Estonia is to join the Eurozone on 1 January 2011, after winning support from EU finance ministers last night, which will make it the seventeenth member of the single currency. Tallinn implemented some of the toughest austerity measures seen in Europe and, in one year’s time, has qualified to become the next country to introduce the euro.
Since the fall the Soviet Union, Estonia has enacted what is probably the most liberal set of economic regulations in Europe. The Estonians can attribute a booming decade of double-digit growth to these regulations, but they have also been responsible, after the brutal crash, for an unparalleled and painful austerity program.
In the 1990s, Tallinn privatized all unprofitable government-owned companies, ports and banks and introduced a flat income tax, which is currently at 22 percent for all Estonians.
Scandinavian banks, in particular, began investing heavily in Estonia. They took over the financial sector and acquired real estate. Suddenly it seemed that the Estonians could afford anything, and everyone was buying new cars and homes. Loans were available at favorable rates, and those in a hurry could even borrow small sums via text message on their mobile phones. All this cheap money stimulated domestic consumption.
When the real estate crisis shook the United States and Scandinavian banks became more cautious, growth suddenly declined. And given that the Estonian kroon is pegged to the euro at a fixed exchange rate, the option of simply devaluating the currency simply wasn’t available to the government in Tallinn. Instead, it had to make the country more competitive by cutting government expenditures. Economists refer to this painful recipe for austerity as internal devaluation. The government economized on civil servants, in health care, in pensions and in infrastructure, and it raised consumption taxes. Many companies reduced their wages by more than 10 percent — and the Estonians suffered quietly.
But there has not been a single protest march against the austerity program. And in parliament, few have truly contested the government’s economic policies.
Fiscally, the program has been effective. Estonia has cleaned up its finances in only one year, and the country now satisfies all criteria for membership in the euro zone, the countries that use Europe’s common currency. Tallinn is taking on new debt that amounts to only 2.4 percent of gross domestic product (GDP), and the country’s total debt at the beginning of the year was only 7.2 percent of GDP, compared with 115 percent for Greece. But there is a price for this success: 137,000 people are out of work, which, for a population of 1.3 million, makes for 19.8 percent unemployment.
Perhaps one of the reasons they are so patient is that, despite the crisis, the country has rarely been in a better position. Estonia is independent, the standard of living has risen tremendously in recent years, and its citizens still have vivid memories of the bad times when Estonia was a remote Soviet republic.
The economy in the small country on the Western Sea is expected to grow slightly this year.
Finance Minister Jürgen Ligi, 50, is the man in charge of implementing the government’s austerity program. He is the right man to enforce unpopular decisions with his spoiled fellow Estonians. He has the broad shoulders of a top athlete and the necessary self-confidence. Ligi has reduced his own salary by about 20 percent. “We had a real estate bubble and a financial bubble. They burst and now, economically speaking, we are back where we were in 2005,” he says. “We have learned from it. The way we do business has become much more cautious and conservative than in the past.”
When asked whether, in light of the current euro crisis, Estonians even want the common currency anymore, he answers: “Without a doubt. The common currency brings stability and confidence, particularly for such a small country as Estonia.”
The European Commission in Brussels has already spoken out in favor of accepting the Estonians in the Eurozone, and now the decision is up to the euro-zone countries. Bizarrely enough, three highly indebted countries, Italy, Spain and Portugal, will be among those deciding whether model pupil Estonia should be permitted to introduce the euro by as early as next year.
Source: Spiegel Online