The Estonian Way

The small, open Baltic economy was obviously on overdrive before the crisis and the economy busted. A lot has been said about the mistakes made by companies and consumers during the boom years and policy-makers have received their fair share of the blame (together with Nordic banks), but it would be a mistake to dismiss the Estonian economic model. Because the very same companies, consumers and policy-makers have shown a remarkable resilience to ride out the storm and get the economy back on track again. Last year, the economy contracted 15% and the budget was tightened by 9 percentage points – without any major political or popular protests. Few other countries in Europe, let alone the most vulnerable ones in Southern Europe, seem to be even close to pulling that off. So the Estonians clearly have something to teach the Greeks and other profligate Europeans when it comes to belt-tightening.

The correction during the last 18 months have eroded the previous imbalances – the current account is in surplus and inflation is very low – and the economy has started to pick-up with the most ambitious forecasters saying 2% growth this year and 5% in 2011. But the biggest accomplishment is arguably that Estonia fulfills all the Maastricht criteria and will be invited to adopt the Euro in January 2011 – unless the existing members find a poor excuse to keep them out, which is very unlikely. Estonia should actually be used as an example within the Eurozone on how to streamline budgets. Interestingly enough, tiny Estonia would be one of only two countries in the Eurozone fulfilling the Maastricht criteria. The other one is the even smaller Luxembourg but its Minister of Finance is chairman of the Eurogroup, so small prudent countries could, and arguably should, play an important role in the club.