Estonia needs to borrow more

TALLINN - The old saying goes: “When in Rome, do as the Romans do,” and this phrase can be translated for use in the eurozone as well. Estonia is, as of Jan. 1, 2011, a eurozone member, but one that can behave as an average eurozone country (but in fact, given the high debt, exploding deficits, inflexible economies and what not in many other eurozone countries, it should not!).

However, in one aspect Estonia would probably be better off if it did mimic its new peers. Estonia has virtually no national debt. Indeed, the small Baltic State has hardly issued any government bonds at all. Although that is something to be proud of, in a way it is hurting its welfare at the same time. That welfare could be improved, as for example the unemployment rate is almost 20 percent. Reducing that by just a quarter would do wonders for Estonia’s well-being, Edin Mujagic, a monetary economist at the ECR Euro Currency Research in Utrecht, The Netherlands and at Tilburg University, writes in an EU Observer column.

Estonia needs stable and high economic growth to increase the welfare of Estonians. To achieve that, it, as any other country, will need to invest in better infrastructure and education and create an environment where entrepreneurship thrives. This needs to be done as, for example, the country is faced with a significant brain drain due to stubbornly high unemployment.
Those investments require money, money Estonia does not have but could get hold of very easily and, which is Mujagic’s main point, very cheaply. In fact, given its ultra sound public finances, Estonia could even get paid to borrow, or borrow for free at the very least.

Attention turns to the recent example of the Netherlands, one of those financially sound eurozone countries, though Estonia might not see it that way, given the Dutch national debt of approximately 65 percent of its GDP and budget deficit of quite a few percent of that GDP. Recently, that country borrowed money for a period of three years paying just one percent interest rate.
At the current inflation rate of 1.9 percent that boils down to being paid to borrow, as the real interest rate (nominal minus inflation) is negative. Unless the Estonian government believes its country will be hit with deflation, then it is missing a great opportunity. If it, like many economists, including Mujagic, subscribes to the view that inflation will be much higher in the coming years, then the picture becomes even more attractive.

Estonia could do the same as the Netherlands have done, given its healthy fiscal position. It could be “paid” to borrow and could use that money to improve its infrastructure, stimulate entrepreneurship and enhance the education of Estonian people. By doing this, economic growth, and thus welfare, is bound to increase. Paying those loans off in the future should equal small change for Estonia, certainly for a much richer Estonia by then. Mujagic continues, urging the government to go to the bond markets and start borrowing.