What the eurozone can learn from Estonia
After three years of painful austerity measures, Estonia now has a growing economy.
June 5th, 2012
12:21 PM ET

What the eurozone can learn from Estonia

Editor's Note: The following text is from GlobalPost, which provides views — importantmoving or just odd — from around the world.

By Paul Ames, GlobalPost

Sixteen months after it joined the eurozone, Estonia is booming. The economy grew 7.6% last year, five times the eurozone average.

Estonia is the only eurozone country with a budget surplus. National debt is just 6% of GDP, compared to 81% in virtuous Germany, or 165% in Greece.

Shoppers throng Nordic design shops and cool new restaurants in Tallinn, the medieval capital, and cutting-edge tech firms complain they can’t find people to fill their job vacancies.

It all seems a long way from the gloom elsewhere in Europe.

Estonia’s achievement is all the more remarkable when you consider that it was one of the countries hardest hit by the global financial crisis. In 2008-2009, its economy shrank by 18%. That’s a bigger contraction than Greece has suffered over the past five years.

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How did they bounce back? “I can answer in one word: austerity. Austerity, austerity, austerity,” says Peeter Koppel, investment strategist at the SEB Bank.

After three years of painful government belt-tightening, that’s not exactly the message that Europeans further south want to hear.

At a recent conference of European and North American lawmakers in Tallinn, Koppel was lambasted by French and Italian parliamentarians when he suggested Europeans had to prepare for an “inevitable” decline in living standards, wages and job security in order for their countries to escape from the debt crisis.

While spending cuts have triggered strikes, social unrest and the toppling of governments in countries from Ireland to Greece, Estonians have endured some of the harshest austerity measures with barely a murmur. They even re-elected the politicians that imposed them.

“It was very difficult, but we managed it,” explains Economy Minister Juhan Parts.

“Everybody had to give a little bit. Salaries paid out of the budget were all cut, but we cut ministers’ salaries by 20% and the average civil servants’ by 10%,” Parts told GlobalPost.

“In normal times, cutting the salaries of civil servants, of policemen, etc., is extremely unpopular. But I think the people showed a good understanding that if you do not have revenues, you have to cut costs,” adds Parts, who served as prime minister from 2003-2004.

As well as slashing public sector wages, the government responded to the 2008 crisis by raising the pension age, making it harder to claim health benefits and reducing job protection — all measures that have been met with anger when proposed in Western Europe.

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History helps explain citizens’ willingness to bite the austerity bullet. Estonia broke free from Soviet rule just over 20 years ago, together with its Baltic neighbors Latvia and Lithuania — who are also enjoying a robust recovery, but are outside the eurozone.

For older Estonians, memories of the grim days of Soviet occupation make it easier to accept sacrifices today. Among the young, there is a widespread awareness that in a nation of just 1.3 million people, the freedom and opportunities their generation enjoy depends on unity in times of crisis.

“Western Europe has not really experienced a decrease in living standards since the Second World War,” says Koppel. “Historically, austerity is inevitable, but it’s not part of the culture of Western Europe right now. This is what really differentiates us, that we were able to understand that.”

It still has its share of economic problems. The average monthly take-home pay of 697 euros ($870) is among the lowest in the eurozone, and unemployment at 11.7% is still above the bloc’s average. The shockwaves of eurozone collapse radiating from southern Europe could yet snuff out the recovery.

The jobless rate is falling. however, thanks in part to a thriving tech sector.

Post-independence governments invested heavily in scientific education and information technologies, successfully attracting investment with the e-stonia label.

Estonia has also paid close attention to the fundamentals of establishing a favorable business environment: reducing and simplifying taxes, and making it easy and cheap to build companies. Its location — with quick access to Nordic, German and Russian markets — has also helped, along with the very low debt level Estonia inherited when it broke from the Soviet Union. Joining the eurozone on Jan. 1, 2011, Estonia's stable economy shone, despite the crisis in the currency bloc.

Innovative young companies have been at the forefront of the Estonian revival thanks to successful startups like the web-designer Edicy, online money transfer service Transferwise and point-of-sale software developer Erply.

