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ESTONIA


 



In-depth Business Intelligence 

Key Economic Data 
 
  2003 2002 2001 Ranking(2003)
GDP
Millions of US $ 8,383 6,413 5,500 95
         
GNI per capita
 US $ 3,870 4,130 3,870 72
Ranking is given out of 208 nations - (data from the World Bank)

Books on Estonia

REPUBLICAN REFERENCE

Area (sq.km) 
45,226 

Population
1,341,664

Principal 
ethnic groups 
Estonians 63.9%
Russians 29%
Ukrainians 2.7%

Capital 
Tallinn

Currency 
Kroon

President 
Arnold Rüütel


Update No: 302 - (27/02/06)

Centre Party Has Six-Point Lead in Estonia
Since 1991, only one of the Baltic nation's administrations has lasted more than two years. In March 2005, Prime Minister Juhan Parts - a member of Res Publica - announced his resignation. In April, a new administration-headed by Reform leader Andrus Ansip-was sworn in. The governing coalition also includes the Estonian Centre Party (KESK) and the Estonian People's Union (ERL). 
The KESK continues to dominate the political scene in the Baltic nation, according to a poll by TNS Emor, conducted on February 21st. 22 per cent of respondents would support the KESK in the next parliamentary election.
The Estonian Reform Party (ER) is in second place with 16 per cent, followed by the Fatherland Union (EI) with 11 per cent, the ERL with 6 per cent, the Social Democratic Party (SDE) with 5 per cent, and the Union for the Republic - Res Publica (RP) with 3 per cent. The next election is tentatively scheduled for March 2007.
The SDE has threatened to call a no-confidence motion to stop Ansip from moving ahead with a series of proposed tax cuts. Earlier in February, the prime minister defended his plans, declaring, "We have to struggle and compete with other countries for foreign investment all the time, because other countries are catching up on us in terms of attractiveness of the economic environment." 

Europe -yes; Euroland - no?
Estonia joined the European Union (EU) in May 2004. This was a great moment for the Estonians, overwhelmingly endorsed by popular opinion. They had come home to where they belong - Europe, after decades in Soviet servitude.
It was the first former Soviet republic to introduce its own currency, the krona, in June 1992. It was inaugurated under the tutelage and auspices of the Bundesbank, now no more. The krona has been an outstanding success. 
It is not so obvious that the best thing for Estonia to do is to join the Eurozone. In any event, Estonia may miss its deadline of January 2007 for adopting the euro, because its inflation rate, close to 4 per cent, is above the limit imposed by treaty. That would apparently not faze too many people: in a recent survey commissioned by the government, 54 per cent of respondents said they did not want the euro, while 41 per cent favoured it. 
"We have always had mixed feelings about joining the monetary union," Marje Josing, the director of the Estonian Institute of Economic Research, said. "We have some experience of being part of a union." 
Gunther Verheugen, vice chairman of the European Commission, said in an interview recently that he was sceptical about Estonia adopting the euro in 2007, as its government plans. Along with Lithuania and Slovenia, Estonia wants to be among the first new member states to trade in its own currency for the common one. "When you highlight the three candidates who want to launch the euro next year, it is striking that Estonia is having quite a few problems," Verheugen told The Financial Times Deutschland. 
"As far as the expansion of the euro zone is concerned, we should be very careful," he said. "It is important that the criteria are met exactly. We won't be conducting any experiments."
The three countries are currently participating in the ERM-2 mechanism, which is essentially a temporary waiting period before accepting the euro. During that period, candidate countries have to meet certain criteria, including low budget deficits and inflation. Estonia, where the consumer price index grew some 4.1 percent last year, is struggling with inflation. 
Verheugen's comment echoes other calls by EU officials and analysts that the planned expansion of the eurozone might be less ambitious than originally thought. Even Lithuania, where inflation reached 3 per cent last year, is riding a razor's edge. 

