Ülo Ennuste Economics

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Ambrose Evans-Pritchard



Debt deflation laboratory of the Baltics

Property prices in Estonia’s Hanseatic capital of Tallinn have fallen by 59pc from their peak in the Baltic boom, a remarkable state of affairs for an EU country nestled against Russia on the most dangerous fault line in Europe.


By Ambrose Evans-Pritchard
Published: 6:52PM BST 20 Sep 2009

Comments 11*

Cost per sq.m has dropped from €1,611 (£1,455) to €669 since April 2007, according to Ober-Haus Real Estate Advisors. Swedbank says up to 30pc of its mortgages in Estonia are in negative equity. Recent loans are in euros – not the local kroon.

Professor Ülo Ennuste from Tallinn University says the private net wealth of Estonia’s people has fallen below zero. I know of no other country in the world where this has occurred, though Latvia may be deeper in hock. Estonia’s foreign debt is 116pc of GDP, second highest in Eastern Europe.

 It is not a good moment for the poster-child of the flat-tax revolution, but those crowing the end of “Margaret Thatcher’s Baltic Model” neglect half the story. Estonia’s euro peg is anything but free-market. It makes Tallinn dance, awkwardly, to Frankfurt’s distant tune. It stoked the boom by enticing people to borrow cheap at eurozone rates: it is now prolonging the bust.

The economy will contract by 14.5pc this year, twice as bad as Iceland (OECD forecasts). Industrial production has fallen 28pc. The unemployed receive half their former pay for a few months, then benefits fall to £12 a week. The shock awaits this winter. Chief victims will be ethnic Russians on the lower rungs of industry.

Most governments would try to cushion the blow. Estonia is instead pushing through yet another austerity package to keep the budget deficit below the EMU ceiling of 3pc of GDP. Such is the totemic appeal of euro entry in 2011.

“This is an absolutely mad policy,” Mr Ennuste told an Open Europe Forum. “We’re in a vicious circle where thousands more lose their jobs and don’t pay taxes, so there have to be more cuts. We need fiscal relief packages at once. This makes nobody happy but the Kremlin.”

The government could spend more. The national debt is just 5pc of GDP. It chooses not to do so. Such ultra-orthodoxy shows admirable discipline. Estonians will be a shining example to us all if they pull it off – and hold their society together.

“Estonia’s credit rating (A-) is going to rise against other countries next year,” said economy minister Johan Parts. “The next phase of the global crisis is how states are going to manage their huge deficits.”

Dag Kirsebom, the author of Hard Landing: a Fairy Tale of the Rise and Fall of the Estonian economy, said the elites had lost the plot. “They are complacent, and they shouldn’t be. We’re in a downward spiral but all they are focused on is joining euro.

“The free-market model worked great for 15 years and then they ruined it with crazy lending. Did Margaret Thatcher say you should borrow money from Swedish banks to buy German cars? I don’t think so. They screwed up, and now it is too late. They need to let the currency fall to reflect the damage already done.”

The euro is more than a currency ambition for Estonia. Like joining Nato, it is part of a national strategy of locking into every part of Europe’s security system as quickly as possible to keep Russia at bay.

What puzzles me is the strange serenity in the ministries. Officialdom seems to think it enough that they have managed to defend their peg without recourse to the IMF, and that their neighbour has collapsed even faster.

“The situation in Latvia is a tragedy,” said Mr Parts. “Nobody will lend them any money except the IMF, and it has the same menu whether you are Latvia or Zimbabwe. The big difference between us and the rest of the Baltics is that we had a buffer of reserves, and we didn’t run budget deficits in the good times.”

Mr Parts quoted Aristotle to defend Estonia’s currency peg: “Give me a single fixed point and I can move the globe”. But is the euro the right “fixed point” when the currencies of Sweden, Russia, Poland, Ukraine have plunged around you? The official view is that exports are not sensitive to the exchange rate. This overlooks the suffocating effect of deflation in a post-bubble economy saddled by debts and wage levels that raced ahead of productivity. The country faces an “internal devaluation” within the EMU bloc to right the ship again. Such cures are painfully slow, and very damaging to democratic solidarity.

Edward Hugh from Baltic Watch advises the four fixed-peggers – Estonia, Latvia, Lithuania, and Bulgaria – to bite the bullet and negotiate a joint devaluation against the euro rather than suffer the political agonies of deflation.

Estonia’s leaders will hear none of it. They can defend the peg as long as reserves last at the central bank. At recent loss rates, they are safe until Christmas.


*11 kommentaari 11:00 21.IX 09


Comments: 11

  • I wish the good people of Eastern Europoe would stop seeing EU membership and especially the Euro as an El Dorado. They and us would be better off out.

