Once I wrote a post about Swedbank and Latvia. The title was “Hookers that cost too much, flash German cars and insolvent banks”. Roughly I predicted a disaster in Latvia based on – you guessed it – the price of hookers. I was right. Latvia's economy has now entered a true depression.
The logic was that Latvia was running an unsustainable current account deficit and borrowing in a currency which was not its own (it was borrowing in Euro intermediated by Swedish banks – notably Swedbank).
The normal solution to an unsustainable current account situation is to devalue – but if you have a lot of foreign currency borrowings that solution too becomes difficult as the domestic currency amount of your foreign currency borrowings goes up as your currency goes down. You become competitive and simultaneously go desperately bankrupt.
If all that is required to restore competitiveness to your domestic industry is a small devaluation then that is just fine. Sure the notional value of your debt goes up – but 15% is still manageable – especially as the devaluation should drive domestic incomes up.
But if the amount of devaluation needed for domestic competitiveness is large and the foreign debt is large then there is a true disaster in the making. Devalue enough and you bankrupt almost everyone.
Now how do I measure the competitiveness? Well I want a reasonable cross-border comparison of labour costs of labour of roughly equal skill. I guess I could use the price of an electrician – but I don’t know how to find that.
So instead I use the price of prostitutes. Sure Latvians might be better looking than most – but the prostitutes were frightfully expensive (at least by Eastern European standards) and (according to several comments I received on the blog and by email) were also providing poor service. [Honestly I don’t know.]
This brings me to Poland. Poland is the subject of the latest Eastern Europe scare mongering. Its a large part of the GE/Eastern Europe story for instance.
A large proportion of domestic mortgages are priced in Swiss Francs – and the Zloty has devalued sharply against the Franc. It is bad in Poland. But it would be far worse if Poland had started with high cost structures.
Now I have not tried to manufacture anything in Poland – but using my usual index (the price of prostitutes) it appears that Poland is now quite reasonably priced. Sure it is not Thailand – but hey – they look to be offering the best deal in Eastern Europe. Get your Ryan Air flight now.
I will thus make a prediction. It is not going to be as bad in Poland as Latvia. And whilst GE will lose money in Poland (possibly a lot of money) it will not lose as much as some of the more vehement bears are arguing.