In its formulation as a Chern-Simons theory, three-dimensional general
relativity induces a Wess-Zumino-Witten (WZW) action on spatial bound
aries. Treating the horizon of the three-dimensional Euclidean black h
ole as a boundary, I count the states of the resulting WZW model, and
show that when analytically continued back to Lorentzian signature, th
ey yield the correct Bekenstein-Hawking entropy. The relevant states c
an be understood as ''would-be gauge'' degrees of freedom that become
dynamical at the horizon.