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Eurocrash: how Latvia's boom turned to bust (make that "slump")

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Paul Mason | 08:00 UK time, Friday, 20 March 2009

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Amid the snow and concrete of Rumbula airfield in Latvia, there are still dotted the silhouettes of smashed-up Soviet-era aircraft bunkers. But it is not the wreckage of the communist system I have come to see. It's the wreckage of what replaced it.

Where the Tupolev bombers used to stand there are now parked, bumper to bumper, hundreds of brand new articulated trucks that have been seized from their owners by the banks.

"It feels a lot like the early nineties, just after the Russians went," says Kaspars Virsnitis.

Eurocrash graphicHis construction supply company was turning over 8 million Euros last year. Now it's gone bust and his premises have been commandeered as a makeshift lorry park. It was when that filled up that they had to start using the military runway.

"People are losing their jobs; buildings half-finished. We're back to square one."

His order book collapsed last October at the same time as most of the builders who owed him money went bust.

Why didn't you see it coming and plan for it, I ask?

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He stands on one leg and pumps his other foot: "Last government. They just said: put foot on accelerator to floor".

Latvia grew faster than any of the boom economies of the Wild East. Last year its GDP was growing at over 10% per annum. This year it looks set to shrink by 14%. Public sector pay, having been cut by 15%, is to be cut by 20% more; 20% unemployment is a realistic figure by the end of the year.

When I ask the country's youthful new prime minister, Valdis Dombrovskis, when he expects the economy to begin growing once again he says, quietly: "Right now we don't talk about that".

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Latvia, in short, is at the beginning of a slump. And the tempo of a slump is slow: explosive start gives way to slow onset and slow recovery.

We have to hope that the rest of the world can avoid one, but it is still not certain. The psychological impact on the post-soviet generation here, that has known only the upside of capitalism, can only be guessed at.

Watch my report on the Latvian economic collapse below:

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So why does my tour of eastern European economies matter? Well, the crisis here could pull much of the West European banking system down with it. And economic sovereignty is draining away from places like this. Their fate will be decided in the IMF offices in Washington, not the soviet-era chancelleries.

Comments

  • Comment number 1.

    It must be very austere out there indeed, three posts in 2 days from you.

    I think we have to reserve judgement until your tour is complete but it does beg the question over here.

    'Why does a monster in Austria (terrible though that episode is) grab the main headlines here for days and days when whole countries are collapsing economically with barely a whisper on the main news?

    The media seem to be complicit in the 'denial bubble' that is forming which I talked about on this blog yesterday.

    Why is that? Why are the kind of things you (paul mason) are reporting not given more mainstream airtime?

    Are the BBC so bought into celebrity culture and so fearful of ratings that they base their news, not on what the people need to know, but on what sensationalised garbage they think they will watch?

    May I remind the BBC that you are a public service broadcaster, that means you serve the best interests of the public, pandering to the public's increasing appetite for celebrity and sleaze and sensationalism is not the same thing.

    Can we have Paul's articles on eastern Europe on Panorama or news at 10 as well please?

    No let me guess panorama is booked up for a two week special interview with Fritzez psychiatrist or something similar. How does that serve the public exactly?

    Jericoa

  • Comment number 2.

    I really wanted to watch the Latvia item but the opening item was so mind-numbingly dull - even now I forget what it was but think it had something to do with how boring Brown and his Ego is - that I switched over and watched the incredibly tedious, dull and immensely boring BBC Wales Politics Show instead.

  • Comment number 3.

    Paul...you've become a Timelord again!

    Your post/blog is timed/dated as 08:00/20-Mar-09

    I write this post at 23:40/19-Mar-09

    How do you do it?

    BTW, instead of writing about Latvia's crumbling economy...please can you just post/blog tomorrow's Euro lottery numbers please?...... the jack pot will only be shared amongst 4 of us (at most!).

    PS - I hear that the fairer sex are rather fit over there...you don't have to comment about that though ;-)

  • Comment number 4.

    Surely some mistake?

    I'm commenting 8 hours before this blog has been posted. Come on BBC schoolboy error or what?

  • Comment number 5.

    RATINGS - WHAT RATINGS?

    Hi Jericoa. I am inclined towards the belief that that BBC folk are too far up their own ratings to care about the outside world - especially the paying punters.

    The 'art' of news presentation must be true to itself. No award-winning producer would send a team to catch the Second Coming if Kylie and Becks were both in town, meeting Prince William.

    The BBC is 'made in its own image' - it looks upon its own works and sees that they are good.

    The result a self-fulfilling blasphemy.

  • Comment number 6.

    Much as I'd hate to contradict a local, the Russians didn't all go in the early 'nineties (after the break-up of the Soviet Union), many remained behind as an unwelcome and unwanted minority.

    Their presence brings another dimension to the crisis in Latvia, namely that in such times simmering ethnic tensions can overspill ("Latvian jobs for Latvian workers", anyone?)

