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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
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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.
******
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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