Ways out of the crisis (2/3): Estonia — subsidised austerity
27 June 2012
Estonia, the model of a country that slashed government spending, only managed to overcome the serious 2007-2009 crisis thanks to well-timed funds from the EU.
The nocturnal tweets of Estonian president Toomas Hendrik Ilves regarding comments by economist Paul Krugman about Estonia, sparked a vivid debate. The Nobel Prize for Economy wrote that Estonia, the incarnation of exemplary austerity, is, in fact not such a fabulous economic success.
This view led to a multitude of criticism. In one of his tweets, Ilves quoted an article by Swedish economist Anders Aslund who noted that in 2008, Estonia had no other alternative but to adopt an austerity policy. "The Baltic States have no independent fiscal or financial policies, therefore they cannot 'stimulate' their economies," Aslund wrote in Estonian daily Postimees.
In a heated Twitter exchange, none of the tweeters took the trouble of taking a closer look at Estonian economic data. To claim that the government has not stimulated the economy is to be, putting it kindly, mistaken.
For the European Union budgetary period from 2007 to 2013, the Baltic States negotiated the highest rate of subsidies in relation to gross domestic product (GDP). As luck would have it, the beginning of the payments, 2008, coincided with the time the world economic crisis grew to worrisome proportions.
Imagine the opposite situation
None of the other EU Member States was provided with as much financial aid to disburse – not then nor even today. During this period, Estonia benefited from aid of over 4.5 billion euros, of which a little more than half has already been spent.
In order to compare what is comparable, one has to imagine the opposite situation. Let's suppose that Estonia had not had all of those European subsidies but, in order to face a huge economic crisis, the government had nonetheless decided that the country did need all those things obtained with EU financing: highway construction, training for the unemployed, investment in higher and professional education, etc. As its budget revenues dropped, the government would have had no other choice but to borrow money.
What lessons can be drawn from this? One could ironically say that Krugman criticised the political management of the crisis. Even a good dose of economic 'stimulus' does not bring us back to better days.
On the other hand, one must have more empathy for the governments of the countries in crisis who insist on the need to stimulate while enforcing rigour. Yes, spending must be cut and structural reforms made, but even Estonia did not get out of the crisis using only these methods.
Without the stimulus to the economy made possible by European subsidies, it is improbable that the Estonian recession would have been limited to an 18% reduction in GDP [between 2007 and 2009] or that the recovery would have been so rapid.