The daddy of them all is Skype, which was developed by a quartet of Estonian software geeks with their Swedish and Danish buddies back in 2003, and was bought up by Microsoft last year for $8.5 billion.

The internet phone company runs its biggest operations out of a technology park in a Tallinn suburb, where more than 400 people from 30 countries work in a relaxed, light-filled office block complete with sauna, childcare and series of trendily designed cafes and chill-out lounges for the engineers to recharge their creative energies.

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“In Estonia we have this national trait of just getting things done,” says Tiit Paanenen, the site leader at Skype Estonia.

“I’ve tried to work out why this is, and I think it’s because we are small. The circles working on the same subject all know each other, so you create this sense of accountability with each other. If you screw up, everybody knows about it.”

Estonia itself was like an innovative startup when it suddenly became independent in 1991, Paanenen explains. Old hierarchies were overturned and youngsters were thrust into key political and business positions as the country built an economy from scratch.

“One of the results is that we are very competitive, because of the efficiency, because of the use of technology in the areas where otherwise you’d have a lot of overheads and waste,” the shaggy-haired executive said in an interview.

“Estonia is bigger than its size already … we are making an impact in the world, and it will continue.”

Topics: Economy • Europe

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soundoff (36 Responses)
  1. Marine5484

    If the Estonians were wise, they'd pull out of the Eurozone before it's too late. But then again, the right-wing news media is forever making a case for the Eurozone.

    June 5, 2012 at 1:59 pm | Reply
    • The Decline

      Marine – I think you mean left wing.

      June 7, 2012 at 2:54 pm | Reply
  2. j. von hettlingen

    Of the 1.3 million living in Estonia, one third of them are Russians. Many Russian-speakers complain of discrimination, saying strict language laws make it hard to get jobs or citizenship without proficiency in Estonian. Some Russian-speakers who were born in Estonia are either unable or unwilling to become citizens because of the language requirements. An Estonian passport would open doors to other EU countries.
    The Greeks should learn from Estonia. Christine Lagarde said a few days ago that she is more concerned about the people in the sub-Sahara than the Greeks. Yes, they would feel less miserable if they could empathise with people in other parts of the world who are way worse off than they.

    June 5, 2012 at 4:43 pm | Reply
    • ✠ RZ ✠

      Blast from the past Jvh, Step 5: assume your annual taxable income is a healthy 10 million and your wife is a stay at home angel with no taxable income. It's gonna be a bull year for the markets, and both you and your wife have separate but cross guaranteed brokerage accounts. You decide to sell SHORT a rather large block of let's say Brookfield common shares and your wife goes LONG investing in the same value of convertible preferred. Now,just sit back and watch the market go up over the year.

      June 5, 2012 at 10:54 pm | Reply
  3. Dillon

    This is hardly a great example. The article contributes much of the success to 1) Post-independence governments invested heavily in scientific education and information technologies, successfully attracting investment with the e-stonia label and 2) reducing and simplifying taxes, and making it easy and cheap to build companies.

    Neither one of those is a great example of austerity. The argument behind austerity is that government is too big and the debt ruins confidence of investors etc etc. From what is looks like Estonia vastly benefited from years of government investment into education, and a reduction of barriers for business. I dont see or its not shown clearly the link between slashing government salaries and a tech boom.

    June 5, 2012 at 5:57 pm | Reply
    • The Decline

      Dillion – you should re-read the article. It states that Estonians reduced salaries by varying percent points depending on the occupation and sector. They also raised the retirement and therefore pension age. They also made it harder to collect on public benefits. All of that is most definitely austerity measures.

      June 7, 2012 at 2:57 pm | Reply
  4. Andrey

    Blah blah blah.... They have joined the Eurozone just 16 months ago! And to do that they had to comply with strict requirements: had to reduce their debt and state spending, get budget in order and combat inflation: all the staff that Eurozone memeber countries do not do any more! So just watch them – joining Eurozone will do to them the same thing it has done to every other country before them: liberals will take over and it all will go south!

