Back in June, the economist and New York Times columnist Paul Krugman wrote a blog post effectively mocking the argument that Estonia’s strong post-financial crisis recovery proved the merits of austerity.

“So, a terrible – Depression level – slump, followed by a significant but still incomplete recovery,” he wrote. “Better than no recovery at all, obviously – but this is what passes for economic triumph?”

Firing back on Twitter, Estonian President Toomas Hendrick Ilves called Krugman ignorant and smug. The former diplomat then told The Wall Street Journal the Tweets were a genuine and “immediate defense” of the painful belt-tightening Estonia undertook to buttress an economy that contracted 14 percent in 2009. The WSJ noted that Ilves had a point because Estonia had rebounded to robust growth.

This week’s publication of the European Commission’s (EC) fall economic forecasts is a good opportunity to revisit this argument, which is important because the debate over the merits of austerity is far from over. With beleaguered economies like Slovenia hoping public sector spending cuts and other belt-tightening efforts will help right ship, does Estonia demonstrate that the short-term pain of austerity is worth the long-term gain in “confidence” and, as a result, renewed growth and stability?

“Estonia: Returning to balanced growth,” the title of the EC’s country forecast says a lot. Here, “returning” seems a lot like a euphemism for “falling” because growth is expected to drop to 2.5 percent this year from 8.3 percent in 2011, the fastest rate in the European Union at the time. This is mostly due to falling demand for Estonian exports as the economies of the country’s key trading partners slow.

At the same time, though, growth is expected to climb to a solid 4 percent by 2014, and other indicators are positive. Unemployment is down significantly from 2010, and the 2012 deficit is projected at 1.1 percent of GDP, well under the 2.6 percent target. According to the European Bank for Reconstruction and Development (EBRD), foreign investment has rebounded since 2009, though this year’s projection is well below the 2010 and 2011 figures.

These data offer a muddled picture. Sure, growth is better than contraction, but the GDP figures are hardly a resounding endorsement for austerity. And while the EBRD praises Estonia for the “most prudently managed” finances in the EU, that’s not protecting its economy from slowdowns in its key trade partners.

Stepping back, then, a big question is whether austerity is necessary to stabilize a cratering economy, as Estonia’s was in 2009 and Slovenia’s is today – i.e., Would Estonia be much worse off now without the belt-tightening back then?

“Obviously,” some might say. But, taking another step back, then why is GDP in the austere EU set to contract this year while the U.S., which went the route of stimulus, is growing, albeit slowly?

Anybody?

Picture from Flickr

S. Adam Cardais

S. Adam Cardais is a TOL contributing editor. Email: adam.cardais@tol.org.

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