This is an extraordinary tale of a country being ruined by a fixation that the only way to stop being dominated by their neighbour, Russia, is to get into the euro as fast as possible. No matter that all economics point to the solution to the problems of a hitherto well-managed and prosperous economy is to devalue against the euro. NO! That cannot be allowed because it would delay the entry into the eurozone.
Here is another country being ruined by the euro.
Christina
TELEGRAPH 21.9.09
Debt deflation laboratory of the Baltics
Property prices in Estonia's Hanseatic capital of Tallinn have fallen by 59pc from their peak in the Baltic boom, a remarkable state of affairs for an EU country nestled against Russia on the most dangerous fault line in Europe.
By Ambrose Evans-Pritchard
Cost per sq.m has dropped from €1,611 (£1,455) to €669 since April 2007, according to Ober-Haus Real Estate Advisors. Swedbank says up to 30pc of its mortgages in Estonia are in negative equity. Recent loans are in euros – not the local kroon.
Professor Ülo Ennuste from Tallinn University says the private net wealth of Estonia's people has fallen below zero. I know of no other country in the world where this has occurred, though Latvia may be deeper in hock. Estonia's foreign debt is 116pc of GDP, second highest in Eastern Europe.
It is not a good moment for the poster-child of the flat-tax revolution, but those crowing the end of "Margaret Thatcher's Baltic Model" neglect half the story. Estonia's euro peg is anything but free-market. It makes Tallinn dance, awkwardly, to Frankfurt's distant tune. It stoked the boom by enticing people to borrow cheap at eurozone rates: it is now prolonging the bust.
The economy will contract by 14.5pc this year, twice as bad as Iceland (OECD forecasts). Industrial production has fallen 28pc. The unemployed receive half their former pay for a few months, then benefits fall to £12 a week. The shock awaits this winter. Chief victims will be ethnic Russians on the lower rungs of industry.
Most governments would try to cushion the blow. Estonia is instead pushing through yet another austerity package to keep the budget deficit below the EMU ceiling of 3pc of GDP. Such is the totemic appeal of euro entry in 2011.
"This is an absolutely mad policy," Mr Ennuste told an Open Europe Forum. "We're in a vicious circle where thousands more lose their jobs and don't pay taxes, so there have to be more cuts. We need fiscal relief packages at once. This makes nobody happy but the Kremlin."
The government could spend more. The national debt is just 5pc of GDP. [Our’s is at 57% and galloping upwards! -cs] It chooses not to do so. Such ultra-orthodoxy shows admirable discipline. Estonians will be a shining example to us all if they pull it off – and hold their society together.
"Estonia's credit rating (A-) is going to rise against other countries next year," said economy minister Johan Parts. "The next phase of the global crisis is how states are going to manage their huge deficits."
Dag Kirsebom, the author of Hard Landing: a Fairy Tale of the Rise and Fall of the Estonian economy, said the elites had lost the plot. "They are complacent, and they shouldn't be. We're in a downward spiral but all they are focused on is joining euro.
"The free-market model worked great for 15 years and then they ruined it with crazy lending. Did Margaret Thatcher say you should borrow money from Swedish banks to buy German cars? I don't think so. They screwed up, and now it is too late. They need to let the currency fall to reflect the damage already done."
The euro is more than a currency ambition for Estonia. Like joining Nato, it is part of a national strategy of locking into every part of Europe's security system as quickly as possible to keep Russia at bay.
What puzzles me is the strange serenity in the ministries. Officialdom seems to think it enough that they have managed to defend their peg without recourse to the IMF, and that their neighbour has collapsed even faster.
"The situation in Latvia is a tragedy," said Mr Parts. "Nobody will lend them any money except the IMF, and it has the same menu whether you are Latvia or Zimbabwe. The big difference between us and the rest of the Baltics is that we had a buffer of reserves, and we didn't run budget deficits in the good times."
Mr Parts quoted Aristotle to defend Estonia's currency peg: "Give me a single fixed point and I can move the globe". But is the euro the right "fixed point" when the currencies of Sweden, Russia, Poland, Ukraine have plunged around you? The official view is that exports are not sensitive to the exchange rate. This overlooks the suffocating effect of deflation in a post-bubble economy saddled by debts and wage levels that raced ahead of productivity. The country faces an "internal devaluation" within the EMU bloc to right the ship again. Such cures are painfully slow, and very damaging to democratic solidarity.
Edward Hugh from Baltic Watch advises the four fixed-peggers – Estonia, Latvia, Lithuania, and Bulgaria – to bite the bullet and negotiate a joint devaluation against the euro rather than suffer the political agonies of deflation.
Estonia's leaders will hear none of it. They can defend the peg as long as reserves last at the central bank. At recent loss rates, they are safe until Christmas.
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