Lithuania. A road between misery and austerity

We have receieved this letter from Lithuania from one of our readers. The letter explains the situation in Lithuania, with austerity packages carried out at the expense of the working class and how capitalists have benefited from cheapening labour and attacks on the welfare state.

The Baltic countries for the last two years have been a role model for pro-austerity organisations such as IMF or EU. Many people try to explain the fact that Baltic countries like Lithuania, Latvia and Estonia are not in any way austerity success stories.

Recently, popular media economists such as Paul Krugman wrote a lot about Estonia and Latvia. Why not Lithuania? Maybe the facts would show that Lithuania is actually doing just fine and austerity really works?

 Clearly not. One can discuss what Lithuania (and other Baltic countries) should have done in order to fight with massive budget deficit. Export oriented economies (and whose currencies are pegged to Euro) cannot sustain big deficits, but what Lithuanian government did – is truly astonishing, and not in a good way.

 Income inequality is very serious problem. Occupy movements all over the world demand reduction of inequality. The demand is not purely ideological or as some people want to make us believe – socialist dogma. It is a fact that inequality reduces economy potential and naturally, growth. Lithuania has huge inequality of income distribution. It arose after a big tax reform in late 2008 by the conservative and liberal government. The ratio of total income received by the 20 % of the population with the highest income to that received by the 20 % of the population with the lowest income rose from 5.9 in 2008 to 7.3 in 2010.

But the problem is not taken seriously. Progressive taxation is viewed as populist idea by the media and traditional mainstream parties. They argue that the idea of “taking and distributing wealth” is a bad thing even when inequality is one of the biggest in developed world.

After the economy went bust in 2009 and contracted by 14.8 per cent, thanks to the government, Lithuania’s economy expanded by 5.9 percent in 2011. This ought to be a key argument to show that austerity programmes actually works. But this is just one side of the story. Unlike Greece and other southern European countries which, according to IMF, have to do “internal devaluation” in order to restore competitiveness, Lithuania already had relatively cheap labour. According to Eurostat, in first quarter of 2010 Lithuania’s labour costs were reduced by 11.3 per cent compared with 2008 and by another 6.7 per cent by late 2011. Unemployment has gone down from 17.8 per cent in 2010 and 15.4 per cent in 2011 to 13.8 per cent now. This would be fairly pleasing result and so-called victory for austerity, except that current unemployment is decreasing mostly because of big emigration.

This didn’t stop the government from continuing their cynical and destructive policies. The next move was to liberalise the labour market. It will now become even easier for employers to lower labour costs even further, since unemployment is still high. Social exclusion has risen by almost 6 per cent in the two years following 2008 and reached 33.4 percent of total population.

The Lithuanian conservative led coalition government is refusing to raise minimum wage enough to stop business subsidies. Currently, the monthly minimum wage is 231 Euros, third from the bottom in European Union. The last minimum wage increase was in early 2008. In 2010 poverty threshold for one person was 203 Euros, while person earning minimum wage after tax have 194 Euros. Moreover, overall inflation in Lithuania from 2008 to 2011 was 20.6 percent. Simple math will tell you that people, who already struggle to pay bills, are worse off by 47.5 Euros compared with 2008. The situation is made no better by the government’s plans to increase monthly minimum wage by puny 15 Euros.

I already mentioned business subsidies. People who earn only minimum wage (about 20 percent of labour force) are also entitled to benefits from social security. It comes in the form of compensation for utilities like water or heating. Businesses by paying minimum wage are forcing the state to pay for theirs lack of investment in productivity and capital, even though profits are already at pre-crisis levels. The government reaction is truly bizarre. The refusal to lift people out of in-work-poverty and remove the burden from budget is costing a lot. Firstly, people who claim benefits and compensations are already loosing their dignity and that creates group of people who are dependent on the state for support. Secondly, the government is imposing austerity measures to fight the budget deficit, therefore the public sector is being reduced and people lose their jobs. Meanwhile, businesses can literally exploit workers at state expense.

Even so, there is not much we can do, except to publicly expose the real situation in Lithuania which would question the current austerity consensus between all major parties that misgovern the country with protective policies for the wealthy and destructive – for everybody else.

Lukas Mikelionis