    June 5, 2012 at 5:58 pm | Reply
    • The Decline

      Aubrey – Greece had similar requirements to join the EU yet they made it in. Estonia clearly understand how to manage its finances and is will to make cuts when need be. Sounds like a good addition to the EU

      June 7, 2012 at 3:00 pm | Reply
      • George Emsden

        Greece would never have joined the Euro had anyone checked the figures which were basically fraudulent. Political will overcame the rules

        June 8, 2012 at 11:26 am |
  5. Matt A.

    Capitalism has found a home. At last!

    June 5, 2012 at 5:58 pm | Reply
  6. Guest1351235

    The article is interresting by itself but the comparaison with EZ does hadly makes sense. Similar austerity measures have already be taken in most countries in europe... as an example, full wage retirement is also 67 in germany, france, spain (65 for italy I think). It seems more likely that what as allowed estonia booming is that it is an emerging market which as selectively and sucessfully encouraged particular assets (e-business for example)

    June 6, 2012 at 12:21 am | Reply
  7. AlexShch

    There was a popular joke about Estonia back in 1990: "Estonia declared war to Sweden and capitulated immediately".

    There is some wisdom in this joke: Estonia simply attached itself (or, simply put, sold itself) to a more sound economy: basically to Nokia. For a small country this maybe a solution of all their problems: foreign investors came, took over factories, modernize, and created more or less decent jobs for most people. But it is hardly an example for others to follow.

    June 6, 2012 at 12:22 am | Reply
    • jj

      Foreign investors came and closed all the factories. Businesses became small but dependent on those Swedish banks, which froze credit when they had to recapitalize in their home country. Many of these small business could not survive, resulting in one of the sharpest economic contractions in the world. If you have not noticed, Estonia has lost about 4% of the population from the crisis. The Baltic countries are the oldest in Europe and are on the brink of a crisis in the working age population. I guess they will be forced to import from the Muslim Third World.

      June 6, 2012 at 9:29 am | Reply
      • AlexShch

        That is right, I agree with you. At the time of leaving Soviet Union Estonia had zero debt, the best standard of living among soviet republics, and, frankly, Eastern Europe as well. Also insignificant difference between rich and poor (basically there were no poverty in european and american definition of this term, and absolutely no traces of dirty poverty, homelessness, or anything like that) - this is actually an important asset in a situation when economy is about to shrink - austerity + social injustice causes violence, but just austerity in a society where everybody is equal is more or less OK. Education was good, but far from the best in Soviet Union. The fact is, that a lot of engineers, especially for electronic industry (a leading industry in Estonia) were russians brought there during 196x and 7x. Now they are called "occupiers".

        As far as reduction of population what you saying is true - in fact, Estonia and Latvia are the two countries with the largest decline in population in Europe, and in fact, elsewhere in the World as well. Most of this is explained but the contraceptive effect of democracy - people just do not want kinds when feeling freedom. Some emigration takes place too, mainly young people heading to the west, not necessarily specialists, but overall this effect is secondary and is actually quite minor.

        As far as "they will be forced to import from the Muslim Third World", I seriously doubt this. At first, population decline may be considered "good", since it is a small territory any way, and some politicians may say that it is overpopulated. Secondly, THE PURITY of Estonian Nation is THE MAJOR CONCERN of the government. OK, theoretically you can take muslim kids, tell them that Islam is bad and brave brothers from Waffen SS are holy heroes fighting for freedom. Besides SS and Waffen SS promotes superior European values, and even Reichsführer-SS Heinrich Himmler is not too bad: he was just slightly miss-understood. You can dye hear of these kids to be blond, and even make plastic surgery to straighten their noises, but what about inferior non-Estonian genetics of these kids? ...No, I seriously doubt that an idea to compensate decline of population by bringing foreigners would have any traction in Estonian Parliament.

        June 6, 2012 at 12:24 pm |
    • George Emsden

      But Nokia is Finnish, not Swedish?

      June 8, 2012 at 11:28 am | Reply
  8. Adam Jon Monroe, Jr.