The paradise for capital - and labour? 
It is not at all surprising that the Estonians are in the forefront of social experimentation. Estonia is the maverick country among the maverick former Soviet republics. It has become Europe's most fervent champion of capitalism and free market ways in revulsion against its much-reviled socialist past. 
Socialism was supposed to liberate the proletariat from subjection and poverty. It succeeded in replacing subjugation to the bourgeoisie by subjugation to the communist bureaucrats, the vanguard of the proletariat no less. In Estonia's case this meant that a country that was richer than Finland in 1940 ended up after half a century of communism in 1989 with having one fifth of its standard of living!
Social experiments, consequently, have been possible in Estonia that would be unacceptable in more mature countries, with advanced capitalist economies, such as Germany. Fired with a free-market fervour and hurtling into the high-tech future, Estonia feels more like a Baltic outpost of Silicon Valley than of Europe. Twenty months after it achieved its cherished goal of joining the European Union, one might even characterize Estonia as the anti-Europe in terms of an economic model of the future. 
The flat tax has become an article of faith. Estonia became the first country to adopt it in 1994, as part of a broader strategy to transform itself from an obscure Soviet republic into a plugged-in member of the global information economy.

It's working - comrades 
By all accounts, the plan is working. Estonia's economic growth is around 10% per annum and was nearly 11% in the last quarter -- the second fastest in Europe, after Latvia, and a pace more reminiscent of China or India than Germany or France. 
People call this place E-stonia, and the cyber-intoxication is palpable in Tallinn's cafes and bars, which are universally equipped with wireless connections, and in local success stories like Skype, designed by Estonian developers and now offering free calls over the Internet to millions. 

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The flip side of Estonia's market ethos is a thinner social safety net than in Europe's welfare states. Opponents of the flat tax here -- and there are some -- say it has widened the divide between rich and poor, making Estonia less like its Nordic neighbours and more like the United States. 
Germans showed how allergic they were to the idea when Angela Merkel chose a flat tax advocate as her economic adviser. Antipathy toward him was so intense that political analysts say it probably cost Merkel's party a clear majority in the German Parliament. 
Yet the concept has caught on in this part of Europe. Latvia, Lithuania and Slovakia all have a flat tax, while the Czech Republic and Slovenia have considered one. Tax policy, not support for the American-led war in Iraq, is the bright line that separates the so-called old Europe from the new. 
"Everybody dreams about a society with no inequality," Ansip said. "But the best policy is to have a strongly growing economy. With more prosperity we can increase social benefits." 
Taxes and welfare are not the only issues where Estonians seem to be diverging from Western Europeans. People are increasingly ambivalent about adopting the euro, even though the government still hopes to do so by 2007. The prime minister has been at odds with the European Commission, which has threatened to reduce its money for roads, bridges and other infrastructure. And Parliament recently voted by a wide margin to extend the deployment of the country's tiny contingent of troops to Iraq by another year. 
The war, which has inflamed much of Europe, is not a divisive issue here. Only two Estonian soldiers have been killed in Iraq. "We know what it means to live under a dictatorship in Estonia," Ansip said. "We were always dreaming that help would come, and we did get help, especially from the United States." 
Make no mistake: Estonia is grateful to be in the European fold. Membership in the European Union -- and NATO -- throws a security blanket over a land that has been subjugated repeatedly by foreign powers, most recently the Soviet Union. 
With Estonia safely inside, though, Europe no longer looks like much of a draw. The euro, which once symbolized prosperity, is now viewed by many here as an invitation to higher prices. Inflation has already doubled since Estonia joined the European Union in May 2004. As a cautionary tale, people here point to Italy, where the cost of a haircut or a cup of coffee spiked after it retired the lira. 
"We have always had mixed feelings about joining the monetary union," Marje Josing, the director of the Estonian Institute of Economic Research, said. "We have some experience of being part of a union." 
Feelings toward Europe soured further after Britain, which held the rotating presidency of the European Union, proposed reducing financing to new member states by US$16.8 billion between 2007 and 2013. Estonia, Ansip said, is counting on the cash. European leaders worked out a compromise December 17th that lessens the cuts, which mollified Ansip. 
The suspicion goes both ways. French and German leaders complain that Estonia and other flat tax countries practice tax dumping, using their rock-bottom rates to attract foreign investment. The solution, they say, is for European countries to harmonize their taxes, a proposal that gives most Estonians disquieting memories of their centrally planned past within the Soviet Union. 
Still, not everybody loves the status quo. Economics Minister Edgar Savisaar is among those who believe that the flat tax has deepened class differences. A prime minister of Estonia under Soviet rule, Savisaar now leads a popular centre-left party, which is in a shaky coalition with Ansip. 
Reinstating a progressive tax, he said, would pay for education and for more aid to families and the elderly. With Estonia facing a national election in March 2007, Savisaar is expected to make that a political issue. 
"What are the best societies to live in?"' asked Savisaar's top adviser, Heido Vitsur. "The best societies in the world to live in are the Nordic societies. We have to move in that direction." 
Ansip is all for catching up with Finland and Sweden. But he says Estonia should not do it by abandoning a policy that he says helped propel the country this far. "I don't think it's the right thing for every country in the world," he said. "But it really suits Estonia." 

