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Krugmenistan vs. Estonia

The Nobel laureate says stimulus and currency devaluation are the best way to survive a crisis. Estonia chose austerity. Why their rancorous, and often hilarious, war of words matters

(Corrects name of the first post-Soviet president of Estonia.)

In May 2009, months after the passage of a $787 billion stimulus package in the U.S., Estonia’s government took the opposite tack: the hard line. It did not dip into the country’s reserves or borrow money. Ministers say they never even considered devaluing what was then Estonia’s currency, the kroon, which would have derailed a 10-year plan to adopt the euro. To maintain the country’s balanced budget, a tradition it had honored since the end of the Soviet occupation, Estonia’s government froze pensions, lowered state salaries by about 10 percent, and raised the value-added tax by 2 percent. The gross domestic product dropped more than 14 percent that year.