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Euro Nations: Benchmark Estonia

By Shlomo Maital     

 Estonia

  With all eyes focused on Greece,  it is easy to forget about little Estonia.  Bloomberg Business Week reports that this tiny nation, squeezed between Latvia and Russia, joined the Euro zone only four years ago.  Many countries leaped at the Euro capital markets opportunity and their governments sold bonds like drunken sailors. 

    Not Estonia.  Government debt is less than 10 per cent of GDP.  That is one – tenth the average debt burden in Europe, and about 1/20th the debt burden of Greece (170 per cent of GDP).

    How come?

    Estonia has refrained from issuing government bonds, since 2002.  Instead, the Estonian government took loans from the European Development Bank, which lends ONLY for infrastructure and investment, not to finance current government spending.  Maris Lauri says, “we can’t afford to borrow to finance current spending; such borrowing becomes a habit and we saw where that landed Greece and Russia, in 1997/8”. 

      Some Estonian economists are opposed. They think Estonia should leap at the low interest rates and borrow.  But it won’t happen. 

       “Estonia is a strange bird in the Euro zone,” says Frederick Erickson, who heads the European Institute for Political Economy in Brussels. “No other country has such a stronge instinct for understanding the way macroeconomic problems are rooted in the real economy.” 

       Estonia’s Prime Minister says Estonia has to save its borrowing and access to Euro capital markets, for the time when Estonia’s GDP reaches 75 % of the Euro average (it is now 73%), at which time European aid money dries up. 

        Strong wise leadership can keep a small country like Estonia out of hot water.  Greece, in deep hot water, has to be rescued.  Estonia will not.  As the Hebrew saying goes, wise leaders avoid crises that smart leaders know how to escape from. 

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Stock Prices Plummet in October

By Shlomo Maital

   market crash

On Sept. 13, in a blog titled “the coming meltdown”, I noted signs that the world economy was weakening.

Now, in this the middle of October, stocks have declined sharply.   For the month, U.S. stocks are down 5 per cent, German stocks are down 9 per cent and French stocks are down 11 per cent.   There are a number of causes.   Believe it or not, Ebola has created a negative mindset. Oil prices are down, slashing profits for many big companies and nations. Demand appears to be weakening in Europe, raising fears of a third recession since 2009. Geopolitics are highly unstable, with problems in Ukraine, the Mideast and elsewhere.

   At the same time, there is a flight to ‘safety’. Bond prices are up, as demand increases, with investors willing and even eager to take low yields in return for safety.

   The bright spot is the U.S. economy. Falling gasoline prices, often below $3 a gallon, have put money into working people’s pockets and they are spending it. This is a natural experiment. It amazes me how economists and policymakers are ignoring this simple evidence — spurring demand helps the economy! America’s economy is doing better than Europe’s as a result.

   October is an awful month for stock prices, for some reason. In October 1987, the market fell 20 per cent on a single day, but that was due to computer trading and a doom loop link between spot and future prices.

   The mindset of global investors continues to be shaky. In the end, it is the confidence, or lack of it, of global investors that drives equity and bond prices. When world headlines are terrible, as they are now, investors run for cover.  

Blog entries written by Prof. Shlomo Maital

Shlomo Maital
September 2019
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