Krugman Anti-Austerity Jab Irks Budget Champ Estonia

Estonian President Toomas Ilves lashed out at Nobel laureate economist Paul Krugman for questioning the Baltic nation’s economic recovery as an austerity success story.

Estonia’s recovery from a “depression-level” economic slump in 2008-2009 has been a “significant but still incomplete recovery,” Krugman wrote in his New York Times blog yesterday. “Better than no recovery at all, obviously -- but this is what passes for economic triumph?”

The Baltic nations of Estonia, Latvia and Lithuania, suffered the world’s biggest recessions after the collapse of Lehman Brothers Holdings Inc. in 2008 burst a debt-fueled property bubble, shut off credit flows and curbed export demand. The three countries reduced spending and raised taxes by as much as 15 percent of their gross domestic products in 2009-2010. Estonia was the only country in the euro area to report budget surpluses for the last two years.

“Let’s write about something we know nothing about and be smug, overbearing and patronizing,” Ilves, a graduate of Columbia University, wrote late yesterday on his Twitter Inc. account. “But yes, what do we know? We’re just dumb and silly East Europeans. Unenlightened. Someday we too will understand. Nostra culpa.”

‘Sincere’ Defense

He confirmed his comments in an e-mail, adding “it was a sincere and immediate defense of the major and often difficult efforts of Estonia to deal with the economic crisis and to stick to the rules adopted in the European Union.”

Austerity measures helped Estonia improve its budget balance by more than 10 percent of gross domestic product, adopt the euro last January and cut government debt to 6 percent of economic output, the lowest among the 17 countries that use the currency.

The $19 billion economy grew 7.6 percent last year, the fastest pace in the EU. GDP, adjusted for inflation, may return to pre-crisis levels in 2014, the central bank said in December.

The Baltic nations “managed to do what no-one thought was possible -- implement internal devaluations, which in practice meant salary cuts for everyone in the country,” Peter Elam Hakansson, chairman of Stockholm-based East Capital, wrote in a monthly newsletter, e-mailed today.

Austerity Needed

Austerity is necessary to produce growth, Ilves said last month in an interview, adding that growth as a policy “doesn’t make sense.” He failed to predict his country’s recession at the end of 2007, calling forecasts of an economic crisis “fear mongering” in a New Year’s Eve speech.

European Central Bank Executive Board member Joerg Asmussen this month cited the Baltic countries as an example of the benefits of fiscal overhaul. Krugman, along with economists including New York University’s Nouriel Roubini, in 2008 and 2009 forecast the Baltic countries would have to abandon their currency pegs to the euro as the costs of austerity would become too high for their populations.

“Krugman supports the worldview that created poverty,” Estonian Finance Minister Juergen Ligi told a news conference today in Tallinn. “Our poverty won’t be cured with the recipes that prescribe lavish borrowing, purchasing expensive things and then feeling rich.”

Comparing levels of economic output today to those in 2007 is “totally arbitrary,” Ligi said. “God forbid those times come back. They ushered in the crisis.”

To contact the reporter on this story: Ott Ummelas in Tallinn at oummelas@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net

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