Overview of main macroeconomic developments according to Eurostat figures, Estonian gross domestic

CzECH REPUBLIC

3. Position and potential impact of the Czech Republic on current key issues

2.1. Overview of main macroeconomic developments according to Eurostat figures, Estonian gross domestic

product grew at an impressive rate of 7.6% in 2011 while in 2012 it is predicted to slow to 1.6%, and to rise again to 3.8% in 2013 (this following a 14.3% contraction in 2009 and a 2.3% increase in 2010).

Unemployment fell to 12.5% in 2011 and is project to decrease further to 10.4% in 2012 and 9.8% in 2013.

inflation, at 5.1% in 2011, will slow to 3.9% in 2012 and 3.4%

in 2013. Estonia’s public sector recorded a 1.0% surplus in 2011 which will turn into a 2.4% deficit in 2012 as a result

within the European Union and the EU’s common cause as such have consistently been among Estonia’s top foreign policy priorities since 2004. as long as the german line does not deviate too much from the “community method”, Estonia is in its element: relations with Berlin should remain good and the country can go on cementing its reputation as an economic model student in the EU.

correspondingly, Estonia has backed the early (i.e. 2012) introduction of the European Stability mechanism (ESm), the reinforcement of the European financial Stability facility (EfSf), both greek bail-out packages, bank recapitalisation, private involvement in greek debt restructuring, EcB independence, strengthened financial surveillance, and – most emphatically – any and all measures to strengthen fiscal discipline across the eurozone.

there has been a recent little hiccup with the government’s legal ombudsman ruling Estonia’s participation in the ESm, although desirable politically, would be unconstitutional as it could result in the country’s parliament being outvoted. the ombudsman has referred the matter to Estonia’s State court (i.e. constitutional court), which in the end approved it. thus, Estonia completed the ratification of the ESm treaty (as well as of article 136 of the treaty on the functioning of the European Union) by early october 2012.

an integral ideological component of the government’s stance is the frequently voiced domestic contention by the prime minister (as well as the finance minister and others) that the modern continental European welfare states are unsustainable. there has been an added public emphasis on issues linked to advancing competitivity and the functioning of the internal market, but it is difficult to judge the extent to which the Estonian leadership has seriously raised this at summits.

Estonia has also displayed a marked preference for the community method and EU27-level solutions (a preference it believes is shared by germany). the British veto at the 8-9 December 2011 summit was accordingly scathingly received by officials (at least in private). overall, there has been a distinct shift away in the course of 2011 (and, coincidentally, since accession to the eurozone) from Estonia’s traditional tendency to align with Britain in favour of a closer relationship with germany and france.

What the Estonian government continues to reject emphatically is any suggestion that it is ready to cede sovereignty. instead of “fiscal union” Estonian ministers prefer to speak of a “stability union”. tax harmonisation in particular is a topic studiously avoided by officials – beyond general positive nods in the direction of moves towards standardisation of the tax base. it remains stated Estonian policy since 2004 that tax issues are a matter for sovereign governments.

2. General economic analysis

2.1. Overview of main macroeconomic developments according to Eurostat figures, Estonian gross domestic product grew at an impressive rate of 7.6% in 2011 while in 2012 it is predicted to slow to 1.6%, and to rise again to 3.8% in 2013 (this following a 14.3% contraction in 2009 and a 2.3% increase in 2010).

Unemployment fell to 12.5% in 2011 and is project to decrease further to 10.4% in 2012 and 9.8% in 2013.

inflation, at 5.1% in 2011, will slow to 3.9% in 2012 and 3.4%

in 2013. Estonia’s public sector recorded a 1.0% surplus in 2011 which will turn into a 2.4% deficit in 2012 as a result

of a carbon quota investment programme and increased pensions expenditure. government borrowing will however shrink in 2013 to 1.3% of gDp.

facing what is likely to turn into a protracted crisis, the government’s Estonia 2020 programme focuses on the need to boost exports (which weathered the 2008-2009 crisis remarkably well). key here is said to be increases in productivity. Between 2003 and 2010, Estonia recorded an average annual productivity growth of 3.2% which translated into an average annual gDp growth of 3%. Between 2010 and 2020, the aim is to attain an average of 3% in annual productivity increases (as opposed to an EU-wide projected annual average of 1%) which should, in turn, translate into an annual gDp growth of 4.4% throughout the period. to this end, the key sectors to be targeted by the government include r&D, training and education, business infrastructure and investment climate.³

all of this will take place against the backdrop of persistent high levels of long-term and structural unemployment, as well as generally negative demographic trends (which are expected to see Estonia’s working age population drop from 908,000 in 2010 to 801,000 in 2030).⁴

analysts warn that Estonia remains highly dependent on the state of the Swedish economy, which in turn is vulnerable to shocks in germany. hardo pajula, a leading analyst with the SEB bank, says Estonia is “today already in a sense a part of the Swedish economy” given the dominance of Swedish banks and the export sector’s dependence on Ericsson. pajula points out that while Swedish growth forecasts remain high, real estate prices in the country continue to increase, suggesting a housing bubble which

3 http://valitsus.ee/et/riigikantselei/eesti2020 4 Ibid.

could burst as soon as the Swedish central bank is forced to raise interest rates.⁵

Table 1, Main macroeconomic indicators of Estonia

2009 2010 2011 2012 (f) 2013 (f) real gDp growth rate (annual change, %) -14.3 2.3 7.6 1.6 3.8

gDp/capita, EU27=100 64 64 67 n.a. n.a.

gross fixed capital formation/gDp (%) 21.5 18.8 21.5 23.1 23.9

fDi inflow (BEUr)* 1,3 1,2 0,1 1,0 n.a.

private consumption/gDp (%) 53.6 52.1 50.9 51.9 51.6

public consumption/gDp (%) 22.0 20.9 19.5 19.3 18.9

Exports of goods and services (BEUr) 9.0 11.4 14.8 15.4 16.6 imports of goods and services (BEUr) 8.2 10.4 14.0 14.8 16.0

current account balance/gDp (%) 4.6 3.8 0.6 -0.3 -0.3

Unemployment rate (%) 13.8 16.9 12.5 11.6 10.5

inflation (hicp) 0.2 2.7 5.1 3.9 3.4

interest rates (10y) - - - -

-Eurostat, European Commission, * WIIW (f = forecast)

as the above table shows, growth in upcoming years is expected to be export-led, with private consumption picking up just a little of the slack and public expenditure forecast to decrease as percentage of gDp. it is important to bear in mind, however, that exports are likely to remain a fickle area in the foreseeable future. Sweden’s status as a non-eurozone country may give Estonia an initial competitive advantage as the euro weakens, but eventually both countries’ economic health will be dependent on that of germany. in other words, the future of the eurozone and the path the current crisis will take remain major unknowns in this equation.

5 Hardo P. (2010)