Paul Krugman and others, is still behind our Baltic neighbours and just a tad ahead of Latvia.

And then there are the countries ahead of Lithuania and Estonia – it is interesting (at least for an economist…) that our neighbours are about to overtake Portugal and Greece but not all that surprising, as I tried to explain here. Structurally, these countries are very weak and their GDP per capita performance is starting to reflect this after being ‘artificially’ boosted by the now long gone credit boom.

And this brings me to the second issue, the euro. Below is the development in GDP per capita in 2013 compared to 2002 (the longest Eurostat allows in a simple search), setting for both years the EU average at 100, i.e. the chart show the relative development of a country over this period.

Source: Eurostat

What does the euro do to economic growth? Nothing much – it should boost trade and thus growth but its role lies much more in facilitating transactions. In short, a country does not grow rich just because of the name of its currency. The euro provides us with an environment of low inflation. This, in turn, provides low interest rates, which is good for business and individuals and thus for the economy – the euro thus gives us a useful framework on which to create economic growth, but it does not so much create this growth itself – this is still up to the individual countries.

In short, from Figure 2, Greece, Spain, Italy and Portugal have mostly screwed up since joining the Eurozone, having neglected that economic growth is supposed to come from within – instead the euro seems to have acted as a sleeping pill for those countries.

The Baltic countries have accomplished quite decent catch-up but, as so often before, the conclusion is that the key to future success for Latvia lies inside Latvia itself.

With the euro the country has a useful framework on which to build. During the recovery many voiced the idea that the Baltic countries provided models for the Southern countries. Rather, it is the other way around – the Southern countries tell us what not to do.

Morten Hansen is Head of Economics Department at Stockholm School of Economics in Riga.