Why Estonia may be Europe's model country

An 82-foot-high billboard wrapping Estonia's finance ministry building in its capital, Tallinn, boasts: "The euro, my money." It stands just blocks from the city's cobbled, winding medieval streets and baroque churches, in a downtown where skyscrapers have replaced Russian bunkers, as a symbol of Estonia's transformation from poor Soviet republic to the European Union's rising star.

When Estonia was accepted into the eurozone in January, seven years after joining the EU and two decades after the fall of the Soviet Union, it was another big step for the small Baltic nation away from its imposing neighbor to the east, Russia.

Over the next five years, it's expected to have Europe's fastest-growing economy. It emerged from the global financial crisis wounded, but has rebounded after adopting austere measures few other countries would accept. It's given the world Skype and the only national volunteer cyberarmy, and is adding to the EU a rare sense of determination at a time when pessimism about the euro prevails – a consequence of the debt crises that have hit Greece, Ireland, and Portugal and the bailout plans that followed. Indeed, Estonia, which is still the eurozone's poorest country, has emerged as the darling of its beleaguered union. [Editor's note: The original version incorrectly stated that Estonia is the poorest European country. It is the poorest eurozone country.]

"We are very poor but very optimistic," says Jürgen Ligi, Estonia's earnest finance minister, sitting in a sparse office under a portrait of Estonian President Toomas Hendrik Ilves. Mr. Ligi, a dedicated triathlete, brings a rigid sense of discipline to his office. In many ways, he's been the chief overseer of Estonia's aggressive capitalism – flat tax rates and no corporate income tax on reinvested profits. That's been paired with cost-slashing austerity: pension cuts, reductions in benefits for civil servants, shortened maternity leaves, and even streetlights that don't stay on as long.

But in Estonia, where most remember the harsh lives under the USSR (roughly 10 percent of its population was deported to Siberian gulags), those cuts haven't resulted in any major public outcry. "We have seen much harder times," says Ligi.

In fact, Estonians overwhelmingly supported their government's austerity measures: In March they reelected the government of Prime Minister Andrus Ansip, making him the first post-Soviet era prime minister to win a second term.

The Estonia example shows that "it is possible to undertake serious fiscal adjustment in a short period of time, and be popular," says Anders Aslund, senior fellow at the Peterson Institute for International Economics in Washington. "When you do what you have to do – cut expenditures and have a clear aim of your policy – you get reelected."

Estonia's fast break from communism

Estonians benefit from emerging from the Kremlin's yoke without the ethnic and political turmoil that has weighed down other post-Soviet states. When it broke free of communism, it started over with a crop of young entrepreneurs and idealistic leaders. "Because we started anew, we got new laws, new leaders, and new technology," says Jaan Tallinn, one of the founders of Skype, the Internet phone company that was recently sold to Microsoft for $8.5 billion. "The big winners were the start-ups."

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