Hey there, time traveller!

This article was published 5/8/2011 (3343 days ago), so information in it may no longer be current.

Opinion

Lots of people are blaming the U.S. fiscal crisis on a dysfunctional political system. So it's interesting to observe how three of the West's youngest democracies, along the Baltic Sea in Central Europe, have managed to take far tougher measures than any being contemplated in Washington -- and survived to reap the benefits.

The collapse of Lehman Brothers in the fall of 2008 brought economic calamity to Lithuania, Latvia and Estonia, former Soviet republics that gained independence in the early 1990s and subsequently joined NATO and the European Union. All three had borrowed excessively to fund housing and consumer booms; when global markets froze and the financing dried up, their markets collapsed. Estonia's GDP fell by 14 per cent, while Latvia's dropped by a stunning 25 per cent. Unemployment in both countries reached 20 per cent.

Rather than implode or prevaricate, the Baltic governments acted quickly. Opting against the devaluation of their currencies, they instead made the hard decision to drastically cut government spending, raise taxes and push down wages. In one year, Estonia reduced its budget deficit by nine per cent of GDP -- which happens to be the current size of the U.S. federal budget deficit. The average wage dropped by a fifth.

Now that austerity is paying off. In the first quarter of this year, Estonia was the fastest-growing country in the European Union, registering a blistering 8.5 per cent annual GDP growth rate; it also boasts the steepest drop in unemployment. Exports are booming. Perhaps most remarkably, the government of Prime Minister Andrus Ansip, which presided over the austerity campaign, was re-elected in March with an expanded parliamentary majority.

Mr. Ansip, who was in Washington last month for meetings with U.S. Vice-President Joe Biden and House Speaker John A. Boehner, modestly insists his tiny country (population 1.3 million) has nothing to teach the United States.

But in a conversation with us, he passed on a couple of insights. "People are able to understand that governments are not able to work miracles, to pull rabbits out of hats," he said. At a time of crisis, "they understand why budget cuts and tax increases are needed." What's required is leaders willing to explain the problem and offer assurances that the pain will be fairly shared, he said.

Mr. Ansip noted that in most countries, government debt is unpopular -- so much so that polls of the level of trust in government roughly correlate with levels of indebtedness. Estonia, which has cut its debt from 12 per cent to six per cent of GDP, ranks third in Europe for trust in government, behind only Luxembourg and Sweden. In other words, leaders willing to take tough measures to put national finances in order are more likely to be rewarded than punished by their constituents. As for those who duck the tough decisions -- well, let's just say Congress's public approval rating is nowhere near Mr. Ansip's.