The Euro's Model Student : Planet Money On today's show, we bring you the story of one country that played by the rules and did everything exactly the way they were supposed to. One country that worked tirelessly to gain access to the special club of the euro — Estonia.
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The Euro's Model Student

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The Euro's Model Student

The Euro's Model Student

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OTT LEPLAND: (Singing in foreign language).


UNIDENTIFIED PERSON: (Speaking Estonian).


OTT LEPLAND: (Singing in foreign language).


Hello and welcome to PLANET MONEY. I'm Chana Joffe-Walt.


And I'm David Kestenbaum. Today is Tuesday, January 18, and that was part of the finale of the show "Esthonian Pop Idol." The title is actually "Estonia Is Looking For A Superstar." That's what you heard at the top. Today on the show, Estonia. This little country looks at the mess that is the euro - the very troubled currency of Europe. It looks at that and says that looks awesome. Sign me up.

JOFFE-WALT: (Laughter) Estonia just signed up. They just joined the euro. And strangely this little country - little Estonia - is sort of a model for the other troubled countries that are already on the euro. We're going to get to that in a minute. First our Indicator. Today, it's not from Jacob Goldstein - he's on vacation - but from Adam Jacob Davidson.

ADAM DAVIDSON, BYLINE: Hey, Chana. David, hi. David. Today's Indicator - $1.3 billion. That is how much profit Citigroup - the massive, banking, finance conglomerate - reported. Now, the reason I'm bringing this up - we on the show don't normally really care that much about how any one company happened to do in their earnings reports. But I think Citigroup is the perfect institution to look at to understand this whole financial crisis we've been through and to try and figure out where we are right now. I think most people felt in late 2008, early 2009 that Citigroup was basically a failed business. It was bankrupt. In any other time, it would just go away and die. But the U.S. government and many others felt that to let Citigroup collapse - at the time, the largest bank in the world, the largest company, by some measures, that had ever existed - would have destroyed the U.S. economy, destroyed the world economy - even worse than what did eventually happen. So the government stepped in of course and kept Citigroup alive.

KESTENBAUM: And we have a heartbeat, right? I mean, 1.3 billion in profits - I mean, for bank of Kestenbaum - you know...

JOFFE-WALT: (Laughter).

KESTENBAUM: ...We get a 1.3 billion, that's a really good year for us. But actually I can't tell how good a year that is if you're as big as Citigroup.

DAVIDSON: When you're as big as Citigroup, a billion dollars - it might as well be zero. I mean, but, you know, depending on how you measure the size of the bank - and this is...

KESTENBAUM: Bupkis (laughter).

DAVIDSON: This is nothing. This is bupkis. And the lesson that I get out of this is, OK, yes, now we can somewhat kind of celebrate, I guess, that this emblem of the financial crisis is - for the first time in several years - actually profitable. They lost over $7 billion last year. But the lesson I get is even now - even two years after the financial crisis's worst days, even after growth - albeit very anemic growth in the overall economy - we still have this huge financial institution that's barely alive, that's barely able to earn its keep even after the extraordinary help of the U.S. government.

JOFFE-WALT: So it's bad. So they're still sick. That's what that 1.3 billion is telling us.

DAVIDSON: Yeah. They're still sick, and that's clearly what the world's investors thought. As soon as this news was reported, they started selling Citigroup stock. They fell quite a bit. And the reason, I think, so many people are worried about Citigroup - looking at Citigroup, wondering what's going to happen is the lesson of Japan. We've talked on this podcast about Japan's lost decade and - what many, many economists say - took a few-year crisis and turned it into a 20-year crisis in Japan - was that Japan kept all these massive banks in business that should have gone out of business - that should've disappeared and collapsed. What we know - what there's pretty solid evidence of - is when a bank should collapse but is kept alive through government largesse, those banks tend to make much worse decisions. They make riskier decisions, stupider decisions. They add less to the economy. They don't help the economy be vibrant and healthy. And, well, you know, I would guess a majority of people who looked at the situation two years ago thought, well, you can't let Citigroup collapse. Those same people now look at the situation and think, wow, it really, really is scary to have such a huge bank that's just barely trudging along. Even Citigroup's leaders told investors today, you know, all those different things you want us to do to make us really start growing again? We're not going to able to get to that for at least another year.

