Your country decided to adopt the euro in extremely difficult economic conditions. Did this help the country to rebound from the financial crisis or did it add to its difficulties?
The euro has definitely helped our economy to recover more sharply. Positive news about our public finances and the euro adoption has alleviated the fears of foreign investors and increased the confidence of consumers and local investors, and the Estonian economy is currently growing at the highest pace in the EU. Naturally, euro adoption should be the key policy goal for other EU countries to ensure sound policies.
Did the adoption of the euro increase the rate of FDI in Estonia?
The euro is so young in Estonia that you cannot be sure about the numbers yet. But the interest of foreign investors has definitely increased considerably. FDI net inflow increased to 7.3% of GDP [€1.1bn] in 2010, which is the highest rate in past five years. In 2011 this growth has continued. Most foreign investments are made in the form of reinvestments – about 75% – and investments in share capital accounts for the remainder. The high volume of reinvestments shows a belief in our environment and the good profitability of past investments in Estonia. Most of the profits are reinvested in the companies.
What is Estonia's competitive edge in the region? And why should investors invest in the country?
Estonia’s competitive edge is based on the strong and consistent drive to support the integration of our economy and finance with the EU's single market and common policies. I believe that good governance and business culture; low levels of corruption; strong public finance; a favourable tax environment for reinvestments; and the country's closeness to Scandinavia, both in terms of its cultural and work environment and its physical closeness, play an important role as well. Our cost level is relatively low and our labour force well qualified. Adoption of the euro is also important and the profitability of previous foreign investments in the country has been good.
In the first quarter of 2011, Estonia had one of the highest GDP growth rates in the EU, its industrial production was up by more than 30% and the export of its manufactured goods was up by more than 50%. What was the main factor behind such a fast recovery and Estonia’s overall success?
Estonia’s GDP growth rate was 9.5% in the first quarter [of 2011] and 8.4% in the second quarter. Due to the rearrangement of companies (expenditure and wage cuts) made during the crisis and the attractiveness to Scandinavian capital (Estonian subsidiaries belong to the same supply chain) the recovery has been fast. For example, Ericsson is playing a big role in the growth of industrial production and in the export of manufactured goods. Strong economic growth is based on growing exports and this year domestic demand is recovering as well.
Estonian prime minister Andrus Ansip’s government implemented an austerity programme. You were among the masterminds behind that programme. Are the austerity measures the way to fight the economic slowdown? Should they be adapted in other countries fighting the crisis at the moment?
I was the head of the financial committee in parliament at the beginning of the crisis and became minister of finance at the hardest time. My personal experience and also international lessons have convinced me that there is no alternative to sound public finances, quick reaction and austerity. First of all balances and the quality of spending is the key to recovery from govenrment’s side. This is also a good opportunity for companies and people to adjust to new conditions and increase competitiveness.
The rate of unemployment in Estonia, at 12%, is exceptionally high, especially given the size and the demographic structure of the country. Why is that and what is the government’s programme to tackle unemployment?
Estonia's labor market has been highly flexible and this is the key strength of the economy. Naturally, this could mean labour realloction between sectors, if economic circumstances change. As a small country, we do not have a viable option to postpone the necessary changes for political purposes if some industries go out of business.
In our case, the key messages are that the number of unemployed has almost halved in the year since early 2010, and Estonian people have remained active labour market participants. We expect job creation to continue.
Unemployment in Estonia reached its peak in the first quarter of 2010, at 19.8% (136,800 people). Now it is at 12%, and is expected to continue falling. The government adopted the 'action plan' for reducing unemployment in September 2009. This plan foresees the extension of active labour market measures as well as increases in the financing of employment programmes. The action plan also includes support for the creation of new jobs; measures for preventing inactivity; the enhancement of additional training and retraining opportunities; and the availability and flexibility of career counselling.
The employment rate is already increasing quickly. Wages have increased between 4% and 5% this year, which is clearly below the growth of profitability. Compared to the Scandinavian wage level, wages are about three to four times smaller in Estonia, so an increase in the cost of labour does not play too big a role here. Looking at the change in the structure of exports, investments are probably made in more capital-intensive sectors and less in labour-intensive sectors.