While Washington continues to increase
spending and accumulate government debt as if it had a vocation to become Athens
on the Potomac, some smaller European countries have turned away from profligacy
and pursued strategies which have culminated in notable achievements. American
policymakers should take note.
Despite obituaries written by various
American pundits, Europe is still very much alive! Notwithstanding negativism over
downgraded sovereign debt, a plunging euro and the frenzy to establish regional
financial aid for the weakest within the European Union, other factors have
been at work. Without much fanfare, two major decisions were taken in July:
Estonia will become the 17th country to adopt the euro, replacing the kroon,
and accession negotiations were opened with Iceland. Both countries bring very
positive attributes to the EU.
Estonia joined the EU along with the other
Baltic States and seven others in May 2004. Since it broke away from the Soviet
bloc, Estonia has pursued free market policies more vigorously than other new
EU members. It achieved substantial economic growth, only to witness a sharp
contraction after a real estate bubble burst and domestic inflation spiked. But
the Estonians were willing to stay the course and applied harsh policies which led
to a 17 percent decline in GDP over the past two years. (If only Greece had the
same determination!) Encouragingly, there was some economic growth in the final
quarter of 2009. So even severe economic problems are surmountable if there is a
will not to resort to self-indulgence through borrowing but to endure temporary
How did Estonia have the political will to
absorb the pain, unlike Greece? It never borrowed excessively and for the most
part, it lived within its means. As with other euro area adherents, Estonia had
to meet the Maastricht criteria in order to adopt the euro. The 2010
Convergence Report gave Estonia a green light on price stability, exchange rate
convergence, independent monetary policy, and most importantly the government
budget and debt criteria. Indeed, Estonia has an enviable track record on the
last two indicators that have caused much consternation among some euro
According to 2009 data, the government
budget deficit was only 1.7 percent of GDP, the third lowest in the EU, and the
general government debt ratio to GDP was a mere 7.2 percent – the lowest among
the 27 member states. Estonia had a government budget surplus in the five years
ended 2007. With such rectitude on fiscal matters, Estonia should be welcomed
with open arms into the euro area.
In recent times, Iceland is best remembered
for two catastrophes: an ash-spewing and unpronounceable volcano that fouled European
skies and the reckless financial dealings of its very few banks. The volcano
has quieted down and the government will make restitution to the daring overseas
depositors who feasted on improbable Icelandic investments. At the same time,
the government decided it was time to apply for EU membership.
This is not as improbable as it sounds. Iceland
was a founding member of the European Free Trade Association (EFTA) and has
always had a fairly open economy. Unlike the last 12 countries to join the EU, it
has a high standard of living. Its per capita income is estimated at over US$39,600,
higher than the EU average of $32,600 and higher even than Germany’s $34,000. Bouts
of high inflation are now history and the jobless rate of 8 percent is lower than
the current EU average of 10 percent. Public finances, too, are in relatively
good shape. Despite the estimated 14 percent government deficit relative to GDP
in 2009, there were surpluses in excess of 5 percent of GDP in 2005-2007 and
near balance in 2008.
The banking crisis taught the Icelandic
private sector some lessons. Banking supervisors need to be more vigilant and you
don’t have to be American to be greedy (the British and Dutch were the primary
depositors in a scheme called Icesave). Now the chickens have come home to
roost. Iceland must make good on these external financial obligations and find
a solution as part of the EU accession negotiations.
Iceland has only 320,000 people but when it
joins the EU it will have the highest fertility rate. It is the only European
country with fertility at the replacement level of 2.1, while the EU average is
1.5. Compared with the rest of the EU, Iceland has a relatively young
population: the 0-14 year old age group comprises 21 percent of the population
versus 15 percent in the EU.
The population is highly educated and
industrious. About 37 percent of women have had tertiary education versus 27
percent for men. Women have exceeded men enrolled in higher education since
1985. Iceland has one of the highest women’s employment rates at nearly 78
percent. Although there are several political parties and governments are
unstable, it is worth recalling that Iceland’s parliament, the Althing, is the
world’s oldest, dating back to the year 930.
Both Estonia and Iceland demonstrate that the
European experiment is not moribund, but overshadowed by acute financial throes
experienced by a few countries and the general economic malaise that confronts
and confounds major world leaders. These two small European countries have
dealt convincingly with their economic and financial difficulties and have
something to contribute to the rest of Europe – if only their example.
What can the United States learn from developments
in these two small countries? First, that spending and borrowing need to be reined
in and, secondly, that the euro, despite alarms of a premature demise, is a viable
currency that will continue to secure its place in the international
marketplace in direct competition to the US dollar.
Estonia and Iceland deserve a round of
Vincenzina Santoro is an international
economist in New York. She represents the American Family Association of New
York at the UN.