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FOREIGN ECONOMIC COOPERATION

Estonia and Bulgaria discuss economy, ties 


A meeting was held between Estonian Foreign Minister, Urmas Paet, and his Bulgarian counterpart, Ivailo Kalfin, in Estonia when Kalfin was on an official visit to Estonia, and Paet urged cooperation in the field of economy and tourism, Sofia News Agency reported.
Bulgaria and Estonia believe that more active work needs to be done in the area of tourism. The expected opening of charter flights between the two countries is a step in this direction, Paet added, saying that Estonia is highly interested in Bulgaria and the speedy conclusion of the already drafted agreement on avoidance of double taxation will help to intensify the ties between the two countries. Both ministers agreed that bilateral contacts would increase with the opening of an Estonian Embassy in Sofia and of a Bulgarian one in Tallinn. 
Kalfin said that Bulgaria is also interested in Estonia's experience as a country that has achieved impressive economic development. He also assessed his visit to Tallinn as an extremely productive one. Cooperation between Estonia and Bulgaria in the field of ICT and tourism was high on the agenda of the talks between Kalfin and Estonian Economics and Communications Minister, Edgar Savisaar. 
Other issues discussed were energy efficiency, development of small and medium-sized businesses and utilisation of EU funds. Kalfin told Savisaar that the economic aspect of the visit is of extreme importance. He said that Estonia is a country with a fast developing economy - growth of 10 per cent, income growth of the same size, influx of foreign investment, low inflation and decreasing unemployment. Estonia has immense experience in IT use in the work of the government and in the provision of services to citizens, and according to Kalfin Bulgaria can learn from the achievements of its Estonian friends. He noted that Bulgaria and Estonia would cooperate actively in the area of IT and tourism. During negotiations between Estonian Prime Minister, Andrus Ansip, and Kalfin, the process of Bulgaria's accession to the EU and the country's preparedness to join the EU were high on agenda. Ansip expressed hope that Bulgaria will fulfil the membership criteria and be ready to join the EU on January 1st 2007. Asked about Estonia's position about the possible postponement of Bulgaria's accession to the EU, Paet noted that Tallinn has a clear position on Bulgaria's EU membership. Estonia was among the first countries to ratify Bulgaria's Treaty of Accession to the EU, which is a clear expression of its political will on Bulgaria's EU membership, added Paet.

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FINANCIAL NEWS

2006 will be a loan boom in Estonia

According to SEB Eesti Uhispank analysis in the year 2006 as more and more people are benefiting from economic growth so the number of borrowers is increasing, New Europe reported.
The bank said it expects the current borrowing boom to continue and 2006 will not bring a real estate crisis, but loan boom in Estonia. Among others, the bank expects to issue around 36,000 new housing loans in 2006 and see the loan volume go up 50 per cent. According to Ott Jalakas, head of the bank's money and capital markets division, the average loan amount is expected to reach one million crown in six months for the duration of 25 years. However, the bank admitted that interest rates were slowly rising because Euribor is going up. Riho Unt, Deputy Manager of the retail banking division of SEB Eesti Uhispank, says that borrowing will become dangerous if banks were to issue loans at prices that are close to the market price of the real estate that is used as collateral.
"Even if the real estate market crash happened those who would be affected most would be speculators. Those people who buy their own home never lose," said Unt. Real estate prices in Tallinn went up 50 per cent in a year last year and banks' loan portfolios swelled by 60 per cent.

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