JOFFE-WALT: Did you just manage to do a more depressing Indicator than Jacob Goldstein delivers every week?


JOFFE-WALT: (Laughter).

DAVIDSON: And I took seemingly good news and made it depressing.

JOFFE-WALT: Nice twist. Thank you, Adam.

DAVIDSON: Thank you, guys.

JOFFE-WALT: OK. On to today's show - to the euro's newest member. So, David, around 10 years ago, 11 European countries decided they should all form one big currency union, the eurozone. And over the years, there have been new members to the euro - Greece. Slovenia joined five years ago. Slovakia three years ago, and now Estonia.

KESTENBAUM: And we've been doing a lot of reporting on the euro and what a mess it is. So here's a quick review. A few months ago, we did a story about how the Greek government needed a bailout because it way overspent its budget, threatening the entire eurozone.

JOFFE-WALT: We did a story about how Ireland's banks grew so large and so sick they were about to take down the entire country. So Ireland needed a bailout, too, threatening the entire eurozone.

KESTENBAUM: We did a story about how the fund they set up to bail out those countries doesn't actually have money in it yet, and it's going to be guaranteed by the very countries that may be on the brink of failure, also threatening the entire eurozone.

JOFFE-WALT: And we did a story about how Spain faces potential collapse because its regional banks paid for an enormous housing bubble that has now collapsed, threatening the entire eurozone and maybe the global economy in that case, too.

KESTENBAUM: So on today's show we bring you the story of one country that didn't mess things up - one country that actually played by the rules, did everything exactly the way it's supposed to. And, yet, life there still kind of sucks - Estonia.

JOFFE-WALT: And given everything that we just said about all those countries who did mess up and how they're threatening the euro, the first glaring obvious question for Estonia is, why would you want to be part of this club? Aren't you worried about the euro crisis?

PETER VORK: I don't mind (laughter).

JOFFE-WALT: This is Peter Vork (ph). He's a management consultant in Estonia, and he - like the dozen or so Estonians I've spoken to over the last few days - told me there is a lot to be gained from joining the euro.

KESTENBAUM: So Peter points to two main reasons. The first one is just that it makes the math easier. There are no more currency conversions to worry about.

VORK: Even Finns can say, OK, I have 100,000 euros. I would like to buy - I don't know - real estate. The apartment next door costs 100,000 euros. But in Estonia, it costs something - I don't know - one-and-a-half million Estonian kroons. What is this? Now, it costs the same - 100,000 euros. They look at Estonia now in different ways because it's the same money, which they understand.

KESTENBAUM: So that's an economic reason - increased investment, increase in trade, all that stuff. But reason number two, it's more of a national security, psychological argument. If you're Estonian, you're big fear is that some neighbor is going to come invade you. For Estonians, their currency is really wrapped up in their identity as a nation - their independence. Estonia gained independence from the Soviet Union in 1991. So joining the euro now - it was a big decision for them because Estonians love their national currency. Everyone remembers the moment that they got their new currency, the kroon. Like this guy who judges that show "Estonian Idol." His name is Mihkel Raud.

MIHKEL RAUD: They were our own money. I mean, you know, like, that's probably the very moment when I realized that, hey, we're living in an independent country. The only money that I have seen in my life were, you know, the Russian rubles, which cost nothing and, you know, looked ugly and looked very Soviet and Bolshevik, you know?

JOFFE-WALT: This is what Estonians had. There weren't flags flying everywhere immediately after they got their independence. But money - the actual currency was this every day symbol that things were now different.

KESTENBAUM: So why would they be willing to give it up now? Well, the reason they valued it was because it was a symbol of their independence. And they figured that joining the euro - that's going to help them stay independent. They figure if someone attacks them, the euro countries are going to back them up.

