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.

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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 Professor of Public Policy & Director of the Institute for Policy Research, University of Bath.

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You may call me a monster – but I'm glad that girl's lemonade stall got shut down

What's wrong with hard-working public servants enforcing perfectly sensible regulations?

Who could fail to be moved by the widely shared tears of a five year old whose innocent lemonade stall was brutally shut down by evil bureaucrats? What sort of monster would not have their heartstrings tugged by the plaintive “I've done a bad thing” from a girl whose father tells us she “just wanted to put a smile on people's faces”?

Well me, actually.

There are half a million cases of food poisoning each year in the UK, and one of the reasons we have stringent controls on who can sell food and drink, especially in unsealed containers, is to try to cut those figures down. And street stalls in general are regulated because we have a system of taxation, rights and responsibilities in this country which underpins our functioning society. Regulation is a social and economic good.

It’s also pretty unfair to criticise the hard-working public servants who acted in this case for doing the job they are no doubt underpaid to do. For the council to say “we expect our enforcement officers to show common sense” as they cancelled the fine is all very well, but I’m willing to bet they are given precious little leeway in their training when it comes to who gets fined and who doesn’t. If the council is handing out apologies, it likely should be issuing one to its officers as well.

“But these are decent folk being persecuted by a nanny state,” I hear you cry. And I stand impervious, I’m afraid. Because I’ve heard that line a lot recently and it’s beginning to grate.

It’s the same argument used against speed cameras and parking fines. How often have you heard those caught out proclaim themselves as “law-abiding citizens” and bemoan the infringement of their freedom? I have news for you: if you break the speed limit, or park illegally, or indeed break health and safety or trading regulations, you are not a law-abiding citizen. You’re actually the one who’s in the wrong.

And rarely is ignorance an excuse. Speed limits and parking regulations are posted clearly. In the case of the now famous lemonade stand, the father in question is even quoted as saying “I thought that they would just tell us to pack up and go home.” So he knew he was breaking the rules. He just didn’t think the consequences should apply to him.

A culture of entitlement, and a belief that rules are for other people but not us, is a disease gripping middle Britain. It is demonstrated in many different ways, from the driver telling the cyclist that she has no right to be on the road because she doesn’t pay road tax (I know), to the father holding up his daughter’s tears to get out of a fine.

I know, I’m a monster. But hooray for the enforcers, I say.

Duncan Hothersall is the editor of Labour Hame