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Against the background of a severe
economic crisis in the eurozone, one is surprised
to find a member of the euro area that is actually showing good economic
performance. This member is Estonia. In terms of so-called real gross
domestic product (GDP) the average yearly rate of growth in Estonia stood at
8.4 percent in 2011 against overall eurozone
performance of 1.5 percent. So far in 2012 the average yearly growth stood at
2.8 percent in Estonia versus -0.2 percent in the eurozone.
 
Also note that the unemployment
rate in Estonia displays a visible decline: it fell to 5.9 percent in August
from 7.6 percent in January. In contrast, the unemployment rate in the eurozone climbed to lofty levels in August. After closing
at 10.8 percent in January, the eurozone
unemployment rate shot up to 11.4 percent in August.
A severe cleansing, i.e., the
removal of various nonproductive activities is a key factor behind the
success story of Estonia. Between Q3 2009 and Q1 2011 the average yearly rate
of growth of government outlays stood at -7.4 percent. In short government
outlays were cut sharply. Note that this purged various false activities that
emerged on the back of previous loose government spending. Additionally,
Estonia's government debt as a percentage of GDP is only 6 percent versus
Germany's 81 percent and Greece's 165 percent.
Another important factor that
revitalized the Estonian economy is a fall in money supply during the period
May 2008 to November 2009, i.e., money supply declined for 19 months. Note
that the average of the yearly rate of growth of our monetary measure (AMS)
during this period stood at minus 7.9 percent. A fall in money supply
arrested the transfer of real wealth from wealth-generating activities to non-wealth-generating
activities. This amounts to the strengthening of wealth generators and to a
weakening of non-wealth-generating activities. Because of a time lag, the
effect of this decline in money supply is still in the system, i.e., it
continues to benefit economic fundamentals.
Since Q2 2011 the government has
reversed its stance and embarked on massive spending. The average of the
yearly rate of growth between Q2 2011 and Q2 2012 stood at a positive figure
of 11 percent. (Contrast this with the -7.4 percent during Q3 2009 to Q1
2011.) Furthermore, the yearly rate of growth of money supply has been
displaying strong growth. The average of the yearly rate of growth between
December 2009 and August 2012 stood at 8 percent. (Contrast this with the
figure of -7.9 percent during May 2008 to November 2009.)
Rather than persisting with the
cleansing process, the government and the central bank have chosen to reverse
the stance, thereby arresting the process of healing the economy. Temporarily
the reversal of the stance is probably going to "work." It will
give rise to new bubble activities and will strengthen the old bubble
activities. In terms of real GDP, it is quite likely that we are going to see
a visible strengthening ahead in its growth momentum. At some stage, however,
the weakening of wealth generators is going to be felt and the Estonian
economy is going to suffer because of the reversal in its fiscal and monetary
stance.
Summary and Conclusions
The Estonian case shows that a
policy that removes bubble activities lays the foundation for healthy
economic growth.
Any attempt to alter tighter fiscal
and monetary policies brings back false, nonproductive activities and leads
to an economic impoverishment.
It is not possible to generate
something out of nothing.
Any attempt to do so results in an
economic disaster.
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