Estonia: The Muted Revival of a Baltic Tiger

By Jon Bithrey (December 29, 2011)

The small Baltic state’s economy is forecast to have grown by 8% during 2011, according to the EU’s official statistics body. That’s more than five times faster growth than the European Union as a whole.

But Estonia is still regaining the ground it lost during a financial crisis that struck it and its Baltic neighbours in 2008-9, when a property bubble burst spectacularly, causing the economy to shrink and unemployment to rocket to 18%.

And with the eurozone crisis still unresolved, the renewed growth could slow once again.

In the inauspicious offices of an employment agency just outside Tallinn’s old town, Kate is looking for a job. She’s 26 and has been searching for work for six months.

“I feel really terrible being unemployed,” she says in her native Russian.

“What can I say, it’s difficult. I have friends of the same age, we’re all educated people but we are all struggling to find jobs.

“Superficially, things seem much better than they were in 2009, but for me and many others, the situation hasn’t improved.”

Despite rapidly falling official unemployment – now down to 11% – many people are still coming through the doors of the agency, JT Agentuur.

“Every day, people are calling and writing to try and find work. We get hundreds of emails,” says consultant Lilia Kurnikova.

“For example, for every farming job we advertise, we get 200-300 applications. Even very educated people are applying.”

There’s a more positive vibe at a major education and employment fair, known as Teevit, taking place in a convention centre on the outskirts of Tallinn.

Hundreds of teenagers and twenty-somethings wander between stalls, there to promote both local and foreign organisations.

They include several school leavers who are keen to leave Estonia, seeing more opportunities elsewhere.

“We gave the signals to private companies to cut expenses and labour costs”

One of them, Onelise, says she wants to go to Sweden for a year and work in music or design. But her reasons aren’t all career related.

“Estonia can be boring. Half the year is winter and there’s not much to do. I hate snow and I love summer. I want to see what the rest of the world has to offer,” she says.

To many observers, Estonia’s economic resurgence has been quite startling.

Finance Minister Jurgen Ligi, from the governing centre-right Reform party, puts it down to a refocusing of the economy, away from domestic consumption – which fuelled the boom years – towards exports.

“We gave the signals to private companies to cut expenses and labour costs… to improve our export competitiveness. This helped us a lot. When we regained growth, it was mostly down to exports,” he says.

It’s also no coincidence that Estonia has by far the lowest national debt in the EU – 6.7% in 2010. That’s because successive governments have focused on balancing the budget rather than spending more in the good times, unlike most other European countries.

Estonia’s best-known export is the technology firm Skype, which started life here in 2002. Now owned by Microsoft, it employs 400 people at the Tallinn site.
Sten Tamkivi, head of the Tallinn operation of Skype Skype, founded in Estonia, was barely touched by the Baltic country’s recession.

The head of the local operation, Sten Tamkivi, sits down in a “soft” area in Skype’s building on the old Soviet Science Park on the outskirts of the capital.

It’s a spacious, pleasant office with a pool table and even a sauna for staff use. He says Skype, and the IT sector in general, was largely unscathed by the economic downturn.

“The recent recession in Estonia hit low-value generating areas in the economy, like real estate,” he says.

“High-value jobs, such as in the IT industry, saw very little impact. Higher unemployment didn’t make it easier for us to hire though, as the technology firms we compete against in Estonia for skilled workers were still hiring.”

In fact, he says, Skype benefits in difficult economic times.

“Skype is quite counter-cyclical in its nature. When times are tough, people will look at ways of saving money, and we enable them to cut their communication bills.”

Estonia has been a member of the single European currency for a year. Despite the euro’s troubles, public opinion is still broadly in favour of membership.

But Estonia’s remarkable economic rebound is threatened by the risk the debt crisis poses to growth, making its greater reliance on exports a double-edged sword.

But Estonia’s president, Toomas Ilves, says the single currency has been of great benefit to the country.

“Joining the euro has restored investor confidence lost during our recession”, he says from his official residence in Tallinn’s leafy Kadriorg district.

“Being at the table, assisting with the decision-making process and frankly weighing in on the side of fiscal responsibility means we’re among the decision makers,” he says.

“Membership has given us at least an extra point in GDP growth over countries that haven’t qualified for euro membership.”

And he believes that debt-laden European countries can learn from the Estonian experience.
Nakosmatis Loukas in his Tallinn restaurant Restaurant owner Nakosmatis Loukas says setting up a business in Estonia is much easier than in Greece

“Other countries will have to go through a similar process. There is no way we can keep current levels of salaries and prices and remain competitive,” he says.

“You don’t have to reinvent the wheel. The Irish are doing it, Estonia is doing it. I think others can too.”

Even Greece, perhaps. Nakosmatis Loukas, who set up a small Greek restaurant in Tallin’s Old Town in 2004 after visiting the city on holiday, believes the two economies cannot be compared.

“One country is much bigger than the other,” he says.

But starting a business in Estonia was much easier than he’d found it in Greece.

“When we came here, we started a business in 15 minutes. And all the government offices we needed to visit were on the same street, almost in one block,” he says.

“In Greece, the minimum is two months and if you want to start a business, you have to travel all over the place”.

With the European economy slowing, and storm clouds hanging over the eurozone heading into 2012, Estonia’s annual growth will slow to somewhere between 2% and 5%, according to forecasts.

But that doesn’t phase bullish Finance Minister Mr Ligi.

“We have cut back on our spending and are more competitive than we were. We are much more prepared for any crisis than most of Europe.”

Most of Europe would probably agree.