A severe contraction without abandoning the currency board

Estonia's growth chart falls off a cliff in 2009, when real GDP contracted by roughly 14%, one of the deepest single-year recessions recorded anywhere in the European Union during the global financial crisis, after years of double-digit credit growth financed largely through Swedish-owned banks had driven a construction and consumption boom that could not be sustained. Rather than devalue, Estonia kept the kroon locked to the euro under the currency-board arrangement it had run since 1992, choosing instead to let wages and prices fall, an internal devaluation that, combined with deep public-spending cuts, kept the budget deficit low enough to preserve Estonia's eligibility for euro adoption even as unemployment climbed above 16%. Presenting Eesti Pank's 2008 annual report to the Estonian parliament in June 2009, Governor Andres Lipstok described an economy going through a painful but necessary correction of the imbalances built up during the boom years, and the strategy was vindicated within three years: Estonia adopted the euro on 1 January 2011, the first of the three Baltic states to do so, turning a currency-board peg that had briefly looked fragile into a permanent fix.