The Economist: Lithuania and Latvia eager to follow Estonian example

By Danuta Pavilenene

Plunging unemployment, rocketing growth, soaring exports and a budget surplus: that is the story of Estonia as it bounces back from a precipitous economic collapse. This burst of good news shows not only the virtues of flexibility and austerity (a sensitive subject, as other euro countries taste the same medicine); it also gives heart to Latvia and Lithuania, the British weekly The Economist writes.

Estonia's GDP growth rate in the first quarter of the year was 8.5%, the highest in the European Union. It boasts the biggest drop in unemployment, from 18.8% to 13.8%. It has the lowest debt in the EU, of just 6.6% of GDP; measured by the price of credit-default swaps, it is among the ten best sovereign risks in Europe. Fitch, a rating agency, has just raised Estonia's standing to A+, informs LETA.

Strong export growth (up by 53% year-on-year in May) and industrial production (up 26%) reflect in part soaring production of mobile-phone kit at the country's largest exporter, Ericsson.

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But the recovery is broader-based. Eva-Maria Ounapuu of Joik, which makes "simple, Nordic, minimalist" cosmetics, says the recession made consumers turn to local products. Now that this market is "all but saturated", she is starting to export. Policymakers in all three Baltic countries feel vindicated: during the crisis many outsiders told them to unpeg their currencies from the euro. Instead they pressed ahead with "internal devaluation", meaning whopping fiscal adjustments (9% of GDP in Estonia's case) and big cuts in nominal wages. Yet long-term competitiveness is still a concern. Although inflation is slowing, the central bank in Tallinn worries about overheating. The previous boom brought double-digit growth and reckless lending, followed by a construction bust and a 14% fall in GDP. Estonians hope that the banks (almost all foreign-owned) have learned from the past.

A bigger question is whether other countries can match this. Estonia boasts unusually thrifty politicians and an open public culture. It scores well in business-friendliness and clean-government rankings. Taxes are flat and low (the government has just moved to cut income tax from 21% to 20% in 2015). Still, next-door Latvia (which had an international bail-out in 2009) and Lithuania are eager to follow the Estonian example. They also have booming exports (up by 38% and 42%, respectively, in the year to May). Lithuania is also enjoying a storming recovery in the shops. The pair hope to follow Estonia into the euro, reducing their currency risk and boosting their image with investors. But the go-ahead Estonians are already scenting the next challenge. Should the single currency crumble, they are determined to be on the inside track for any new German-centred "super-euro". Goodbye "eastern Europe"; welcome to the "new north".
The Baltic Course