Upbeat note on Estonian economy

Estonia introduced the euro at the beginning of 2011. The NIB Newsletter asked Marje Josing, Head of the Institute of Economic Research in Tallinn, how this NIB member country is tackling its way out of recession with its brand new currency.

Marje Josing, Head of the Institute of Economic Research, Estonia.

Photo: Institute of Economic Research

Estonia became the 17th euro-zone country at midnight on 1 January. Has everything gone according to plan?

It seems that our consumers and enterprises are managing the euro rather well. We did not have any technical problems. Inflation (3% in 2010) is a concern for consumers, but this is related to world market prices, not the euro.

Estonia has experienced a severe recession during recent years. Bearing in mind the credit expansion that preceded the crisis, what are the main lessons to be learned in the field of banking and finance?

At the state level, it is important that government has reserves and Estonia has had a balanced state budget. Private lending has been extensive, and the main lesson for banks is that they must evaluate their risks better.

Several Nordic banks were competing in the Estonian market to gain higher market shares. They gave loans too easily. It was very difficult for Estonian authorities to stop this rally as these banks had their headquarters abroad.

What are the prospects for the economy now?

The Estonian economy grew by 3% last year. In the 4th quarter of 2010, the year-on-year figure was 6.6%. It is notable that the acceleration came mainly from the export sector, which grew by 67% in December year-on-year. It is of utmost importance for Estonia that Sweden and Finland are recovering. This seems to be the case as many sub-contractors now have good turnover and order books. For 2011, we expect a 4-5% GDP growth.

Do you think the decision to introduce the euro will increase investments in Estonia?

Euro will support those investors who need some extra assurance. Several Nordic countries compared experiences in Estonia with their own countries and they expected the currency to be devalued. This was not a good idea for Estonia as there was so much euro-denominated private lending. Now the risk is lifted since the households' income and credit payments are in the same currency. The euro also helps tourism from Finland. We do not think that simply because of the euro, everyone will come to Estonia. Factors such as business climate, tax regimes, and infrastructure play a much more important role.

Public finances in the euro countries are causing challenges at the moment. What is your recipe to cure the sovereign crisis?

It was surprising to see that European countries do not respect agreements that they have made. At the same time, Estonia adhered to the Maastricht criteria in order to introduce the euro. This current crisis may be useful for Europe as it will force governments to discuss the problem deeply. It is easy to take loans, but somebody must pay back the debts. A more balanced state budget is very important.

NIB's latest loan agreement in Estonia was signed in October 2010. NIB provided financing for the construction of a 170-kilometre electricity connection between Estonia and Finland. How important has the support by international financial institutions such as NIB been during the crisis years?

Projects like this are very important because energy causes challenges for the Baltic countries. This is partly due to historical reasons. We are a bit isolated in this respect. The closure of Ignalina adds to the challenges. There is a need to do something rapidly, and all projects that increase our connections, be it infrastructure, roads, or energy, are useful in this regard. We are not big enough to make these investments alone. Such projects are also positive for investors and enterprises.

How do you see the prospects for the supply of long-term financing in the Estonian economy?

I am rather optimistic. We will have elections in March, and it is very likely that those parties now in the government will also be in the next one. This means that the policy to attract foreign investments and aim for a balanced budget will continue. We might be small, but we're attractive.

February 2011

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