Report on Estonia

As of winter 2012 we are publishing updates on the Estonian economy and other important local news. This page will contain the latest overview that’s available and the older ones can be found here.

Last updated: March 19th 2013

Over the last few years Estonia has become a sort of role model for financial conservatives on how to behave in a recession. Almost every prominent politician who is in favour of cutting spending brings our little country up as a positive example. And despite the particular road taken not being much of a free choice for the local government, as explained in this article, the outcome can not be denied. No matter how strongly Krugman and others want to.

The first estimates after the bottom of the recession predicted that it will take multiple years before Estonia will be able to reach the peak GDP levels of the boom. As the current trend shows Estonia seems to be in line with the most optimistic prognosis. One also has to remember that those estimates were primarily made with the assumption that the crisis was over. Obviously, this has not been the case as the financial issues for many countries are still getting worse. And it can already be seen in statistics as well. But while the international growth indicators have slown down and many countries are facing a possible double-tip recession, Estonia is still going strong. And even exceeding the latest expectations (IMF now predicts 3% for 2013).

GDP change to the same period of the previous year (Source: Eurostat)

GDP change to the same period of the previous year (Source: Eurostat)

Yet, not everything is as rosy as it might seem to someone living outside of Estonia and simply following our macroeconomic performance. As people here have become more familiar with the life in the western countries they have also started to demand more and more for the same living standards. Which from the standpoint of an average citizen is quite understandable. But an economist might raise some questions whether hopes of such well-being are reasonable.

Taking a closer look at the differences between Estonia and the western countries one can see that the cap in living standards can mostly be explained by two aspects – accumulated capital and national debt.

The first cause for inequalities, accumulated capital, can be negated by keeping the environment for investments more lucrative in comparison to our role models. This would enable a faster inflow of foreign capital and would also help keep local assets here. Precisely this has been atleast partly the policy of the Estonian government over the last couple of decades. Though possibly slow, the accumulation of capital is the surest way to become prosperous in the long-term.

Gross Fixed Capital Formation, euro per inhabitant (Source: Eurostat)

Gross Fixed Capital Formation, euro per inhabitant (Source: Eurostat)

The second cause, national debt, is more of a short-term solution for gaining additional wealth. The main problem is that even if one manages to stay in debt for a longer period, which has been the case for most western countries, there would still remain the threat of the day when one has to start paying it back. At this point one could lose all the advantages gained through the loans. Unless one would default on his obligations, which is the road Greece is taking atleast to some extent. But this could cause problems for future fund-raising due to the lack of trust towards ones ability to serve his debt.

Government consolidated gross debt, percentage of GDP (Source: Eurostat)

Government consolidated gross debt, percentage of GDP (Source: Eurostat)

Latter is something that most people, do not take into consideration. And even if they do not demand directly for the state to seek out a loan, their actions very often do not leave any other choice.

Until now Estonia has been able to ignore this dangerous road. But the increasing jeaolusy of people towards the citizens of wealthier countries and the resulting behaviour keep putting more pressure on the government to take the easy way out. Although, it is easy enough to leviate that kind of demands in the private sector, it is more problematic in the public. One of the main reason being that people employed by the state tend to be unionized to a far larger extent. And the unions are thanks to the protective legislation able to strike without major repercussions.

The latest and perhaps the most memorable wave of union protests in Estonia started in the winter of 2011 with unions organizing several protests against changes in labour legislation that according to them would weaken the position of collective bargaining. Next in line were the teachers, who supposedly focused on protesting against their workload which they found to be unacceptable. Despite of that, it is reasonable to presume that the main target in their sights was their wage. Especially as there had been no opposition to the gradually rising workload over the years. This strike was also supported by transportation workers. Though the public transportation in the capital city was paralyzed for an entire day, we should probably be happy that there were no signifact similarities to a strike in Finland which caused serious problems for the industry across the country.

The strike that lasted for a few days resulted in an offer for higher wages without any new additional benefits on the grounds that there is not enough money to do more.

Teachers' meeting (Source: Estonian Public Broadcasting)

Teachers’ meeting (Source: Estonian Public Broadcasting)

The biggest statement in this series was made by people employed in medical care last fall. The strike lasted for almost a month and meant limited medical care for everyone during this period. As a result the union managed to negotiate a rise in wages and a drop in workload. It was also agreed that there needs to be more funds directed into healthcare in general. But more significant than the result was the discussion that rose during the conflict.

Why are not the wages in Estonia as high as in the Nordic? Despite it being explained often that the reason is simply the fact that the local industry does not produce enough value added needed to support such high wages in fields funded through taxation, the outcries for this unreasonable income continue.

One solution offered is simply to raise the wages in the public sector by any means necessary. In a country where public funds are mostly gathered through taxes, the way to accomplish that would be lending money. The following consumption would supposedly bring along the industry and the rest of the private sector. And as a result we would reach the higher living standards of our western friends. Nevermind the debt we would be required to pay back.

We can only hope that the government can hold on to its previous positions and not give in to the pressure of spending more than they have income. But in the light of the support the government has shown towards the ESFS, ESM and other proposed ideas for the rescue of the euro area, one can not be too optimistic. Even if we do not want to take on debt for our own short-term benefit, we might be forced to do so for the benefit of others.

And with the rising support for the leftist opposition, which spent a lot effort on stalling the state budget for this year, who knows what kind of modern government and policies we might be in for. Who knows what will become of our strict fiscal policy should ideas that are popular in tough economic times win out.

Charter 12 protest (Source: Estonian Public Broadcasting)

Charter 12 protest (Source: Estonian Public Broadcasting)

P.S. Oh right, our prime minister managed to insult the anti-ACTA protesters as well saying ‘they eat suspicious seeds and should wear tin foil hats’.

P.P.S. And last fall there was a protest against the approach politicians have taken when talking to the public (Charter 12).

- Robert Müürsepp