Germany is being shocked by the middle of the summer price hikes (averaging 15-50% increase) on basic food items, like bread and milk products (http://www.reuters.com/news/video/videoStory?videoId=62328). The aftermath of those price hikes shall ripple through the rest of the EU soon after. Already the annual inflation rate in July in Latvia skyrocketed to the post independence high 9,5%. Latvian PM customarily expressed his disbelief in those numbers, whilst traditionally forgetting that he is the helmsman of the dilapidated Ms Latvia. Anti-inflationary measures that government in Latvia kept in secret and finally accepted came too late and they are half baked anyway. In Lithuania and Estonia inflation is raising as well, but the rates in LIT and EST (4,6% and 5,8% respectively) are half of those of Latvia. Mr Kokins from Parex bank reckons that there is a major cause for such disparity between the Baltic cousins. Namely, the overall price levels of the Latvian economy were half of those in Estonia and Lithuania (http://www.ldiena.lv/lat/business/comblog/gatiskokins/2007-04-03/14754), therefore, while Baltic eonomies are converging with the rest of the EU it is Latvia who started with the lowest price level. Thus the gallopping economy in Latvia simply brings with it sharper price hikes that also influences higher price expectations of the population at large and adds to the spiralling of inflation. No wonder then, that Latvia was considered the poorest EU region before Romania and Bulgaria joined the club.
The economic news accross the Atlantic does not bring good news either. The US housing market unfortunately contaminates also the rest of the US economic health, thus it was reflected in the big slump of the New York stock exchange this Friday, that left a dominoe effect on other stock exchanges accross the industrially developed world. Here we may witness in practice, that whenever the US economy catches cold sneezes are felt in the rest of the world.
Housing markets are being scaled down in Scandinavian and Baltic countries, and with the hyper-liberal credit market of the 1990's being tightened up the consequences should be felt more harshly in the fragile (in comparison with mature Scandinavian ones) Baltic States economies. Latvia is the weakest link here, and while Estonian and Lithuanian governments are living for some years with budget surplus, it is the Latvian government now who learns, how to finally produce deficite less budget for the next fiscal year (2008). The task is formidable in the situation where postmen, doctors and teachers have promised to strike in case their employees would not satisfy their salary rise (to actualy double them) demands. In addition, Latvia, Lithuania and to the lesser extent also Estonia face gradual outpouring of their workforce. Germany's decision to lift the ban of the ten new EU members to work in Germany, while seeing its economy revitalized, only adds to the problems of the Baltic employees to find labour for MOST OF THE TASKS of their overheated economies.
The autumn usually sets in at the end of the August in the Baltic States, when parents must start preparing their offsprings for the new school year. Weather has been exceptionally good this Summer, and Latvian TV referring to the Financenet website (http://www.financenet.lv/zinas/latvija/article.php?id=162398) reported yesterday that there was a record harvest of grain this year (1,5 mil. tonnes), althought the yield of Latvian fields is still miserble (2,9 tonnes from hectare). The record harvest, however, would not prevent Latvian consumers from seeing autumn price hikes of basic food stuffs. And the reason for that is not even traditional lack of professionalism of the Latvian government, but the benefits offered to Latvian farmers via the free trade regime and revolutionary events ading to the immense growth of the bio-fuels in energy sector. During the Cold War period millions of tonnes of basic foodstuffs were amassed in special storage facilities throughout the industrially developed cuntries. Now the storage facilities are empty, and, the reason for that is ever growing appetite of China & India, as well as, the growth of bio-fuel sector. Firstly, the growing apetite of China and India is reviving the farmig sector in the EU. The wholsale and retail giants like Aldi, Lidl and Carrefour dumped prices imbecilly low for most of the last three decades. Now the global trade with China has opened new opportunities for the EU agricultural producers when they finally get a market price for their produce. It means that old fashioned crisis of the 19th century might have a comback, when after a bad harvest there is simply scarcity of food. Just look out for floods in India, China and Indonesia and combine it with growing appetite of China's & India's rapidly growing middle class. Secondly, the rise of bio-fuel sector has been spectacular due to the constantly rising energy prices. Overall the bio-fuels comprise only 5% of the global energy supply, and the possible increase of the bio-fuel supply most directly shall affect the energy prices as well as traditionally low price of basic foodstuffs. Mexican tortilla riots are just the first signs of the discontent among underprivileged, and lets wait and see which country's underclass shall be next?
The price for a ton of wheat and rye in the Riga port shot up within a week (from Ls110 to Ls 140 per tonne). Overall it was the 75% increase as if to compare the price with the one last year. And its just before the new harvest is taken into barns. What should happen when the new tilling season shall arrive? Answer is very simple, basic foodstuffs are monetized and most of the Latvian next years harvests are already sold in advance, it means that there is no way to lower the price for food without government intervention, that depends very much on Brussels as well! The head of Latvian Bakers Association, Mr Valdis Circenis reckons that the price for a loaf of bread should double this fall, because spiralling inflation and energy prices doe not reflect the real price of the bread, and it stays so low due to the Baltic big retail chains competing in price dumping. However, already today the loaf of bread in Estonia is about 0,30EUR more expensive than in Latvia, thus an theoretical option for "carry bread" trade between the two countries. Add here the factor of converging open economies and you have an answer for the problem. Thus to sum up, global free trade regime, high energy prices, rising bio-fuel sector add to the gradual and unacustomed (in comparison with the Cold War period "stability") price hikes and might bring the traditional economic crisis (caused by bad harvests following environmental or natural disasters) back into agenda in disguised manner.
These are interesing times and offer plenty of opportunities for entrepreneurial spirits in the Baltic States and make the task of governments particularly challenging. Lets just squarely think about Latvian underprivileged 14o 997 official pension receivers in 2005 ( http://www.lm.gov.lv/index.php?sadala=296&id=3108). The average monthly pension today is about Ls130 (185EUR) and it makes the annual wellfare spending roughly 23o 400 000Ls, which is roughly 10% of the annual budget. If the price for basic foodstuff doubles in upcoming months it would mean that government must either increase pensions or lower the VAT for agricultural staples goods from 18 to 5%, or to synchronize both actions in order to allow underpriviledged to keep their ends meet.
Agricultural producers in the Baltic States states are witnessing a certain renessaince, and this opportunity should not be missed. In the meantime it might be sad if the production of agricultural products would simply follow the logics of building up the scale of the agribusiness sector without investing in the sustainable growth of the sector in the Baltic States. Sadly, but that would not imply the growth of the knowledge based economy. Lets wait for the autumn, and I am rather confident about the leadership in Estonia and Lithunia. However, lets see how well the incumbent PM steers the overheated Latvian economy in rougher seas of global economic tremors.