Global Crisis/Innovation Blog

Estonia, the Euro, and National Contrarian Thinking

By Shlomo Maital

    A few years ago, I visited Estonia, a small Baltic country with only 1.3 m. people, once a part of the USSR and now a dynamic and creative nation with strong political leadership.  We were impressed by its commitment to innovation, not just at the level of startups (Skype was founded and developed by ethnic Estonians) but at the national or government level. For instance, Estonians file taxes on-line, usually submitting their annual tax report in 20 minutes or so, and it also votes on-line, the first nation to do so.  Estonia’s Government meets on-line, often, with travelling ministers joining sessions by videoconference,  dialing in to a start-of-the-art wired Cabinet room.  Estonia has very low tax rates and is singlemindedly weaving its economy into the fabric of the European Union.

   Now, as of Jan. 1, Estonia has happily, wholeheartedly, embraced the euro.  Prime Minister Andrus Ansip slid a bank card into an ATM and withdrew some euros, at an ATM specially set up in front of the opera house in the capital city Talinn.  With this, Estonia became the 17th member of the Euro zone.  “Being inside is better than being outside” [the Euro zone], said a leading Estonian banker. 

   Why would Estonia want to join the Euro zone, when the euro has been so unstable, so troubled, its future in doubt?  The answer is simple.  It is a matter of alternatives. Which do you prefer, as a foreign investor, as the head of Estonia’s Central Bank, or as Estonia’s finance minister – the kroon, weak and unstable, with high risk, or the euro, known, and relatively more stable? 

     Estonia suffered a deep drop in its 2009 GDP.  Part of this was self-inflicted.  In order to defend the fixed kroon-euro exchange rate (part of the condition for officially adopting the euro), Estonia slashed its government budget and reduced its deficit by fully 9 per cent of GDP – a huge cut, one that other larger governments have been unable to even contemplate.

     Estonia remains a poor country, with GDP per capita only two-thirds of the OECD average. But it has vision and determination, and sees Ireland 1987-2007 as its model.  Estonians are ethnic Finns.  They share the Finnish stoicism and toughness.  Estonia endured centuries of foreign domination, and many now see the Euro as a key to future independence. 

      Estonia has a long road to travel.  One in ten Estonians are unemployed, a fifth of the population lives in poverty and it is by far the poorest country in Euro zone.  But it perceives of itself as the anti-Greece: the opposite of the profligate irresponsibly heavy-spending Socialist nation that took to the streets to fight necessary fiscal cuts. 

    “There is no reason to be afraid,” said one leading Estonian. “We have had worse experiences.” For Estonia, everything is relative.  The tribulations of embracing the euro, however bad, cannot come close to what Estonia endured under the Soviets and other colonial powers.   While other nations ponder leaving the Euro, Estonia practices contrarian thinking and embraces it with vigor. We wish Estonia well.

* based on: Jack Ewing, “As euro struggles, Estonia readies for entry in currency”, Global NYT, Dec. 30, 2010.