Estonia winning the hard way

TALLINN - Estonia’s way out of the economic crisis was a “very expensive model” to follow, and serious risks still lay ahead in its continuing recovery, reports National Broadcasting. The World Bank’s director of Central Europe and the Baltics, Peter Harrold told Estonian National Broadcasting while on a visit to Latvia with World Bank President Robert B. Zoellick on August 12-13, that Estonia went into this crisis “after several years of very prudent fiscal policy deriving from their utter determination to become a eurozone member as soon as possible, and consequently with a pretty strong fiscal reserve.”

While crisis can itself be a reason for a country to pull together, Harrold believes Estonia’s determination to adopt the euro “come what may,” served a similar purpose.

“Crisis is often the thing that generates something like this. Alternatively, it can be national unity around a particular policy goal that can energize you. That was the case in Estonia, which had a national consensus around the desire to enter the euro - a very fundamental thing and, of course, a huge victory.”
However, Harrold admitted that doing things the Estonian way is “a very expensive model” and was born more from necessity, with a dash of common sense and good luck, than any genius plan - particularly as the pegged exchange rate left very few options open, apart from cutting to the bone.

“If in Europe fiscal policy is your only instrument, do it right and in the good years put aside something for the bad years because you haven’t got many other instruments to use. You can’t depreciate. Poland could depreciate and use the exchange rate as part of their adjustment mechanism. Romania could use the exchange rate; Hungary could use the exchange rate. But none of the Baltic countries could.”

And while the World Bank’s Harrold identified Estonia as the pin-up model for economies in Central and Eastern Europe, he had a warning for any country that thinks it can revert to business as usual in the post-crisis world. “Everyone knows the patterns of growth that we saw in 2004-8 have gone,” he says. “The future will be different: technology led, innovation led, export led. It will be about productivity, not about how fast can we expand domestic demand using foreign capital.”