    Much as it may not fill the Latvians with joy, with their new markets to the West becoming constipated (sorry, but all this recent talk of QE is having a subconscious pull towards the scatological), they may need to revert to looking East again - as indeed may the other "buffer" states between the old lines of Empires.

    However as Russia seeks to find it place in the New Order, will it want to play along to new set of rules?

  • Comment number 7.

    #3 BankSlicke

    Rumours sometimes turn out to be true, but beware of local menfolk - their representation in "World's Strongest Man" type events is proportionately very high!

  • Comment number 8.

    I agree with other commentators on this blog that this subject is far to important to be ignored and should be on the main news or Panorama rather than hidden away on Newsnight (no offence but most people have gone to bed by 10.30pm)

    It's hard to get a true picture of the world economic situation as we seem to get things piecemeal and often interrupted by sensational/salacious "stories" or worse, celebrity "news" items.

    Robert Peston seems to lean towards banking but Stephanie Flanders is good with the economic overview. We need all 3 of you and I'm surprised more people haven't cottoned on to this blog. I think they will so more power to your elbow......

  • Comment number 9.

    Paul

    There is an historic irony in this report.

    You have gone to the territory of the former Soviet Union and reported back saying I have seen the future and it doesn't work.

    GBS RIP

  • Comment number 10.

    hi paul, I'm a brit in budapest. Around 2 weeks ago we had a bbc guy in our central food market delivering in dulcet tones the impending doom surrounding us all in east europe...

    now I understand you've got to sell your stories, but please the man in pest showed and empty market and talked in a hushed voice of the 4 horsemen of the apocolypse... very dramatic, are there going to be oscars for news reporting soon?

    Anyway, I shop there everyday, its always packed! I think he must have turned up there at 6am on a public holiday and bribed the security to let him in?

    I am so sorry that the bbc seem incapable of employing people who can get to the truth of the stories they are employed to investigate...

    so let me try and help a little for anyone who wants to read it... 20 years ago, evrything behind the iron curtain was an economic basket case, what these people have achieved is nothing short of an economic miracle, now the rest of the world catches a cold and east europe gets written off... utter rubbish,

    these guys can survive on their grandmas garden produce and sell sand to the arabs... how do you think they survived communism for 40 years! all government economic data in these regions should be read with a huge guffaw...

    as over 50% of the economy is black and any politician worth his salt is an extremely wealthy man having bought, stolen or bribed all he owns at bottom dollar from the vast state sell offs post 1989...

    how about reporting the facts beeb journos, instead of just following 'the storyboard' that has been set for you, by the guys who treat news as a rolling story

    publish this and I will goulash my hat and eat it, perhaps your budapest journo could come back and film me doing it in a packed market hall... if he does perhaps I can also bake a humble pie and we can share it together!

  • Comment number 11.

    Interested to know who's got the subprime on this. Have the Swedish and Danish Banks packaged this around the system in the good ol tried and tested way?

    I got a feeling the EC wont leave these states out in the cold.

  • Comment number 12.

    paul- an awayday to wigan now latvia in the snow? while some part timer got the miami in the sun gig?

    there are reports cia are recruiting ex fundies and sacked financial analysts to keep tabs on what they now see as 'a clear and present danger' to the american way of life. ie the financial world.

  • Comment number 13.

    Very GRIM i can see all this spreading like

    CANCER through all of EUROPE.

  • Comment number 14.

    FILMED THROUGH A BREAD-RACK CRASSLY (Thanks #10)

    Rumbled in Budapest NoveltyNight?

    When we are all back in the caves, there will be a folk tale - not unlike the boy who cried wolf - of the TV program that cried: "Look at our award for embroidered, distorted, presentation. Why do you want facts and truth, this is much more fun!" In time, no one knew what was real and what was false - until the big tide came. . .

  • Comment number 15.

    # 6 fairlopian_tubester

    As for 'Latvian jobs for Latvian people' in Baltics, can lead to criminal prosecution and up to 5 years of imprisonment. Laws are strict on matters which can lead to tensions between nations and races.
    You should also take a look at this:

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

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

    and really at this, with regards to 'traditional markets':

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

    I just find your comment extremly offensive, small-minded and backward. Educate yourself a bit.

  • Comment number 16.

    I'm writting on this blog coz I'm glad that the bbc write more about East European countries like latvia. Dont forget that u r from the EU so write about the EU. BtW,I'm not sure whether u heard about the President election in Slovakia. I know,Slovakia is small country but...very interesting..Maybe we will have new president - woman. 2nd round will very tight@

  • Comment number 17.

    While feeling profoundly sorry for those who have lost their jobs, I must say that the situation on 'ground zero' does not feel as bad as visiting reporters would have us believe. Riga on a Saturday night is almost as full as it was a year or two ago.

    So far – and let's hope it stays that way – mostly people who deserved to suffer, either for their stupidity or vanity, do so. If a business that has leveraged finance on the assumption that turnover would continue grow by, say, 50% a year goes bust, I dare say it is the result of stupidity rather than unfortunate turn of events.

    The boom was largely virtual, and at least up to now so is the bust.