PRESIDENT TOOMAS ILVES: We didn't choose to become part of the Soviet Union.

JOFFE-WALT: This time you wanted to actually choose the union for yourself.

ILVES: Yes. Well, given our history, we tend to be invaded a lot.

JOFFE-WALT: Oh, we should introduce this guy to you. He's actually pretty important.

ILVES: My name is Toomas Ilves, and I'm president of Estonia.

JOFFE-WALT: Yep, that is the president of Estonia.

KESTENBAUM: Estonia population - 1.3 million. That's about half the size of Brooklyn. The president actually grew up in New Jersey.

JOFFE-WALT: So Estonia wanted to be part of the euro. They wanted to be part of this club. And in a lot of ways - when you look at Estonia, it's sort of a moral tale. Like, the EU is filled with countries that did everything wrong, spent way more money than was coming in, made, you know, promises to citizens and to the rest of Europe that they had no intention of keeping. But Estonia is the country that did everything right. It is the euro model student.

KESTENBAUM: And as is true with all model students in high school, they suffered mightily for it.

JOFFE-WALT: They especially suffered during the global recession that we have all felt. But actually what we've all felt and what they're experiencing in Greece and Ireland right now - when you look at Estonia, that all looks like a cakewalk. So back in 2009, President Ilves - during the global recession - faced, you know, this situation where money coming in from taxes was dwindling. The exact same situation governments all across the world were facing. The only difference - the response.

ILVES: First and foremost, we cut government expenditures, and that was done, again, mainly by cutting various programs, purchases, as well as cutting salaries. And my salary went down 10 percent, for example. Everyone - all public employees except for teachers.

JOFFE-WALT: The teachers didn't get a cut?

ILVES: No, they had their raise postponed.

JOFFE-WALT: And what other stuff was cut?

ILVES: All kinds of road-building projects, infrastructure projects - in general, purchases of various goods. Various things that the government had planned on buying, we put off those purchases.

JOFFE-WALT: So you had less money coming in, and you decided - because you had less money coming in - that you should spend less money?


KESTENBAUM: And there you have the difference between Estonia and the rest of the countries on the euro. Estonia for the past decade has taken this approach. If there is no money coming in, then we don't have any money to spend even if times are really bad.

JOFFE-WALT: And Estonia did this because they were the euro model student. The EU rules clearly say if you want to be in the club, you can't spend a lot more money than you have. Now, of course, other countries on the euro cheated or at least didn't follow the rules. I'm not going to mention any names.

KESTENBAUM: I'll mention the names - Greece, Spain, Italy, Ireland, France...

JOFFE-WALT: Yeah, basically everyone on the euro, but Estonia stuck to the rules. And in fact, right now, if the, you know, euro rules headmistress was looking at Estonia's work, they would get an A-plus-plus-plus-plus, virtually no debt, no deficit - better than every other country on the euro right now.

KESTENBAUM: But if this is the model of what every country should do - it was extremely, extremely painful. Those Estonian government cuts added up to 9 percent of GDP, and the country's economy - it shrank. It shrank dramatically. In 2009, GDP went down by 13.9 percent. That means the economy shrank by 13.9 percent. I mean, imagine what that feels like. That year, the U.S. GDP dropped by 2.6 percent, and that was considered a really bad year.

JOFFE-WALT: And the U.S. government responded by trying to give the economy a boost by borrowing money and boosting spending. Estonia, though - the model student trying to follow the rules - did exactly the opposite.

What you did is like the anti-stimulus basically.

ILVES: Yes, yes. The non-stimulus.

JOFFE-WALT: And that's a really painful route to choose.

ILVES: Well, that remains to be seen. We'll see what's more painful, I think, down the road.

JOFFE-WALT: OK. But immediately, I mean, it means that the people of your country are earning less. There's higher unemployment. It means it's a painful time to get through.

ILVES: Yes, that's what it means. But at least then in Estonia, the citizens have been fairly stoic about this. I mean, people supported the government in this.

