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TALLINN - The applause for Estonia’s euro adoption just doesn’t end. This tiny northern European country’s accession to the eurozone and the Organization for Economic Cooperation and Development has attracted a wave of foreign-investor interest, says a government official, reports Bloomberg.
The national business promotion agency EAS is working with potential investors on 112 projects, compared with about 50 projects a year earlier, Krister Kalda, the head of EAS’s investment and trade development unit, said in an e-mailed response to questions on Jan. 24.
“It is a safe bet [to say] that the euro has had a positive effect, as Statoil mentioned when making a big investment here,” Kalda said, adding that “We also know of other companies who’ve said that. Certainly, there’s also been a boost from the general increase in publicity due to Estonia’s capital Tallinn becoming the European capital of culture this year, and joining the OECD.”
Euro adoption removes currency risks and exchange costs for exporters and investors. The former Soviet Baltic republic is relying on foreign investment and shipping goods abroad as it catches up with Western European living standards amid weak domestic demand because of high private debt and unemployment, at 15.5 percent in the third quarter.
Estonia on Dec. 9 became the 34th member of the Paris-based OECD, a grouping of the world’s most advanced economies, and the 17th eurozone nation on Jan. 1.
Statoil Fuel & Retail ASA, the biggest fuel retailer in the Nordics, set up its financial center in Estonia on Oct. 1, citing euro entry as a crucial factor in picking the location. It spent 270 million euros, the biggest foreign investment in the Baltic country last year.
Kalda said he hopes to reach investment decisions this year on about the same number of projects as last year. In 2010, EAS helped to seal 24 investment agreements totaling an expected 1.8 billion kroons (115.3 million euros), he said.
Key industries for investors are metals and machinery, chemicals, materials technology, business services and information technology, with major investors helping their suppliers to move operations to Estonia, he noted. Aside from Sweden and Finland, where the majority of investment into Estonia stems from, potential investors also represent the U.K., France, the U.S., Russia and Norway.
Considering the possibility for further revenue-generating measures as the government continues with its austerity plans, IRL Chairman Mart Laar says that further tax hikes would be counter to Estonia’s national interest, as the tax burden is already too high in Estonia. “Increasing [taxes] would curb economic growth and keep the unemployment rate high. By lowering taxes, Estonia would lose money, at least temporarily. However, this is the only way that we can move forward,” Laar said, reports news agency LETA.
According to the former prime minister, the main fault with Estonia’s tax system is unduly high payroll taxes; the higher the charges levied on the workforce, the more cautious employers are in creating new jobs.
IRL proposes to cap the social tax, a move that “should facilitate creation of high-paying jobs, and lower the unemployment insurance premiums,” he says. The party’s platform foresees eliminating the fringe benefit tax on employer contributions to employee pension funds, supplementary health insurance and training courses.
Laar also said IRL would block all attempts to rashly increase public sector debt.
Despite what Laar considers high tax rates, the Estonian Market Research Institute forecasts continued strong growth in trade, after the already encouraging November figures. Statistics Estonia reports that in November 2010, compared to November 2009, Estonia’s exports of goods rose by 48 percent and imports by 38 percent, at current prices.
Twenty-five percent of companies polled by the Institute in December expected export orders to increase, while in November the share was 20 percent. Half of those polled said that they expect orders to remain at ordinary levels and the rest were pessimistic.
The Estonian economic confidence index of the European Commission showed an increase in December; the entire EU and euro area economic confidence index also improved. Economic confidence is higher in Germany and Sweden, which are among Estonia’s most important trade partners.
The European Bank for Reconstruction and Development now expects Estonia’s economy to grow this year by 3.6 percent. In October, EBRD forecast that Estonia’s economy would grow 3.2 percent this year.