#1Aug 18th, 2005
The Estonians (not big admirers of the French and Germans and prefer to ally themselves with America and Britain) are showing France and Germany how to run an economy.
This little country, only the size of Holland and with a population of just 1.5 million, is booming.
www.iht.com (external - login to view) . . .
Tomorrow: Daniel Altman on the unwillingness of Europeans to cede control of cherished companies to foreigners.
TALLINN, Estonia Standing on Tallinn's Toompea Hill as yellow evening light settles over the Baltic, you can see ferries busily entering the docks from Finland. Daring shapes of modern buildings - Radisson Hotel, Union Bank - tower over the Old Town's rooftops. Tourists throng the restaurants and squares.
Membership in the European Union has changed Estonia, this small country of coastlines, forests, and wet plains, since it joined on May 1, 2004.
Membership accelerated a transformation that began when Estonia emerged, limping and gray, from communism 14 years ago.
But Estonia has in turn changed Europe. In a way that could hardly have been foreseen last year, the entry into the EU of 10 new countries - eight, including Estonia, from behind the former Iron Curtain - triggered a tumultuous year and a crisis of confidence among the EU's old guard. The trends they imported - their rapid growth, fueled by low wages and low taxes, as well as a competitive zeal to make up for the last 50 years - threw into relief the moribund growth of older economies such as Germany and France.
Estonia has in turn changed Europe. In a way that could hardly have been foreseen last year, the entry into the EU of 10 new countries - eight, including Estonia, from behind the former Iron Curtain - triggered a tumultuous year and a crisis of confidence among the EU's old guard. The trends they imported - their rapid growth, fueled by low wages and low taxes, as well as a competitive zeal to make up for the last 50 years - threw into relief the moribund growth of older economies such as Germany and France.
The competitive threat posed by the new members alarmed Western voters, who feared for their jobs. That fear contributed to the defeat of the European constitution. It led to the waning of public appetite for further EU enlargement - bad news for Turkey and Ukraine, even perhaps Croatia, Bulgaria, or Romania, all nations now yearning to join the EU's ranks.
Germany and France are now engaged in debates about how to confront globalization and save their comfortable social models. But the view from this cool, northernmost tip of the group of new EU states suggests that the pressure for change that the new members are bringing to bear across Europe's broader political landscape is not about to abate.
In Estonia, which is roughly the size of the Netherlands (about eight times smaller than Britain) - with less than a tenth of its population - one area where EU membership has had a big effect is politics. It has led to a political renaissance for a country that for centuries was a vassal state tossed between Scandinavian and German overlords. Most recently it smarted under the even stricter lash of Russia's Soviet empire.
But Estonia now possesses a new self-confidence as an independent country in the protective embrace of the European Union. This has allowed it and the other new-accession states led by Poland to resist Moscow more firmly, and has also encouraged the EU to take a tougher line versus Russia, for example over last year's disputed elections in Ukraine.
The EU's other startling impact has been economic. In the 1990s, when Estonia became a candidate, the prospect of EU entry unleashed a boom in investment and growth that continues.
There was a setback after 1998 when Russia's economic crisis severed trading lines into what was still one of Estonia's biggest markets. Unemployment rose to 15 percent. But over the last few years, gross domestic product has grown annually by 6 to 7 percent, an expansion that most forecasters predict will continue. Unemployment is 9 to 10 percent.
"The EU is the guarantee to investors that stability is going to continue in the same way," says Ilmar Lepik, head of economics at the Bank of Estonia, the central bank, in Tallinn. "It is a matter of trust. That is the difference the EU has made since last year. It is important if you are very small and very alone."
Estonia's boom has come in sectors like tourism, construction, and electronics. Elcoteq, a Finnish electronics manufacturer, uses Estonian factories where wages are much less than Finland's to assemble mobile phones for Scandinavian companies such as Nokia and Ericsson.
Mart Mägi, at PriceWaterhouseCoopers in Tallinn, says that companies that formerly would have considered Asia for their call centers are now locating in the Baltics and that some U.S. businesses, attracted by low taxes, are contemplating using Tallinn as a base for their European holding companies.
There is also a boom in shipping, as trade between the nations that border the Baltic Sea expands. EU membership might have been expected to turn all eyes to Brussels, but the lowering of borders, and the quickening of trade between the Baltic neighbors, means that increasingly the Baltic is becoming a region with its own character and its own center of gravity. Finland and Sweden are Estonia's biggest investors, and care more and more for its well-being and security.
One crucial support of this economic expansion has been a stable monetary policy. In 1992, Estonia was the first country to break away from the free-falling ruble zone, fixing its new currency to the Deutsche mark. In 1999, it transferred the peg to the euro. It intends totally to submerge its currency, the kroon, in the euro in 2007. However, with inflation at 3.8 percent, above the euro limit, this may be delayed.
"I would say it is now 50 percent," Maris Lauri, an economist at Hansabank, one of Estonia's biggest banks, says of the likelihood. She also cautions about the country's broader prospects. "It looks so good, you have to ask, 'When is the crash going to come?"'
While monetary policy was grounded firmly in the EU's strictures, fiscal policy has been more homegrown, and has probably done more than anything else to bring Estonia into conflict with new partners like Germany and France. Estonia adopted the system of a flat tax rate, currently at 24 percent, for all personal and corporate incomes. It wants to cut the rate to 20 percent.
Flat taxes have won converts elsewhere - in the Conservative Party in Britain, for example. But Germany and France say such low rates unfairly lure away their companies and jobs.
Next month, Germany faces a momentous general election in which economic reform aimed at cutting high unemployment is one of the key debates. France also is trying to work out how to cut its high jobless rate. The German and French debates must now take place against the backdrop of the economic arrangements of Estonia and its fellow accession states - and their relatively rosier performance.
In October, the EU will engage in more soul-searching when it finally decides whether to open membership negotiations with Turkey, with the old EU member states suspecting that Turkish entry would be even more problematic.
But whether the Turks join or not, the Estonians and the difference they have made are here to stay.
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