    Estonia's superiority is due to land value taxation (lvt). By collecting a 1% avg. lvt, land speculation is discouraged. This keeps the price of land down relative to wages, raising the standard of living for the entire nation.

    Meanwhile, taxation on buildings and homes is NOT part of that tax, so there is no disincentive to productive activity in it.

    Land value taxation has been declared the superior tax for centuries, by Mirabeau, Adam Smith, JS Mill, Tom Paine, Henry George, Nock, even Milton Friedman and JE Stiglitz. And Estonia is proving it once again.

    June 6, 2012 at 3:31 am | Reply
  9. Merlin

    This is another bias article that has got nothing to do with the reality of every day life in this country. I understand Estonian government is working hard to make things look great on paper so there can be more articles such as this one. In reality, if you work in one of the 'prestigious' malls in Tallinn expect to get paid 2,8€ per hour, 1.8€ in grocery stores (and yes, that's before tax). Government cannot find money to pay acceptable salaries to people that are absolutely vital for a country to exist – teachers, doctors, nurses, police, firemen etc. Although right after announcing that, they found money to give themselves a raise. Btw a teacher in Estonia gets paid about 500$ per month, if that. Estonian Energy has another reason in every couple of months to raise prices so when you're living in a 50m2 apartment expect to pay an average of 150€ a month for heating only. Prices in grocery stores and cafes are generally the same as they are lets say in Australia. Statistically there are 63 000 children in Estonia that are literally starving. Young people are no longer just going traveling to experience the world. Now young educated people are packing their bags and leaving with their families.
    So if living and working full time in Estonia is an every day survival camp that leaves nothing in your pocket to actually live your life and enjoy it, then what are all these articles good for?!

    June 6, 2012 at 10:54 am | Reply
    • Merlin

      Also, I'm not angry. I'm simply saddened that I no longer want to live in my home country because I really don't see that our government gives a damn about our people

      June 6, 2012 at 11:02 am | Reply
  10. Lee

    The "lesson" here is that after you TANK your economy with "austerity", your bounce back will look "good" when you emerge from your self induced depression. That's the main "lesson" even though the author is trying so hard to spin it into something else.

    June 6, 2012 at 12:57 pm | Reply
  11. taco

    Ok, so they lower wages when they don't have revenues?? where did they get those crazy ideas?? Obviously not wall street...

    June 6, 2012 at 1:17 pm | Reply
  12. Rick

    Just goes to show how easily statistics can be manipulated. Sounds like the austerity was a only a tiny piece of the puzzle in Estonia's comeback yet the author tries to pawn it off as significant. oh, and I can't say I'd call 11.7% unemployment anything to brag about, especially in a country with the same cost of living and 1/2 the wages as many countries.

    June 6, 2012 at 2:27 pm | Reply
  13. LL

    Strange to see so many Leftist Wall Street Financial Speculators here...
    Yeah that sounds strange isn't it?
    One of most strange consequences of this first decade of XXI is the paradox: Governments via Central Bank(FED, BOE, ECB BOJ) put very low rates, banks start to lend like maniacs, credit increases, bubble. burst. Result: Almost anyone criticizes the Credit Bubble, the Banks etc – even if many want to fight it with more credit –
    yet at same time want the bubble results:
    The enormous amount of taxes that went to Governments, the money they flowed to Arts, all the gluttony over other people money. Be it forced by the State or not.
    Don't anyone understand that the level of economic transactions was too high?

    There is no such thing called "Austerity" which is a Keynesian word that the Left want use for blame game.
    You just have to notice that when Taxes increase the Media never says "Austerity", something that occurred yearly here in Europe in last decade. It is only when Governments can't increase spending like they want that the word "Austerity" is employed.

    You either live within what wealth you produce giving a margin to failures and the unexpected or not.

    How much the credit card limit your children have?Do they have a credit card? Now why the Governments have a limitless credit card?
    Are you at home an Rightwing "Austerity" Father/Mother and in public a Leftist "Keynesian" Citizen?
    Is that because if first on it is your money and in the second do you think it is others people money?

