Estonian economy beyond the Euro: questions abound

Piret Ehin

Qualifying for the Euro amidst the economic tumult[1] is an extraordinary achievement, and in the overall European context, Estonian budget and public debt figures are indeed “sheer magic.”[2] As a “poster child for austerity,” Estonia could pay all its public debts and still have reserves left over. Equally notable is the stoicism of the Estonian people in enduring the government’s drastic spending cuts and falling real wages. There have been no major protests or riots – in fact, the government’s popularity has been on the rise since summer 2009. The Commission’s positive decision on Estonia’s Euro-eligibility lends additional “post hoc” legitimacy to the government’s austerity measures, and is likely to boost support for government parties in the March 2011 general elections.
However, there are few reasons for euphoria. In 2009, Estonia’s GDP fell by nearly 15 percent, and unemployment now approaches 20 percent. Opinions diverge on how quickly the economy will recover and how accession to the Eurozone will affect economic performance and the labour market situation. The Organisation for Economic Co-operation and Development (OECD) (which invited Estonia to join the organisation in May 2010) has issued an optimistic forecast, predicting 5 percent economic growth in 2011. The expectation of moderate growth seems to be widely shared, and several analysts claim the crisis helped to improve the structure of the economy. However, more critical voices suggest that a combination of an overvalued currency, lagging productivity, and weak domestic demand will result in anemic growth, long-term high unemployment, growing social problems, and possibly, waves of emigration.[3]

In May 2010, public debate on the Euro quickly shifted from the question “Will Estonia qualify?” to “How will the Euro affect the economy?”. The main message in the Estonian media is that the Euro is no panacea. However, Eurozone accession is expected to cement macroeconomic stability, increase investor confidence, facilitate trade and positively distinguish Estonia from its neighbours.

[1] See the Estonian chapter on the European economic policy and the financial and economic crisis (chapter 3).

[2] Rainer Kattel: Should Greece Follow Estonia’s Example?, 21.04.2010, available at: (last access: 01.06.2010).

[3] Ibid.