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Archive for October, 2012

(Author’s note: I was writing this article during the summer so it might not be perfectly new but the points I make remain)

The election of François Hollande as the president of France has been an important turning point. He is a Head of State who is openly anti-austerity has been negatively portrayed by The Economist magazine’s article, which called him “rather dangerous”.

The election of François Hollande has been a sign of a current trend in Europe that is going against austerity.  Austerity across the EU is now in its third year almost. Some countries are feeling the pain of austerity, especially the PIIGS, which have all had to be bailed out.

With all of its current problems, the last thing Europe needs right now is a complete move away from austerity and fiscal tightening to a more expansionist monetary policy and more borrowing. These policies are, among other reasons, what caused the current crisis in the first place.

First of all, with the exception of the PIIGS, no real cuts are taking place or have actually taken place in Europe. The graphs on this blog post of an economics think-tank in Slovakia show that in reality no cuts took place. The only thing that happened is that the rise of government spending decreased. But it is still increasing nevertheless so there is no real austerity. In some EU countries governments were actually spending more than they had before.

The public across Western Europe was upset about the austerity and many politicians claim that it doesn’t work. What is really felt, however, is not the pain of the austerity since there isn’t really any, but the pain of the continuation of the economic crisis. The recovery of economic activity in 2010/2011 was largely due to expansionist monetary policies across Europe. Governments spent a giant amount of public money immediately after the start of the 2008/2009 crisis to stimulate the economy. But this kind of Keynesian stimulus only works as long as the government money keeps flowing. With every government dollar that flows into the economy the threat of high inflation increases.

Now, years later when governments started to cut public spending so that they do not run up huge public debts the economies are starting to slow down and the global outlook isn’t rosy. This has mostly manifested itself in fears of the so-called “double-dip” recessions.  These “artificial economic revivals” did not last and genuine economic recovery will not arrive easily.

In short austerity isn’t working because it hasn’t really been tried out. Germany and France have huge public debts, although still incomparable with the PIIGS.  There is one country in the EU, however, that has resisted this tide of “no real austerity” or “just a bit of austerity”. The Baltic state of Estonia has been making headlines around the world in being the “prime example” of austerity. Estonia is the only country in the Eurozone that is experiencing an economic growth, is having a budget surplus and its debt is actually decreasing. No other Eurozone country has all of these three things happening at the same time.

Estonia has felt the real pain of austerity. However, throughout the years the country’s inhabitants got closer together and got through the tough times. The politicians cut their wages by around 20% in order to persuade the public to go through with the tough fiscal tightening measures. Now the economy is recovering and it has very good prospects. Estonia adopted the Euro in January 2011 when no other country even considered joining the common currency union.

Estonia is the only country in all of Europe, which meets the economic criteria of the eurozone and the political and military criteria as a NATO member. The World Bank has graded it as the 24th country in the world in the ease of doing business ahead of France and Italy. Estonia’s economy might face problems in attracting FDI because of being right next to Russia, which is the reason why it was eager to join the North Atlantic alliance in the first place.

Estonia deserves a lot of respect and praise for its sacrifices. With a population of just roughly over 1 million, is certainly is a dwarf when compared to the biggest and the oldest EU members such as France or Germany.  The Estonians have chosen the “hard way”. After a tough and painful crash and a recession in 2009 and 2010 the country looks ahead to a highly potential bright future.  They haven’t decided to borrow more money for which they would have had to pay for later and which would have hurt much more than the austerity they went through.  Estonia’s Baltic neighbors: Latvia and Lithuania have chosen a similar economic policy as a way to sort out the crisis.

In a way, the two opposing ideas in the Eurozone are whether it is better to chose an immediate crash which is then followed by a real recovery or pursue a mild long recession made possible by more spending and borrowing which only gives the temporary impression of recovery. Estonia chose the 1st way which is tougher and certainly less attractive with the public.

Estonia should be an example for the European Union since it is one of the few countries that actually did try austerity as a way out of this crisis. It should also serve as an example in NATO, having kept all of its membership requirements.

These days this “new” EU member (having joined in 2004) is showing the right way.  The “old” members such as Italy, Spain, Portugal or Greece are facing grave problems. Germany and France, which are currently leading the way out of this crisis, have huge public debts and do not lack problems. Why should they have all the credibility?

Perhaps once in a while a “new dwarf” should be listened to or respected and given just as much credibility as the “old giants”. 

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