Krugman Takes Opera Bow as Estonia Sings Blues on Euro Wages

Jan. 25 (Bloomberg) -- Bloomberg Television's Trish Regan reports on the spat between Paul Krugman and Estonian President Toomas Ilves and the cantata it inspired. The 16 minute "Nostra Culpa" is set to debut in April. (Source: Bloomberg)

“Stimulate!” sings Paul Krugman’s character in a tongue-in-cheek cantata about his spat with Estonia’s president over austerity. The Nobel Prize winner’s refrain is striking a chord with the nation’s citizens.

Pride at swallowing spending cuts to defeat the worst economic slump since communism fell is dwindling among Estonians, who want higher wages as euro adoption exposes a gulf in living standards with Europe. Krugman, a proponent of deficit-led stimulus, drew an Internet rebuke from President Toomas Ilves last year by downplaying the country’s revival.

Wage frustrations show that the return of growth is denting people’s willingness to accept indefinite austerity even in the Baltic region, which European Union leaders have held up as a blueprint to solve the continent’s debt woes. Estonians, who credit choir-singing traditions for the bloodless return of independence two decades ago, are demanding the EU’s fastest pay increases as they seek reward for their economic pain.

“It’s said that Estonia became independent through singing,” Eugene Birman, a Latvian-born U.S. composer who co- authored the cantata, a short operatic piece, said by e-mail. “We’re taking the closed-door arguments and suppressed emotions from this financial crisis and thrusting them onto the stage.”

Worst Recessions

The Baltic countries of Estonia, Latvia and Lithuania endured the world’s worst recessions after Lehman Brothers Holdings Inc.’s 2008 collapse burst a debt-fueled property bubble, shut off credit flows and curbed export demand. Gross domestic product plunged by as much as a quarter.

Estonians suffered higher taxes, public-sector wage cuts and a freeze in state-pension contributions to bolster the budget by 10 percent of GDP. In 2011, the economy outstripped the rest of the EU by surging 8.3 percent, state debt fell to 6 percent of GDP and the nation of 1.3 million adopted the euro.

The cost of insuring state debt against non-payment for five years using credit-default swaps rose by a basis point to 63 at 3:02 a.m. in Tallinn, the capital, the fifth-lowest in the euro area, compared with the peak of 737 points in 2009, according to data compiled by Bloomberg.

Strikes Spread

As the economy recovered, the currency switch laid bare wage differences with other euro-area members, with private- sector workers fueling a 7.6 percent annual jump in nominal labor costs in the third quarter. Public-sector employees are now demanding the government loosen the fiscal purse strings after surpluses in 2010 and 2011.

Estonia, the EU’s third-least unionized country according to the EU-financed worker-participation.eu website, has witnessed the biggest strikes since independence as teachers and doctors protested over pay and workloads. Workers at the two main power plants are considering action unless demands for a one-third wage increase is met.

Joining the euro area, a move Latvia and Lithuania plan to follow in 2014 and 2015, has also made salaries more easily comparable.

Heightened wage transparency as a result of the euro “seems to have hit many Estonians where it hurts,” said Andres Kasekamp, a political-science professor at Tartu University. “Living standards are still significantly below those in western Europe and will probably remain so for a long time.”

‘Economic Triumph?’

At 855 euros a month in the third quarter, Estonia’s gross average wages are the euro region’s second-lowest ahead of Slovakia. Workers unhappy at the lack of earnings growth have fled to countries such as Finland, with emigration reaching its highest level in a decade last year.

Estonia’s revival has also failed to impress Krugman.

The recovery from a “depression-level” slump has been a “significant but still incomplete recovery,” he wrote in his New York Times blog in June. “Better than no recovery at all, obviously -- but this is what passes for economic triumph?”

The economist’s remarks sparked a sharp response.

“Let’s write about something we know nothing about and be smug, overbearing and patronizing,” Ilves, a Columbia University graduate, said 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.”

The $22 billion economy may expand 3 percent this year and 4 percent in 2014, when it’s due to reach its pre-crisis level, the central bank estimates.

‘Singing Revolution’

Estonians refer to the years before regaining independence from the Soviet Union in 1991 as the “singing revolution,” when patriotic sentiments were channeled into spontaneous mass song, mainly at the Tallinn Song Festival Grounds. This, they say, helped avoid the violent confrontations that occurred in other former Soviet republics.

The 16-minute English-language cantata, called Nostra Culpa, after Ilves’s Twitter outburst, will be performed by local mezzo-soprano Iris Oja and the Tallinn Chamber Orchestra conducted by Risto Joost and debuts April 7. Krugman and Ilves, who didn’t respond to e-mailed requests for comment on the musical work, are the only two characters.

“It would be unfair to characterize the piece as a debate between only those two gentlemen,” Birman and Scott Diel, a U.S.-born journalist who wrote the libretto, said last month by e-mail. “Almost every economic thinker has registered an opinion on the topic.”

Surplus Goal

The discussion hasn’t swayed Prime Minister Andrus Ansip, whose Cabinet has pledged no retreat from its policy of budget surpluses. The government warns against an over reliance on the recession-hit euro area, with EU funding having risen to almost a fifth of budget revenue.

Still, this year’s plan envisages more spending on pensions, child support, unemployment benefits and some public- sector wages. That’s a signal there may be some concessions within the Cabinet’s budgetary goals, according to Fredrik Erixon, head of the European Center for International Political Economy in Brussels.

“There will be subtle changes to fiscal policy as well as rhetoric,” Erixon said by e-mail. “But I do expect the government to fight its corner and remain fiscally conservative.”

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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