    June 6, 2012 at 7:50 pm | Reply
  14. elle

    EESTIS VALITSUS VALETAB RAHVALE! PALUN UURIGE ASJU ! http://et.wikipedia.org/wiki/Reformierakonna_rahastamisskandaal

    June 7, 2012 at 11:01 am | Reply
  15. elle

    http://www.delfi.ee/news/paevauudised/eesti/lastekaitseliidu-juhataja-eestis-nalgivad-kumned-tuhanded-lapsed.d?id=55591812

    June 7, 2012 at 11:03 am | Reply
  16. elle

    http://www.google.ee/search?q=eestis%20on%20n%C3%A4lgivad%20lapsed&ie=UTF-8&hl=et

    June 7, 2012 at 11:05 am | Reply
  17. elle

    http://www.ap3.ee/article/2011/9/5/habene-eesti-sinu-lapsed-nalgivad

    June 7, 2012 at 11:06 am | Reply
  18. Muin

    Yeah but Germans are the only one with real money and real economy. They don't have bubble and burst like U.S. They might ruin a good economy by getting involved in bailout business. Besides, it's pointless to bail out Spain, Greece without any control. We had many countries,civilization failed in history. Euro zone fall might be disastrous but i don't see any point in saving country with the hard country of another. U.S govt. save ungrateful banks but it rewarded execs in return. In fact, they want to get rid of president that saved them.

    June 9, 2012 at 8:34 am | Reply
  19. Aftab khawar

    We doing that since 1997, We welcome to all of you, Best safe place try that

    http://goo.gl/XakCG

    June 29, 2012 at 3:12 pm | Reply
  20. HASSAN

    Nice progress through austerity measure, but how did the austerity measures reflected to the suicide rates of the country?

    Sir, I believe the economy is an indirect reason that increased the suicide rate in countries such us lithuania! The responsible people never held accounted for! so before you say that austeriuty measures helped the country's economy to improve, think the bad conciquences too and please mention them in such articles or just quote them! I am impressed of your ignorance to say that while Greeks and Irish protest against austerity measures and you praise Lithuanians for not even murmur about it! Ignoring that there are a few Lithuanians not in this world anymore.
    Tthe reason i write this article is to expres not a different opinion about austerity measure, but to ask you to factor in alll the conciquences of austerity in a given country other than whether they are murmuring or not.

    thank you for publishing!

    Hassan Geretly

    July 11, 2012 at 4:26 am | Reply
  21. HASSAN

    Sorry, Estonia! :)

    July 11, 2012 at 4:29 am | Reply
  22. O yeah

    It all lies... "we cut ministers’ salaries by 20%" – they increasing salaries last 3 years yearly. The difference between usual worker and minister is 10 times now at least most of citizens get 300 gross and government's salaries start from 3000 net at least Im not talking about biggest liers prime minister and mr pResident and his hungry for money wife. who has 5100 at the present moment. They keep telling that we need to cut off because we dont have money in budget *as at present moment in Estonia strike of doctors* they demanding better salaries and to change medical system as it doesnt work at all. The answer of government were 'We dont have money in the budget and THE SAME TIME they increasing OWN salaries again, so since 1st aprill mr president and prime minister will have 5300 net for example. same time they increasing taxes for electricity, same time mr Parts keep telling we need to invest to EstonianAir 60 millions eur because national air company bankrupt, and He gives no warranty that mr Taskila who is heading EstonianAir right now and has salary 30.000 eur monthly will not make it bankrupt again. They making reports about great GDP but real situation estonian citizen mostly poor as church rats. Most young guys/girls leaving country and never come back. Every day we are listing new lies about great GDP and booming. But hello for example pensioners has just 200 – 250 eur gross pension monthly. how can they able to survive if winter bills are 120 – 150eur. And prices for food same as in London? Is it possible to live for 50 – 100 eur a day?? Is anyone know the REAL situation in this dammed country?

    October 16, 2012 at 8:26 am | Reply

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