Economy in recovery but savage spending cuts have left marks

Tue, Oct 16, 2012, 01:00

LETTER FROM TALLINN:Estonia’s economy grew quickly between 2011 and 2012 as it tried to make up lost ground

THE ANGRY protests by Greeks and Spaniards are not replicated on the streets of Tallinn.

Estonia’s capital exudes a quiet, bustling calm. The shops are busy and demonstrations have been rare – even during the height of the economic crisis.

Estonia is on track to be one of the fastest-growing economies in the euro zone in 2012.

The Baltic nation of 1.3 million people has bounced back from an economic slump that saw unemployment hit 20 per cent in 2009, and a stringent austerity diet of spending and wage cuts.

Not only is the economy growing, but the government budget has a healthy surplus, worth 1.1 per cent of gross domestic product.

State debt is low: 6.1 per cent of GDP compared to Ireland’s 108.5 per cent and Greece’s 132.4 per cent. Young people talk of starting companies, not moving abroad.

Taaniel Jakobs (29) left California’s Silicon Valley seven months ago to come home to Estonia. Jakobs and his business partner decided to make Tallinn the European headquarters of their internet start-up company, eschewing Stockholm or Berlin. With a plentiful supply of tech workers and near universal free WiFi, the Estonian capital was an easy choice, he explains.

“Estonia is such a young country and so much is going on here,” he says.

Ulane Vilumets, also 29, says Estonians are entrepreneurial because it is so easy to start a company. She launched her tourist-information business six years ago from a pavement table in Tallinn. Now her “Like a Local” company has a turnover of €130,000 and is eyeing expansion into Germany.

“When I talk to people my age in Germany none of them are ever thinking about quitting their normal day job and starting their own business. People don’t do that in set and old economies,” she says.

The two entrepreneurs work at Garage 48, a shared office that houses 20 internet start-up companies, located just outside Tallinn’s old town of cobbled streets and medieval turrets.

With its arty murals and twentysomething workers, Garage 48 feels more like a student common room than a typical nine-to-five office.

On the walls is a job advert for Skype, the internet phone company founded in Estonia, now used by 250 million people a month.

Estonia’s internet-fuelled economic success is real, but the savage spending cuts of 2009 have left a mark.

“Austerity was costly and it was very painful for some people,” says Enn Listra, an economics professor at Tallinn University of Technology. Salaries have decreased or have been kept on the same level for a long time, he says, noting that in 2011 Estonians’ salaries were worth 10 per cent less in real terms than they were at the height of the boom.

The Estonian economy grew quickly between 2011 and 2012, because it was making up ground it lost during the crisis. Unemployment is stuck at 10 per cent, while inflation runs at 5.5 per cent, among the highest rates in the euro area.

Not everyone is enjoying the economic recovery. At a market behind Tallinn’s main station Viktor (35) is selling handbags and hosiery. He says his income does not go as far as it used to because petrol and food are more expensive. Another stallholder, Galina, is topping up her pension by selling herbs. She has a son and a grown-up grandson working in Finland because they can earn higher wages there.

Tens of thousands of Estonians are working in Finland, says Harri Taliga, chairman of the Estonian Trade Union Confederation, which he views as a sign of the country’s weak recovery. Estonia is Europe’s “useful idiot”, he says, for undertaking austerity measures harsher than almost anywhere else.

“I cannot imagine that in other countries it would be possible to cut wages by 20-30 per cent,” he says. The legacy of Estonia’s 47-year Soviet occupation means that older workers were not ready to protest against cuts, he thinks.

“People are not secure and they are afraid of losing their jobs.”

Estonia remains one of the poorest countries in the European Union, where national income per head is half the level of western European countries.

This is why opposition politicians have asked why the country, which joined the euro in 2011, should contribute money to a rescue fund for Europe’s struggling economies.

In August its parliament approved the European Stability Mechanism rescue fund. This puts Estonia on the hook for €1.3 billion, a hefty sum for a country where the annual state budget is a little over €6 billion. The first down-payment would be €150 million.

Polls show a majority of Estonians back the currency, although in smaller numbers than most other euro zone countries. Their support may reflect the country’s continuing gain from European Union funds.

“We are still net beneficiaries, although with the bailout we get a little bit less. This is one reason why it wouldn’t be wise or polite [to refuse to contribute to the bailout],” says Prof Listra.