Monetary Policy

Why the Bashing on the Baltics, Dr. Krugman?

Paul Krugman has an odd thing against the Baltic states and their decision to use austerity post-recession.

More bizarrely, while he considers Greece innocent, Krugman has attacked the far smaller and poorer Baltic countries in perhaps a dozen blog posts. Krugman is not, presumably, some kind of bizarre anti-Baltic bigot. His problem is that they have pursued austerity and succeeded; they prove that Krugman's analysis of the European crisis is wrong. As it happens, Estonia actually adopted the euro in January 2011, and the Baltic economies appear to have entered a high-growth trajectory.

Krugman's sour grapes are on full display. He dismissed the success of Estonia, "the poster child for austerity defenders" as insignificant in a June 6 post that provoked the wrath of Estonia's President Toomas Hendrik Ilves on Twitter.

Undeterred, on July 1, he wrote, "the best the defenders of orthodoxy can do is to point to a couple of small Baltic nations that have seen partial recoveries from Depression-level slumps, but are still far poorer than they were before the crisis." On one rare occasion, Krugman partially admitted a positive effect from austerity: "yes, it's actually worth noting that essentially nobody has managed to regain the confidence of the markets [through austerity], except for, you know, Latvia, which had almost no debt." Well, if you pursue austerity, you do escape debt.

The most generous explanation for Krugman's Baltic blind spot is that he thinks mostly about big states, and perhaps only about the United States. Small, open economies work quite differently. Tiny countries tend to adopt a foreign currency or peg their exchange rates, as the Baltic countries and Bulgaria have done. They cannot allow themselves large budget deficits, because the markets will not allow them as high levels of public debt as the likes of Japan or the United States. Their bond yields will rise at even moderate debt levels, as Slovenia, Cyprus and Spain have discovered. Another way to look at it is that even when Krugman writes about European economic policy, he is actually only making arguments for what he believes the United States should do.