Why Estonia should not be our economic poster-boy

Estonia has much to recommend it, but a look at its recent economic history should give anyone pause

Baltic boosterism is back. Last week Fraser Nelson used his new Telegraph column to sing the praises of Estonia's economic performance, taking his cue from an earlier editorial in the Wall Street Journal which lavished praise on the small Baltic state for cutting spending and keeping taxes "flat and low". Estonia is growing fast -- motoring along at an annualised 8.4 per cent -- and proof positive according to Nelson that expansionary contraction works. It has cut its way back to prosperity.

Last time libertarians cheer-led for the Baltic states like this was when their flat taxes were in vogue, back in 2005. Flat taxes were said to be sweeping across Eastern Europe towards Berlin faster than the Red Army, as Germany's general election approached. George Osborne even briefly flirted with the idea -- until Gerhard Schroder tore chunks out of Angela Merkel's poll lead by demolishing her on the issue. The libertarians retreated wounded, to regroup and find a new line of attack.

Estonia is indeed a fine country. Its people are resilient and dynamic. Its government is open and transparent and it invests heavily in innovation. Like other Northern European countries, it has historically exercised fiscal prudence. It has much to recommend it.

But a brief look at its recent economic history should give anyone pause for thought. During the financial crisis, Estonia's GDP contracted sharply -- by over 5 per cent in 2008 and then a massive 13.9 per cent in 2009. Unemployment rocketed to nearly 17 per cent -- one of the highest levels in the EU. It is still very high at over 13 per cent.



Given such a deep loss of output, high unemployment and lower labour costs, one would expect rapid post-recessionary growth. But even then, much of Estonia's recent bounce back has been driven by increased exports, chiefly to its high performing social democratic neighbours. Meanwhile, inflation is high and consumer spending low, and GDP growth is now returning to a trend that is lower than before the crisis in 2008, in part because of the constraints imposed by euro membership.

That the balance sheet effects of the internal devaluations of the Baltic republics were not more severe was largely the result of negligible public debt before the crisis struck, as Roubini has recently spelled out:

The international experience of "internal devaluations" is mostly one of failure. Argentina tried the deflation route to a real depreciation and, after three years of an ever-deepening recession/depression, it defaulted and exited its currency board peg. The case of Latvia's "successful" internal devaluation is not a model for the EZ periphery: Output fell by 20 per cent and unemployment surged to 20 per cent; the public debt was -- unlike in the EZ periphery -- negligible as a percentage of GDP and thus a small amount of official finance -- a few billion euros -- was enough to backstop the country without the massive balance-sheet effects of deflation; and the willingness of the policy makers to sweat blood and tears to avoid falling into the arms of the "Russian bear" was, for a while, unlimited (as opposed to the EZ periphery's unwillingness to give up altogether its fiscal independence to Germany); and even after devaluation and default was avoided, the current backlash against such draconian adjustment is now very serious and risks undermining such efforts (while, equivalently, the social and political backlash against recessionary austerity is coming to a boil in the EZ periphery).

The Baltic republics are also curious poster-boys for British Eurosceptics, who generally favour the break-up of the eurozone, and positively urge Greece to default and bring back a devalued Drachma. It is doubly odd, therefore, that they should commend a country like Estonia for sacrificing everything on the altar of euro membership, particularly as it now has to contribute to eurozone bailout funds.

Still, when you're arguing for expansionary contraction, why let a little matter of intellectual consistency get in the way?

Nick Pearce is Director of IPPR


Nick Pearce is the director of the Institute for Public Policy Research.

Photo: Getty Images
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I'm far from convinced by Cameron's plans for Syria

The Prime Minister has a plan for when the bombs drop. But what about after?

In the House of Commons today, the Prime Minister set out a powerful case for Britain to join air strikes against Isil in Syria.  Isil, he argued, poses a direct threat to Britain and its people, and Britain should not be in the business of “outsourcing our security to our allies”. And while he conceded that further airstrikes alone would not be sufficient to beat Isil, he made the case for an “Isil first” strategy – attacking Isil now, while continuing to do what we can diplomatically to help secure a lasting settlement for Syria in which Assad (eventually) plays no part.

I agreed with much of David Cameron’s analysis. And no-one should doubt either the murderous barbarism of Isil in the region, or the barbarism they foment and inspire in others across the world.  But at the end of his lengthy Q&A session with MPs, I remained unconvinced that UK involvement in airstrikes in Syria was the right option. Because the case for action has to be a case for action that has a chance of succeeding.  And David Cameron’s case contained neither a plan for winning the war, nor a plan for winning the peace.

The Prime Minister, along with military experts and analysts across the world, concedes that air strikes alone will not defeat Isil, and that (as in Iraq) ground forces are essential if we want to rid Syria of Isil. But what is the plan to assemble these ground forces so necessary for a successful mission?  David Cameron’s answer today was more a hope than a plan. He referred to “70,000 Syrian opposition fighters - principally the Free Syrian Army (FSA) – with whom we can co-ordinate attacks on Isil”.

But it is an illusion to think that these fighters can provide the ground forces needed to complement aerial bombardment of Isil.  Many commentators have begun to doubt whether the FSA continues to exist as a coherent operational entity over the past few months. Coralling the myriad rebel groups into a disciplined force capable of fighting and occupying Isil territory is a heroic ambition, not a plan. And previous efforts to mobilize the rebels against Isil have been utter failures. Last month the Americans abandoned a $500m programme to train and turn 5,400 rebel fighters into a disciplined force to fight Isil. They succeeded in training just 60 fighters. And there have been incidents of American-trained fighters giving some of their US-provided equipment to the Nusra Front, an affiliate of Al Qaeda.

Why has it proven so hard to co-opt rebel forces in the fight against Isil? Because most of the various rebel groups are fighting a war against Assad, not against Isil.  Syria’s civil war is gruesome and complex, but it is fundamentally a Civil War between Assad’s forces and a variety of opponents of Assad’s regime. It would be a mistake for Britain to base a case for military action against Isil on the hope that thousands of disparate rebel forces can be persuaded to change their enemy – especially when the evidence so far is that they won’t.

This is a plan for military action that, at present, looks highly unlikely to succeed.  But what of the plan for peace? David Cameron today argued for the separation of the immediate task at hand - to strike against Isil in Syria – from the longer-term ambition of achieving a settlement in Syria and removing Assad.  But for Isil to be beaten, the two cannot be separated. Because it is only by making progress in developing a credible and internationally-backed plan for a post-Assad Syria that we will persuade Syrian Sunnis that fighting Isil will not end up helping Assad win the Civil War.  If we want not only to rely on rebel Sunnis to provide ground troops against Isil, but also provide stable governance in Isil-occupied areas when the bombing stops, progress on a settlement to Syria’s Civil War is more not less urgent.  Without it, the reluctance of Syrian Sunnis to think that our fight is their fight will undermine the chances of military efforts to beat Isil and bring basic order to the regions they control. 

This points us towards doubling down on the progress that has already been made in Vienna: working with the USA, France, Syria’s neighbours and the Gulf states, as well as Russia and Iran. We need not just a combined approach to ending the conflict, but the prospect of a post-war Syria that offers a place for those whose cooperation we seek to defeat Isil. No doubt this will strike some as insufficient in the face of the horrors perpetrated by Isil. But I fear that if we want not just to take action against Isil but to defeat them and prevent their return, it offers a better chance of succeeding than David Cameron’s proposal today. 

Stewart Wood is a former Shadow Cabinet minister and adviser to Ed Miliband. He tweets as @StewartWood.