  • Comment number 18.

    #15 Brothersofsword

    I am aware of the history of Latvia and neighbouring states, and I think you read a bias into my posting that wasn't there.

    While it is true that traditional markets were with other communities around the Baltic (and as such go back to pre-Viking times), recent history (post WW2) concerned subsummation into the Soviet Union and closure of those markets.

    At the same time, Latvia was heavily industrialised towards production for the Soviet economy.

    Subsequently it has faced a realignment of its manufacturing capabilities along with its economy, first as an independent state and as a member of the EU.

    As Paul writes, trade with those re-opened traditional markets (or "new" markets, as I described them because the commodities traded have changed) is being sorely tested by the current economic crisis.

    Secondly, I am unclear whether you are suggesting that Latvia did not find itself with a larger remnant population of ethnic Russians (e.g. compared to Lithuania and Estonia) and that that population has been fully integrated and accepted into the new state?

    My reference to "Latvian jobs" was based on the debate going on in the UK and I apologise if it caused offence.

  • Comment number 19.

    Mr Mason
    Does it occur to you that Latvia's problems may be aggravated by the problems of the United Kingdom.
    Some 10% of Latvia's exports go to the UK.
    By allowing our currency to devalue, by accident or design, the UK has 'beggared its neightbours' and exported its problems to other countries.
    The British banking crisis was nothing to do with Latvia.
    We are the weakling in Europe, we have mismanaged our economy and now we say the rest of Europe is suffering the same problem as us. Seem to me we casued their problems.
    Now the UK Government expects the rest of Europe to solve our problem.
    Bit rich, don't you think.
    By the way, nothing specila aboout Latvian governments collapsing. It happen at least twice a year. All the result of their crazy voting systme. Which is very similar to the system in British European elections

  • Comment number 20.

    Hi Paul

    Great hearing about your blog on Eastern Europe. I am a Brit living in Brasov, Romania and hopefully we will see you in Romania.

    Although its great reading your blog on the crash in Eastern Europe I would like to remind you that there are many countries in Eastern Europe and their economic conditions are different. I have seen the credit crunch bite in Romania however I would not say it is as severe as the UK.... yet!!

    Although there are bid issues in Eastern Europe that need to be addressed I would like to suggest that all countries have made mistakes.... such as the banks in Scotland which the SNP were cuddled up to and were using the whole strategy of the Iceland model as the Independence stratgey. Maybe Scotland if it had gone down that route would be like Latvia today and you be in a freezing airport in Aberdeen just now.

    Eastern Europe will arise again but lets hope in unity with the rest of Europe and not with Russia.

    Keep up the good work on the blog!!

  • Comment number 21.

    I'm from the country named in the blog :)
    Actualy i see several reasons why we are there where we are now.
    At the moment the crysis come noone could not even realise that it could happen, not even close.
    Goverment, at my oppinion, spend a lot of its financial resourses not whisely, and at moment we have no trust to it at all. 13th january showed how depressed people are.
    And i can not agree with the saying about goverment and that it is what we choosed. When i go to vote i dont see anything to vote for - all the time same people, just in other "coats". So we just try to choose best from the worst.

    About the situation at the moment.
    The average income in the goverment stuctures have already been cut not for the 15%, i woud say 20-25%.
    I may be not the best economist, but as far as i know i'm waiting for another cut of after april and the income could stay at ~50% of last years income. And i think it will not be enough and at september or a little later we will need to cut some 2x more, from where... no idea.

    Many people realy choose not to listen news because they are depressing. Unemployment is growing with every day and you cant find a job. People who can leave country like a sinking ship. People who took credit, to buy a house dont know what to do - salaries are cut down, if they still have a job, the price of their house is down by some 50% or more, but the credit is huge.

    At the same time the goverment has fall down, new has come. Instead of solving problems all we can see is political ambitions that dont let them to work.

    So what can i say, wish us a luck :)

    P.S. Bigger europe attention (including journalists) could make our goverment to move faster :)

  • Comment number 22.

    Paul,

    Congratulations. Really excellent reporting. Everyone in the "West" seems worried about how bad things are -- and they have no idea whatsoever about Eastern Europe. It's like people aren't worried, because THEIR end of the boat we are all in isn't sinking. If those economies fall off a cliff as they are being allowed to do -- then the West likely follows.

    I guess it's the same everywhere. The politicians are clueless, and complicit with the bankers (who are getting millions in bonuses while Rome burns -- in fact they are getting bonuses when in fact the are directly responsible for the collapse).

    A huge change has occurred; everyone has become willing to transfer all the debt and difficulty to the next generation (our children) -- and the politicians are letting it happen. Even the IMF doesn't understand.

    In summary, it suggests there's a lot of downside in the future, and forget the idea that the international bankers have it under control. They have no idea what they're doing -- and we are going to pay (East and West).

    At least citizens in Eastern Europe, Iceland, Ireland and other countries having problems should know that Americans are suffering too -- and we need to help each othter!

    Keep the faith, and don't give up.


 

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