After giving the opening address for the World Forum for Foreign Direct Investment, which took place in Tallinn in June, Estonian prime minister Andrus Ansip began his interview with fDi Magazine with characteristic understatement.

 “Well, a few things have happened since we last met,” he said, referring to a chance meeting last summer in the lobby of a boutique hotel in the city’s medieval Old Town.

The week before the forum, Estonia signed an agreement to join the Organisation of Economic Co-operation and Development, and it is set to join the eurozone in January 2011. Wobbles in the eurozone and fears over the currency union’s future have not dented enthusiasm for joining, Mr Ansip insists. “We are wasting EKr1bn [€63m] a year in currency exchange,” he says. “Seventy per cent of the foreign direct investments into Estonia are in euros and the same percentage of our exports goes to EU markets, so it will facilitate trade and investment.” But not all of the occurrences have been as pleasant as the ambience in Estonia’s quaintly charming capital. The country’s GDP plummeted nearly 15% in 2009 – one of the world’s biggest drops – posting negative GDP growth for the first time in years and ending the heady days of double-digit growth. Unemployment shot up nearly 20% after a bursting of the housing boom and collapse of the construction sector.

An enviable position

Nonetheless, many of Mr Ansip’s contemporaries in Europe would trade their economic problems for Estonia’s; his Baltic neighbours certainly would. Estonia’s debt as a percentage of GDP is its lowest ever and remains the lowest among EU countries (just over 7% for 2009). The economy is set to expand by 1% in 2010. It is a source of frustration for Estonia that its economy is no longer in surplus, while others would be content to get their deficits down to manageable sizes. The Estonian budget deficit is estimated to be 2.4% for this year, well clear of the magic 3% required to meet the Maastricht criteria for euro entry, and less than one-sixth of that of some of the more profligate euro countries.

“We have the third lowest deficit in Europe,” says Mr Ansip, “but still we have a deficit. We have a target of returning to surplus by 2013.” The drive to reduce the deficit led to an increase in excise taxes on goods such as alcohol and tobacco. However, the flat-tax system that underpins Estonia’s attractiveness as an investment destination is not likely to be touched. Mr Ansip points out that Estonia still offers the lowest tax burden on capital income and wealth in the EU. Voters might resent sin taxes, but the government is aware that, with such a small domestic consumer market and tax base, it can ill afford to upset inward investors or wealth creators. “We want to tax bad behaviour, not entrepreneurship,” he says. Sticking to the fundamentals that brought about the rapid growth in the first place is the way through the tougher times, insists Mr Ansip. “There were some things we can say we did right,” he says – such as hoarding reserves (now 11.7% of GDP) – rather than going on a spending spree. Estonia will not be spending its way out of contraction, and it is clear that prudence and restraint shown during the economic upswing has stood the country in good stead to deal with the subsequent downturn.

Ratings agency Standard & Poor’s recently raised Estonia’s long-term sovereign credit rating to A from A-, in light of the impending euro accession and praised the government for “a series of aggressive consolidation measures, both on the expenditure and revenue sides”. Gearing back up to pre-crisis growth figures may not be possible in the near future, and sustaining such levels is probably not realistic.

Modesty suits this small, unassuming country better than bullish pride anyway. But Mr Ansip could be forgiven if he pressed home the point that the eurozone’s next entrant has more to teach fellow members than learn from them.