People seeking to rebut stimulus proposals often point to the example of small Baltic republic Estonia. This is the only Eurozone country to have deleveraged significantly enough to be called “Austerian”. Estonian Government Debt went from 7.2 percent to 6 percent of GDP, a remarkably high decrease. It also has a growth rate of 8%, not only one of the highest in the Eurozone, but also unique in the world.
Austerity Advocates also seem to have their private-sector oriented rationale vindicated. Estonia is a strong producer of entrepreneurs, notably including the creation of the worldwide internet calling sensation, Skype. They are also unhindered by government bureaucracy, red tape, etc. Therefore,this should surely be an example which indicates the efficacy and the desirability of austerity policies.
However, there are several chinks in the armor of that explanation. Firstly, Estonia made significant use of EU Structural Funds, borrowing 3.4 billion Euros (approximately 20% of Estonian GDP in 2011) during the years 2007-13. Now, in whichever way the government uses this money, it is effectively a Keynesian demand-side solution. In the Estonian case, however, the funds are supposed to be used to create more jobs in the entrepreneurial sector.This would therefore increase real incomes, therefore increasing consumer spending, pushing the economy forward.
Now, there are people who argue that Government spending does not push the Economy Forward. In the case of Estonia, however, it undoubtedly did do so. Historically, from 1995 until 2012, Estonia GDP Growth Rate averaged 11.6%, reaching an all time high of 4.80 Percent in March of 2000 and a record low of -5.90 Percent in December of 2008. The Estonian Economy began recovering at the start of 2009. Funnily enough, Government Spending began to kick in at the end of 2008, a month or two around the trough of the recession. Considering that Government initatives have a month or two to take effect, Estonia’s boom is more coordinated with a rise in Government Spending.
Second of all, Estonia is more export driven than any other Eurozone Economy, with 98% of it’s 2011 GDP coming from Exports of Goods and Services.This naturally means it is more dependent on foreign demand than any other of its European neighbors. One can conclude that largest catalyst that made these austerity measures work, was Estonian’s willingness to take on the hard measures needed to adopt these “belt-tightening” policies. For example, civil servants in Estonia took a 10% pay cut and ministers aswell saw 20% of their income cut. Pension age was raised, benefits cut, and job protection reduced, which points out that Estonia has unanimously accepted that times of lavish spending has finished, even the finance minister of Estonia has said that the people “understood they had to give up something”.
By Amogh Sahu & Frederick Jordaan at http://ibej.blogspot.co.uk/