America may learn a thing or two from the Baltic state of Estonia as it’s been the butt of many Sunday funny paper jokes yet the reality is different today and worth noting. As Estonia’s GDP growth rate in the first quarter 2011 had reached 8.5%, making it the highest from a percentage wise perspective in the entire European Union. The country was also able to boast the biggest drop in unemployment too, as it saw a drop from a whopping 18.8% to 13.8%, which while still at the high end of the scale, is a major change in the right direction [downward] for a Baltic country and even the EU as a whole.
The other interesting aspect worth noting it sports the lowest debt ratio in the EU, coming in at just 6.6% of GDP as measured by the price of credit-default swaps making it among the ten best sovereign risks in all of Europe rated +A by Fitch who is a regional rating firm specializing in assessing the EU market. So with all of this said where do the lessons learned come from, as what can we take away from a Baltic State whose only export at one time was being a point of humor in the comics for third world dictators and mud?
One thing which is important to note is the policymakers in all three Baltic countries rallied in vindication of their decision if you will as: during the crisis many outsiders told them to unpeg their country currencies from the Euro. Instead they held the party line pressing ahead with a plan of “internal devaluation”, meaning whopping fiscal adjustments (9% of GDP in Estonia’s case) and big cuts in nominal wages.
Ouch your saying, yet this however was the reality which is what the United States have been trying to stave off by digging a deeper and deeper hole where at the bottom its not China we are going to hit as we’ve been told as kids. Instead what we will strike is the land of “default” in that there will be “haircuts” for many bond holders which means no one will venture into that market and the US will have to pretty much go on to a “cash” basis or pay stupidly high interest numbers.
However the lesson here in Estonia is they took the hit to their currency and wages, yes I used the “W” word and its not George W Bush its “wage” and it will continue its march southward as foreign debt rises and cash leaves the US shores as remember there is only so much money so look at our foreign debt and subtract that number from the total amount of money in circulation and you will see the ugly reality. Yes Virginia there is less money hence the credit card companies are stepping in to create secondary currency markets which makes the problem even worse.
Yes all of these are very hard pills to swallow yet is proved out by simple math, and a country once only known for its cartoon exploits…