Austerity Pays Off for Estonia Former Soviet Republic Could Be Next to Adopt Euro

No European country has been more adept than the former Soviet republic of Estonia in dealing with the global economic crisis. 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.

Meeli Hunt is Estonia's best-known unemployed person. When she appears on TV talk shows, she is always perfectly coiffed and still wears designer glasses. She is now even slimmer than she was when she worked as a government press officer. She goes to the gym every day, and she doesn't look her age of 52. She developed her exercise habit when she suddenly lost her job.

Hunt has had a typical Estonian career, which took off after the country gained its independence from the Soviet Union in 1991, a time when everything seemed possible. But in 2008, her career took an equally precipitous nosedive when economic growth came to a grinding halt in Estonia. She managed to survive tough times with her savings, and now things are slowly starting to look up for Hunt, and for the rest of the country. "I've become tougher and more frugal," she says.

As a press officer at the Defense Ministry, she established a good reputation as a multimedia manager. Hunt marketed Estonia, a new NATO member, on the Internet. Later on, she handled public relations for the Freedom Monument, a source of national pride that was erected in downtown Tallinn last year.

Then, one day, her superior walked into her office and began hemming and hawing. She shouldn't take it personally, he said, but the government had to save money and she was being let go. At the time, a law protecting employees against termination, which has since been abolished, allowed her to keep her job for another month before becoming unemployed.

An Unparalleled and Painful Austerity Program

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.

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. Estonia intends to introduce the euro in January 2011. The coins, which have already been designed, depict the contours of the country, which is so far in the east of the European Union that the Baltic Sea is called the Western Sea.

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.

'A Liberal Test Laboratory'

Hunt has described her unemployment experiences in a blog. "Without a job, you're suddenly alone," she says. People who used to be good friends suddenly stop calling.

Hunt was one of 26 people who lost their jobs in her office. They formed a club and vowed not to disband until all of them had found new jobs.

What went wrong in Estonia? "We installed a liberal test laboratory in our country," says economics professor Rainer Kattel. "It worked well, too well, in fact."

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, and investors built office towers.

An Imbalanced Economy

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. "Unfortunately, Estonia failed to develop a strong export sector," says Kattel. The value of imports exceeded that of exports by 20 percent.

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.

"We have a Nordic coolness. We don't get as upset as the Greeks," says Hunt. In her blog, she has proposed that everyone who is unemployed should meet in Tallinn for a major singing festival. Song festivals are a national tradition, and the Estonians were singing when they took to the streets to demand independence from the Soviet Union.

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.

Despite Crisis, Estonians Fare Reasonably Well

The government pays graduated unemployment benefits for one year, followed by negligible welfare benefits. Many Estonians are now using up their savings. 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.

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."

Tallinn newspapers are now speculating over how the EU governments intend to explain to their voters that the euro zone is to be expanded to include, of all things, a former Eastern Bloc country. Ligi finds such skepticism to be unfair. "We don't come from the jungle," he says. "Estonia is a model of Nordic budgetary discipline."

The European Commission in Brussels, the EU executive, has already spoken out in favor of accepting the Estonians, 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.

The economy in the small country on the Western Sea is expected to grow slightly this year. Meeli Hunt, at any rate, recently landed a new job as a PR manager. She has given up her blog, and her club of unemployed former colleagues has disbanded. None of the 26 original members satisfies the acceptance criteria anymore.

Translated from the German by Christopher Sultan
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