New Estonia

In the week that both Vince and Giles sell their souls for power and influence, and the idea that spending cuts really are necessary takes hold within the centre-left, it’s handy to note that there are still economists talking sense.

So here’s Tim Millar at the massively underrated Vimothy, telling cuts-driven economic collapse like it is.  For Estonia, read ConDem Britain?

“Fiscal responsibility” in the New Europe

Estonia is the poster child for austerity in Europe. In response to the crisis it has been “internally devaluing” and deflating its economy, heavily cutting government spending: its deficit went from 14% of GDP in 2008 to 2% in 2009. Estonia’s currency is pegged to the euro in anticipation of future membership. Its national debt is around 6% of GDP. 6%! (Its foreign currency reserves are half as big again). Estonia is Europe’s fiscal golden child.  The market certainly thinks so: CDS on its soveriegn debt are trading at about 90 bps; Greek CDS, by comparison are trading well over 300 bps. It must be a very rich country, then, to have saved all that wealth.


  1. May 25, 2010 at 2:57 pm

    From What I’ve heard from Krugman, even with this internal devaluation labour costs are still too high compared with Germany. I think there’s a lot more pain on its way to Estonia even with everything they’ve done. I might have a look at figures for migration trends out of Estonia to see how people are reacting with their feet.

  2. Rob
    May 26, 2010 at 2:56 pm

    I think there’s an interesting experiment underway here. Estonia is acting on the belief that taking on more debt now will hamper their long-run growth, as it would constrain future spending or exacerbate future taxation required to manage that debt. Most of the rest of Europe is prefering to try to keep the economy afloat via government borrowing in the belief that this will enable them to resume ‘normal’ growth from a higher base, which will make paying the debt off easier. It’s too early to say which one is right, but I would imagine that Estonia is feeling a lot more short-term pain, but will probably experience a greater growth rate over the next decade (of course their growth rate will be higher, since they’ve now got more ground to make up; the question is whether they exceed the catch-up required match the rest of Europe’s growth trend).

    The question of which we would prefer in Britain is a political one. Estonia’s approach probably promotes greater efficiency by forcing unprofitable businesses to close, whereas elsewhere they’re (indirectly) subisdised, but at the cost of unemployment and falling living standards. The immense evolutionary pressure on Estonia’s businesses may make the survivors stronger in the long-run, but that might be little relief to those who own or work for the companies that don’t survive.

  1. June 7, 2010 at 1:45 pm

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