Nr. 12-2011 Published monthly by:
The Swedish Chamber of Commerce
in Estonia


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Voices on Estonia and the euro - Estonia is expected to meet all the Maastricht criteria by the spring assessment and to join the euro area in 2011, says Eesti Pank, Estonia's Central Bank, in their March 2010 economic policy statement.

- The tax receipts of the final months of 2009 were somewhat larger than forecast, so Eesti Pank's assessment is that fiscal deficit remained clearly below 3%, continues the Central Bank's statement.

Urmans Varblane
- The eurozone expectations have a good impact on Estonia as foreign investors now have become more interested in Estonia again, said Urmas Varblane, a member of Eesti Pank's supervisory board, in a mid-March Estonian public service TV-programme.

- The main problem facing the Estonian economy at present is how to finance the new growth. This is going to determine the creation of new jobs and our whole future development, concluded Urmas Varblane.

The EU Commission v. Estonia

José Manuel Barroso, President of the EU Commission

- There are threats to Estonia's 2010 budget targets because of possible revenue shortfalls, said the EU Commission in a mid-March statement. The shortfalls include lower-than-forecast sales of non-financial assets and a possible failure to implement decisions on subtracting dividends and profit shares from state-owned companies.

- Large-scale stockpiling of goods at the end of last year ahead of tax increases in January may also have a negative effect on 2010 tax revenues, continued the EU Commission. Failure to cut spending further instead of one-off measures threatens the goal of returning to a surplus, the EU said.

Estonia's Prime Minister Andrus Ansip's government aims to keep the budget deficit at 2,2 % of the GDP 2010 and now needs to convince the EU that it can keep the gap below the bloc's 3% limit on a sustainable basis and reach a surplus by 2013.

Jürgen Ligi
- The European Commission's opinion in general commends Estonia's fiscal policy and confirms the need to follow the same path, commented Estonia's Finance Minister Jürgen Ligi the statement.

- Controlling expenditure is in our own hands and doesn't depend on the economic environment. If revenue collection is better than planned, as has been the case, our task is to reduce the deficit ahead of plans and not to increase spending, concluded Jürgen Ligi his comment.

- For Estonia, the euro is a sign of quality and trust with which to celebrate our past two decades of existence, says Jürgen Ligi. The message the euro carries has already improved the international reliability of our economy and politics – Estonia is an attractive target for investors and an efficient crisis manager. Our people have demonstrated the admirable skill to appreciate the necessary struggle despite cursing it. Due to our ability to make decisions we have been able to refrain from excessive costs and debt, which will remain an advantage for many years to come.

Foreign Investors' Council in Estonia

- The euro will bring many clear benefits, but also limitations, says FICE – the Foreign Investors' Council in Estonia, in a March article. The impossibility to quickly gain a competitive advantage by adjusting our exchange rate is one of them.

Anders Hedman, SCCE Chairman and a Board member of FICE and Martin Breuer, Chairman of the Holland Business Club in Estonia and FICE
- This means increasing importance of the other tools we have to boost our competitive position. For economic growth we cannot rely much on internal demand, as wealth has diminished. Growth must come from abroad, through export and trade of goods, services and tourism.

- A drastic improvement of the competitive advantage of Estonia will therefore be a key to growth, says the FICE article. In order to create this improvement of competitive advantage we have to realize a convincing and sustainable mix of the following variables:

  • Higher productivity per unit of labor cost
  • Structurally and substantially lower cost of labor in Estonia compared to countries like Finland, Sweden, Denmark, Germany, and maybe even Poland will be needed
  • Substantially lower tax levels (income, profit, capital, social) than in the countries that we compete with
  • Lower levels of bureaucracy than competitors, resulting in lower operational costs of businesses
  • Preferential living and working climate for professionals and an educated workforce (in social, cultural, entertainment [fun to live] terms and in terms of educational opportunities for foreign nationals and their families)
  • More flexibility in the operational environment of companies (regulations, permits, labor law, migration and immigration)
  • Investment incentives
  • Improving Estonia's internationality (education, immigration, English as a second language)
  • Better local infrastructure (roads, public transport, digital highway)
  • Improved, frequent and reliable air connections for passengers and freight
Does Estonia deserve euro adoption by 2011?

img The question was put forth by Morten Hansen, Head of the Economics Department at Stockholm School of Economics in Riga, in connection with a mid-March Business Seminar arranged by the Swedish Chamber of Commerce in Estonia.

Headlined "Future Baltic divergence?" Morten Hansen's presentation was based on the idea of a possible three bullet scenario for a Baltic divergence:

  • Estonia joins the eurozone - leaves Latvia and Lithuania in the dust
  • Currency credibility increases investment in Estonia - investment relocates from Latvia and Lithuania
  • Estonia prospers – "Moldovaization" of Latvia and Lithuania
Morten Hansen
Some wish for a Baltic divergence said Morten Hansen and referred to a recent radio interview with the Estonian economist Andres Arrak; "Estonia could benefit from being the only Baltic country that would join the eurozone. For me it would be the first time that Estonia can set itself apart from the rest of the Baltic States and attract more foreign investors."

Does Estonia deserve euro adoption by 2011? As a comment, Morten Hansen quoted Christoph Rosenberg, IMF's mission chief to Estonia:

- Estonia ran fiscal surpluses during the good years and built up a fiscal buffer. It did let down its guard a bit in the very last year of the boom by allowing expenditures to increase, but it was kept relatively under control, and the structural deficit was not as big as it could have been. The economy's flexibility suggests that the moderate overvaluation identified by staff can be corrected through factor price adjustment alone. While theoretically offering some advantages, a repegging of the kroon at a more depreciated level would be unnecessarily disruptive, both for Estonia and the region.

Looking at an Estonian euro adaption 2011 from a unilateral point of view, Morten Hansen said that after establishing the conversion rate, Latvia could choose devaluation. This would result in an increased overvaluation of the Estonian euro and extra years of 'internal devaluation'.

- This speaks in favor of a coordinated Baltic eurozone accession, said Morten Hansen and also reminded of the Latvian nightmare scenario; Estonia chooses a depreciated conversion rate.

Morten Hansen's presentation created an intensive and lively Q&A session and discussion at the SCCE Business Seminar. How come that Estonia has managed with a fiscal policy outcome so apparently different from Latvia's and Lithuania's? Is there some kind of economical kamikaze mindset present to a greater extent in Latvia and Lithuania compared to Estonia? Are there historical reasons; was the Soviet economical planning and set up different in Estonia compared to Latvia and Lithuania?

An in-depth analysis on the reasons why we have these current economical differences between the three Baltic States will indeed follow in the macro-economic community, and Morten Hansen quoted a report by The Economist some 8 – 10 years ago when the three countries were negotiating their EU memberships; Lithuania was regarded as kind of OK-ish, Latvia should make it and Estonia was regarded as the star pupil.

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