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Paul Krugman's Baltic Problem

Anders Åslund, ForeignPolicy.com Why is the Nobel Prize-winning economist mocking the countries that have escaped the eurocrisis? Amid the carnage...

Anders Åslund, ForeignPolicy.com Why is the Nobel Prize-winning economist mocking the countries that have escaped the eurocrisis? Amid the carnage of the European financial crisis, the Baltic countries, by and large, are doing quite well. Estonia, Latvia, and Lithuania are booming. Last year, their growth rates reached 7.6 percent, 5.5 percent, and 5.9 percent, respectively. The turnaround, driven largely by manufacturing exports, has been one of the most remarkable and promising stories of the crisis. In 2008-2009, all three countries were badly hit by a nearly complete liquidity freeze, which sank their economies by as much as 24 percent. Even so, only Latvia required an IMF and EU bailout, and all three returned to growth after only two years of recession. Today, all three Baltic countries have ample access to international financial markets, and their credit ratings have risen steadily since the summer of 2009. The Balts' rebound stands in stark contrast to the fate of eight mainly southern EU countries — Hungary, Romania, Greece, Ireland, Portugal, Cyprus, Spain, and Slovenia — which either already have or probably will require stabilization programs with external financial support. So what happened? The simple explanation is that the Baltic countries have pursued the opposite policy of the southern Europeans. Read More