Estonia is the very model of modern fiscal policy to follow, according to Philipp Rösler, Germany's Vice Chancellor and Economy Minister, whose economic prescriptions may reflect the fact that he's a medical doctor rather than an economist.
How and why did this "internal devaluation" work:
- Broad domestic consensus among policy-makers regarding the maintenance of fixed exchange rates, which were associated with political independence
- Significant foreign currency reserves
- Highly flexible labour markets allowing for faster downward adjustment in wages and therefore less protracted and painful period of deflation
- Local banking sectors are dominated by strong Swedish banks, in turn backed by the Swedish Government, which could be seen as the equivalent of an "external deposit deposit guarantee"
- Financial support from Sweden, the EU and the IMF
- Culture of patience and low protests, which allowed democratization and market-building even in the face of severe economic hardships
- Coalition governments and depoliticization of economic policy
Economic Adjustment to the Crisis in the Baltic States in Comparative Perspective
Vytautas Kuokötis, Ramūnas Vilpiöauskas
Institute of International Relations and Political Science, Vilnius University
Prepared for 7th Pan-European International Relations Conference
September 2010, Stockholm