Bliss in the Baltic

Bliss in the Baltic

..YOU don’t have to be big to make it to the top. Or at least that is the case for Estonia, the fourth smallest euro zone member, with the best economic performance in the region. This is one of the main results of the Euro plus monitor, a policy brief published by the Lisbon Council, a Brussels-based think tank. The study looks at economic performance measured by a country’s overall economic health and the speed with which it is adjusting to the latest financial turmoil. Estonia’s performance tops both indices.

Part of the success is timing. Estonia's credit and construction bubbles burst well before the euro crisis came to full force, spurring a series of structural changes. Since the second half of 2007, Estonia has had the highest change in its net export balance, equivalent to 23.2% of its GDP. The respective change for the euro-zone is zero. Estonia’s ‘fiscal squeeze’ has also been impressive. In fact, financial stringency means the government in Tallinn could even relax its fiscal policy slightly.

Booming exports and fiscal conservatism have been vital in improving Estonia’s overall economic health. Yet a low debt ratio, only 6.7% of GDP (the lowest in the euro-zone), and a rapidly adjusting labour market have also played a key role, pushing the Baltic minnow ahead of all other euro zone members both in resilience and fiscal sustainability. Its entrepreneurial performance has been equally remarkable. In 2011 the number of new registered businesses in Estonia is expected to reach 14,000 in 2011, 43% more than in 2008.

While the labour market has adjusted significantly, the pre-crisis rise in labour costs is still harming the economy. The unemployment rate is one of the highest in the euro-zone, both among the overall workforce and young workers especially. Estonia ranks last in the labour cost index and among the bottom five in its capacity to integrate immigrants, two factors hampering competitiveness. For all that, topping the league is impressive for acountry that only 20 years ago emerged from half a century of foreign occupation. As Estonia continues catching up, product quality and the relative prices for domestic labour-intensive services are both expected to rise. Assuming competitiveness continues to rise, the Baltic tiger will top many more lists yet.

source: economist.com