Measuring lessons from Estonia

This article about Estonia is circulating on the web.  The conclusion we’re supposed to draw is that austerity works.  However, given that the corollary from the CNBC article is that these measures work even in the Eurozone, I’m not buying it.

But first the good stuff:

Sixteen months after it joined the struggling currency bloc, Estonia is booming. The economy grew 7.6 percent last year, five times the euro-zone average.

Estonia is the only euro-zone country with a budget surplus. National debt is just 6 percent of GDP, compared to 81 percent in virtuous Germany, or 165 percent in Greece.

Estonia’s achievement is all the more remarkable when you consider that it was one of the countries hardest hit by the global financial crisis. In 2008-2009, its economy shrank by 18 percent. That’s a bigger contraction than Greece has suffered over the past five years.

How did they bounce back? “I can answer in one word: austerity. Austerity, austerity, austerity,” says Peeter Koppel, investment strategist at the SEB Bank.

After three years of painful government belt-tightening, that’s not exactly the message that Europeans further south want to hear.

At a recent conference of European and North American lawmakers in Tallinn, Koppel was lambasted by French and Italian parliamentarians when he suggested Europeans had to prepare for an “inevitable” decline in living standards, wages and job security, in order for their countries to escape from the debt crisis.

While spending cuts have triggered strikes, social unrest and the toppling of governments in countries from Ireland to Greece, Estonians have endured some of the harshest austerity measures with barely a murmur. They even re-elected the politicians that imposed them.

“It was very difficult, but we managed it,” explains Economy Minister Juhan Parts.

“Everybody had to give a little bit. Salaries paid out of the budget were all cut, but we cut ministers’ salaries by 20 percent and the average civil servants’ by 10 percent,” Parts told GlobalPost.

“In normal times cutting the salaries of civil servants, of policemen etc. is extremely unpopular, but I think the people showed a good understanding that if you do not have revenues, you have to cut costs,” adds Parts, who served as prime minister from 2003-2004.

As well as slashing public sector wages, the government responded to the 2008 crisis by raising the pension age, making it harder to claim health benefits and reducing job protection — all measures that have been met with anger when proposed in Western Europe.

The article goes on to explain that coming from the former Soviet bloc better prepared Estonians for the sacrifices they would need to make in order to right the ship.  This is all no doubt true.

But ultimately the truth is simpler than all this.  There are 1.3 million people in this country.  They are smart, educated, motivated and hard working.  Unfortunately when people say “austerity” today they are fitting themselves and the term into the neat little template that has been created for us by the media, European ministers and their protesters.  Austerity in practice means cutting expenses, or more accurately slowing the growth in government expenditures, while checking the continued expansion of promised benefits.  Austerity as the term is used today has been shackled by its political intonations, put up as nothing but a straw man that ministers can throw to the dogs to be devoured.

Estonia did not impose austerity.  If the article is correct, Estonia attempted to impose some order on its governmental P&L.  It actually cut its costs.  It did what any rational state who actually wants to foster business would do:

Estonia has also paid close attention to the fundamentals of establishing a favorable business environment: reducing and simplifying taxes, and making it easy and cheap to build companies. Its location — with quick access to Nordic, German and Russian markets — has also helped, along with the very low debt level Estonia inherited when it broke from the Soviet Union. Joining the euro zone on Jan. 1, 2011, Estonia’s stable economy shone, despite the crisis in the currency bloc.

This is not austerity.  It is common sense.

Estonia is an outlier of the Eurozone.  It speaks a different economic language.  The fact is that Estonia is thriving despite the Eurozone.  And that may be just enough to save it when the Austerity-talking countries bring Europe to its knees.

In the meantime, enjoy the scenery:

[Zero Hedge has a funny little piece this morning on the joke that is Austerity in Europe.  Here’s the graph from the post:

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