JOFFE-WALT: How did you get people to support having their wages cut and suffering through a pretty severe - at least of your recession and maybe depression?

ILVES: Believe me, we explain it all the time. In fact, I would say that I spent the last two years doing little else than explaining it.

JOFFE-WALT: Explaining that Estonia has to suffer through this period to get to the euro. President Ilves would keep repeating to become a competitive economy, the government needs to cut back. Estonians, you need to take pay cuts. You need to lose jobs. Unemployment was 18 percent last year. And so every week, the president would write these editorials and give interviews and go on TV explaining, remember, we're trying to join the euro. And they have rules.

ILVES: Well, I mean, it provided a framework to explain what we were doing - for joining the Euro. And so, I mean, it's fairly clear and laid out. And so if you explain that this is what we're trying to do, then you end up with broad portion of the population anxiously following the quarterly reports on what the rate of inflation is and what the the budget deficit looks like and so forth.

JOFFE-WALT: Really? You really had broad portions of the public following what your budget deficit looked like?

ILVES: Well, it was always front page news. I don't know how much people read it, but it was front page news (laughter).

JOFFE-WALT: So it was really a feeling of, like, we are all working towards this moment where we are going to join the euro?

ILVES: Well, I would not say it was unanimous. But, yes, it was fairly strong support for following this.

JOFFE-WALT: Greece and Ireland and Spain were never put through what the Estonians have suffered through. When Greece's deficit grew too large, they lied about their numbers. And even Germany didn't keep strictly to the rules. When their deficit grew larger than the limit three years in a row, they didn't cut the chancellor's salary. They watered down the rules.

KESTENBAUM: Most euro countries bent or broke the rules at some point but not Estonia.

JOFFE-WALT: So when Greeks and Irish hear about needing austerity measures to keep their economies in line to become competitive again, they can look at Estonia and see what it's like. See that it really sucks. If their governments decide to be model students, this is what's ahead for them.

So now you're in. Was it worth it? You suffered through lower wages, higher unemployment in order to get to the point where you could join the euro.

ILVES: (Laughter) I mean, at least we came out of this with something.

JOFFE-WALT: The majority of Estonians are very supportive of joining the euro. They say they're not worried about the future of the euro. They're now worried that they're now going to have to pay for the bailouts of countries that are much richer than they are. Their only concern - the only thing people kept mentioning to me is that the euro is ugly. But they're willing to sacrifice yet again for the dream of joining the euro. They are willing to use uglier money.

KESTENBAUM: This week is actually the first week that Estonians can't use kroons anymore, and that leaves one more question. What do you do with all the old currency? How do you get rid of an entire currency?

JOFFE-WALT: I asked that of Viljar Raask at the Estonian Central Bank. And he says they're collecting every last bill. People are turning in their kroons. And over the next couple months...

VILJAR RAASK: We destroy it.

JOFFE-WALT: You destroy it?


JOFFE-WALT: The coins - they have a machine to mangle them. And those beautiful bills - they'll burn them.

RAASK: We will burn them in order to generate heat.

JOFFE-WALT: To heat like - to heat houses or something?

RAASK: Yes, something like that. Yes.

JOFFE-WALT: David, he says they're going to save a few kroons so future generations can see just how beautiful they were. But this week, in their homes warmed by burning money, Estonians will start using only euros.

KESTENBAUM: Now officially full members of the world's most troubled currency union.


OTT LEPLAND: (Singing in foreign language).

KESTENBAUM: That's it for us today. We are going to post a graph on our blog where you can see how the crisis in Greece and Ireland and Spain compares to the everyday reality of life in Estonia. You can see exactly why - from where Estonia sits now - the euro crisis looks like a pretty good deal.

JOFFE-WALT: And you can write us email at, and you can find us on I'm Chana Joffe-Walt.

KESTENBAUM: I'm David Kestenbaum. Thank you for listening.


OTT LEPLAND: (Singing in foreign language).

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