The Euro's Model Student : Planet Money Despite the euro's troubles, Estonia's still doing well. It has the highest growth rate and the lowest public debt of any EU country.On today's podcast, we talk to Estonia's president.
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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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PRESIDENT NICOLAS SARKOZY: (Through interpreter) We want all members of the eurozone to adopt a golden rule by the summer 2012, which is a promise to balance their budgets to establish budgetary equilibrium. It's a sensible role, which should lead to the reduction of deficits and debt.


OTT LEPLAND: (Singing in Estonian).


Hello, and welcome to PLANET MONEY. I'm Jacob Goldstein.


And I'm David Kestenbaum. Today is Tuesday, August 16. And that was French President Nicolas Sarkozy you heard at the top.

GOLDSTEIN: As you've been hearing on this podcast and in the news, the countries of Europe have been in some pretty serious troubles recently. Today, we bring you the good news story of one country that did not mess things up, one country that played by the rules, did what it was supposed to - Estonia.


LEPLAND: (Singing in Estonian).

GOLDSTEIN: But first, of course, the PLANET MONEY Indicator.

GOLDSTEIN: Today's PLANET MONEY Indicator - 0.1 percent. The German economy, the export powerhouse, the core of the core of the eurozone, grew by just 0.1 percent between the first and second quarters of this year. In fact, growth is very, very slow right now in all of the big eurozone economies. France actually did not grow at all between the first and second quarter. And for the whole EU taken together, growth was just 0.2 percent.

KESTENBAUM: And we've talked about this on the podcast before, but Europe could really, really use some growth right now. Europe has this debt crisis. And one easy way to pay off your debt is for your economy to grow. Then the government gets to collect more taxes. You can put more money toward paying off the debt, and the debt goes away faster.

GOLDSTEIN: And Germany and France, in particular, they are not the ones in big debt trouble right now, but they're supposed to be the strong, healthy economies. They're supposed to be the ones who are essentially going to bail everybody else out. So you really want Germany and France to have healthy, growing economies so they can carry this load.

KESTENBAUM: That actually brings us right into our podcast today about Estonia. Estonia, unlike much of the rest of the eurozone, is actually growing.

GOLDSTEIN: It is growing faster than any other country in the eurozone. In the second quarter, when Germany's economy grew at 0.1 percent, Estonia's economy grew by 1.8 percent.

KESTENBAUM: And that's just one quarter. So one quarter at 1.8 percent over a year, you got four quarters. You're getting close to like 8 percent growth. And, you know, in the U.S. we always talk about annual GDP growth and we think 3 percent is pretty good. So 8 percent, you know, is great. And there's even more good news from Estonia. S&P, Standard and Poor's - the same rating agency that just downgraded the United States - S&P actually upgraded Estonia two notches to AA-minus. And the reason they cited was its strong economic growth prospects.

GOLDSTEIN: When you step back right now and you look at Europe, it's easy in hindsight to see all of these different things that all of these European countries did wrong over the past several years. But Estonia, Estonia's the country that did everything right.

KESTENBAUM: The podcast we're about to play you is a replay. You're going to hear me and our colleague Chana Joffe-Walt. Now, at the time we recorded this podcast back in January, things in Europe were already pretty bad. So Chana started out by asking Estonians the obvious question, why would you want to be part of this club? Aren't you worried about the euro crisis?

PETER VORK: I don't mind.

CHANA JOFFE-WALT, BYLINE: 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: And even Finns can say, OK, I have 100,000 euros. I would like to buy my own real estate, the apartment next door. Next door costs 100,000 euros. But in Estonia, it costs something - I don't know - 1.5 million Estonian kroons. What is this? Now, it costs the same 100,000 euros. They look at Estonia now different ways because it's the same money which they understand.

KESTENBAUM: So that's an economic reason - increased investment, increased trade, all that stuff. But reason No. 2, it's more of a national security/psychological argument. If you're Estonian, your big fear is that some neighbor is going 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 "Estonian Idol." His name is Mihkel Raud.

MIHKEL RAUD: They were our own money. I mean, you know, that's probably the very moment when I realized that, hey, we are 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, look ugly and looks very Soviet and Bolshevik. You know?

JOFFE-WALT: This was what Estonians had. There weren't flags flying everywhere immediately after they got their independence. But money, the actual currency, was this everyday 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.

RAUD: We didn't choose to become part of the Soviet Union.

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

RAUD: 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.

PRESIDENT TOOMAS 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 - 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: OK. 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.

PRESIDENT TOOMAS ILVES: Yes. Yes. The non-stimulus.

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

ILVES: Well, I'm - 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 in Estonia, the citizens have been fairly stoic about this. I mean, people supported the government in this.

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

ILVES: Well, let me 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. 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 the broad portions of the population anxiously following the quarterly reports on what the rate of inflation is and what 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.

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, I mean, I wouldn't 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: I mean, at least we came out of this with something.

KESTENBAUM: And, Jacob, the exclusive euro club that Estonia so badly wanted to join is, of course, not doing so well. And now, little Estonia? Part of its reward for being part of the European Union is that now it's going to have to help with the bailout fund for Greece, Ireland, and Portugal.


LEPLAND: (Singing in Estonian).

GOLDSTEIN: As always, we want to hear what you think. You can email us at or visit us on the blog at

KESTENBAUM: I'm David Kestenbaum.

GOLDSTEIN: And I'm Jacob Goldstein. Thanks for listening.

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