Estonian economy: between crash landing and Baltic summer

Published on September 12, 2007

Politics

The show must go on, blasts Freddie Mercury on the airwaves in the arrivals area of Tallinn airport. An appropriate twist of fate. The Baltic summer sun, still shining at midnight, gives the impression of a country that never sleeps. But modern Estonia really does want ‘the show to go on’, hoping that this Baltic Tiger does not fall behind in the race. In 2006 it raised its Gross Domestic Product by an impressive 11.4%, meaning that, within the EU, it was second only to its neighbour Lithuania. However, it has already reduced its predicted growth for 2007 from 9.2% to 8.1% and, even worse, it has been moved down Standard & Poor’s financial scale. Why? The rating’s agency foresees a crash landing for Estonia’s economy after seventy years of more than 7% growth. Is this true? How solid are Estonia’s foundations? And how can we explain the boom seen in recent years?

‘Estonia is less corrupt than Italy’

‘Since its independence from the Soviet Union in 1991,’ begins Javier Ortiz de Artiñano, a Spanish entrepreneur who has made his fortune in Estonia, ‘the country has decided to implement an extremely liberalist system resulting in, for example, an unemployment rate of less than 4.5%.’ It is like the United States. This is why, in 2003, this young property developer chose Tallinn, further increasing the string of foreign investors.

Estonia’s recipe for success is well known: a standard business tax rate of 22%, tax exemption for reinvested profits, and, here’s an idea: just laugh about the geography. Sitting in Noku (‘little penis’ in Estonian), a fashionable club in Tallinn’s beautiful, medieval city centre, Ortiz explains imaginatively, ‘you know Civilisation, the video game where you have to create an empire? Which country would you choose: a small one with no natural resources and a rubbish climate, or one twenty times the size, sitting right on top of an enormous oil field? Well that’s why Venezuela has ended up the way it has. Estonia will go the distance. Everyone here knows that they live in a small country, and that they need to open up to the world if they want to develop.’

But the secret behind the success of the most eastern Baltic countries is, for Ortiz, ‘the lack of corruption. According to Transparency International, Estonia is way ahead of Italy, and Poland is not far behind, at a similar level to Jamaica.’ This business friendly combination has led to success. This is felt by the Estonian people as well as recorded in official statistics: looking at the GDP per capita for EU countries, Estonia has nearly reached Portugal’s figure of 18, 000 euros. ‘More and more families now own two houses or two cars,’ says David Ajanjan, 20, who is studying to become a programmer. Yes, Estonia has opened its doors to new technology - it is even possible to set up a mortgage by text message.

The other side of the Kroon

However, the domestic spending boom and two figure growth have cost Estonia dearly. According to figures from the Ministry of Finance, inflation will reach 6.1% in 2007 instead of the predicted 4.9%, to then continue to rise to 7.4% in 2008 and then finally begin to decline in 2009. The target date for normalisation is 2012. ‘That should also be the year for the euro,’ predicts analyst Maris Lauri. This is no coincidence. If Estonia threw in the towel in 2006 in its race to adopt the Euro in 2008, this is precisely because of excessive inflation which put it out of the game following the rules of the Maastricht treaty.

‘It’s a real shame,’ says Anne Sulling, who used to be ‘Madame Euro’. She is the brilliant consultant who had served as advisor to the Finance Minister until 2006. For Sulling, a captivating thirty-something, educated in France and the United States, her country couldn't do more. ‘The Kroon is very closely linked to the Euro. This is for the best, but it forces us to apply the same same low interest rates outlined by the European Central Bank, intended for slow economies. Meanwhile, growth in old Europe shuffles slowly forward, we buy cars and houses like nobody’s business, and our Central Bank can’t even limit the number of mortgages held by other banks.’ But has the government really done everything possible? ‘Yes, except of course resorting to fiddling the books, as has been done in Greece, Italy and Slovenia. The reality is that of all the eastern hopefuls, Estonia is the country best prepared for the euro. Since independence, we have always broken even - and we sometimes have money to spare.’ Ortiz goes even further in his criticism of EU politics. ‘Today, there are two options: either put the brakes on this country’s growth or make a political decision. The problem is that the Baltic States don’t count in the EU.’

'We follow the Scandinavian standard'

In the meantime, the population is undecided. ‘Only 40% of Estonians are in favour of the euro because our money is a symbol of independence,’ says Taino Klaar, the young director of the representative body for the European Commission in Estonia, as he stands in front of a photo of himself as a student with Madeleine Albright (the first woman to become United States Secretary of State in the Clinton era). This scepticism is confirmed just a few steps from EU office buildings. I interrupt a woman in her thirties named Tanya Lyubimtseva during a break in her homeware shop, as she repeats the English argument. ‘We can’t adopt the euro while inflation is already this high. People are afraid of the rising cost of living.’ Kathrin, who studies Physical Education, does not agree. ‘It’s better for the country’s security,’ and whoever says security means increasing Estonia’s distance from its former Grand Master, Russia.

‘In reality,’ replies Lauri, ‘if we consider the fact that the target date for the euro has only been postponed, inflation is a short term problem. The real handicap for the country is the labour shortage. The employment rate is increasing by 1% per year, but in five years, it’ll stop. Meanwhile the population will continue to age.’ A ‘normal’ country would think about immigration, but in Estonia this would mean ‘increase the Russian presence which already represents 20% of the population. No,’ insists Lauri. ‘Companies must understand that we are following the Scandinavian standard, that we don’t have cheap labour here, and we have to attract highly qualified personnel. problem is that there are very few immigrants with EU passports because wages are too low.’ Are these reasonable concerns or unfounded fears?

In the meantime, with or without immigration, Estonia wants to maintain its current course, aware that after years of unrestricted flight, landing is now imminent. Estonians only hope that it is not too sudden, just like the eternal darkening of the Baltic summer.

In-text photos: (AF)

Translated from Economia estone, tra atterraggio brusco e estate boreale