Kevin Smith

on September 21, 2009

at 06:06 AM

  • Estonia – as with all the Baltic States – needs to devalue or exit from the Euro.
    Those who enticed them into the Eurozone are to blame (many with D on the backs of their cars, as Eastern European memberships were seen as a political hedge against Russia) as are the greedy politicians and apparatchiks in Talinn who saw EU-membership as a foolproof gravy-train.


on September 21, 2009

at 06:00 AM

  • Estonia is doing the right thing in refusing to debauch its currency and following austerity measures to cut its budget deficit. If it holds its nerve it will experience a short sharp recession followed by a speedy recovery as creative destruction is allowed to take its course. Property and asset prices will fall, making property affordable and investment attractive once again. If only the UK would pursue these policies instead of opting for the Zimbabwe option of debauching its currency and failing to address its very deep rooted structural problems. This will lead to a very dire future and inevitable decline for the UK in the long run as it will never learn to live within its means and impose the savage cuts in public spending that are so desperately needed.

Sane head

on September 21, 2009

at 06:00 AM

  • The Eurozone is a shambles for every economy, except the Germans and their poodle, France. There isn’t a single Euro nation that would not be better off controlling its own economy. Why aren’t we hearing this? Because every major news source goes to the Germans and French for their opinions, rather than polling each member nation and comparing the results. Behind the confident platitudes of the ECB, cracks are growing in the EU structure, that may cause the whole to collapse. If it does, none will be more surprised than those Western Europeans lulled into somnolence by the tame mass media, and the Euro-zealot politicians who are keeping them in the dark.


on September 20, 2009

at 10:53 PM

  • As usual, Evans-Pritchard sounds rational but cannot be relied upon for facts. It simply isn’t true to say that the Polish currency has ‘plunged’. It is off its highs, no more than that but it is part of the A E-P narrative that Poland is in trouble so despite being the only economy in the EU to be still growing, in his columns it’s suffering. As with all economists, the data will support pre-conceived ideas whatever they actually say.

Martin Hinton

on September 20, 2009

at 10:29 PM

  • Mistake: ‘Mr Parts quoted Aristotle to defend Estonia’s currency peg: “Give me a single fixed point and I can move the globe”.’Don’t you mean Archimedes?


on September 20, 2009

at 09:50 PM

  • Not Aristotle,

Detlef Guertler

on September 20, 2009

at 09:46 PM

  • It was Archimedes, not Aristotle.

Neep Hazarika

on September 20, 2009

at 09:37 PM

  • I visited Estonia four years ago, just as the bubble was starting.It’s a very beautiful country, and parts Tallinn – the old city, mainly – are very picturesque. But as with most of the former soviet outposts, huge parts of it were run down, and it was difficult to see how it would make a swift transition into mainland European standards. Dozens of new hotels being built around the city centre begged the question what, apart from possible tourism (dependant of course on the budget airlines), was going to bring much in the way of sustainable economic growth?

    November is possibly not a good month to visit, and the bitter cold and short days convinced me that it would not compete on the same terms as western Europe in the foreseeable future.

    The hot speculative money that flooded in was on a hiding to nothing. Why would anyone pay UK city prices for residential property in Estonia? It was never going to work. This is exactly where you need the flexibility of a floating currency. Pegging is a terrible mistake.

    I feel for the population of Estonia – almost a case of out of the frying pan…


on September 20, 2009

at 09:26 PM

  • It may seem odd to say so now, but the main problem the U.S. will face, fairly soon, will be the unstoppable strengthening of its dollar. It will not be able to stop it, because even massive Federal spending goes–by law, structure, tradition, force, you name it–to the 20% highest income earners.The Federal Government is betting on what all other governments are betting on: that the collapse of demand and massive unemployment won’t challenge the system.

    And they’re right, to a point. Look how bad unemployment got in the U.S. during the depression. And yet there was no serious movement to change the system.

    The real threat to the system here in the U.S. will come when the underemployment rate among those with a Bachelors degree or higher, reaches 40%.

    It’s about 10% now, which is why the Federal Government can blithely pursue Andrew Mellon’s mandate: “liquidate liquidate liquidate.” To use a metaphor from the Westerns, they’ve circle the wagons (protected all the powerful), and now they’re shooting at the Indians.

    So it doesn’t matter what anyone says. The only thing that matters is that undermployment rate among those who have a Bachelors degree or higher.

    By the way, it matters to the Department of Labor. Every month, they break down unemployment by educational level. Just double the number they produce.

John Ryskamp

on September 20, 2009

at 08:53 PM

  • The Estonian government’s policy is madness. They have no business being in a Euro currency area with an economy in the shambles that it is and need a set of economic policies that suits its own circumstances. Nuts.


on September 20, 2009

at 07:48 PM



Main conclusion of my talk https://uloennuste.wordpress.com/2009/09/14/154/  at “Open European Forum”  in Tallinn 16.IX 09 has been:

Memo to:

The Prime Minister of Estonia

The Commissioner for Economic and Monetary Affairs

First, Estonia shouldn’t at all in the present hyper-crisis rush to exit from significant fiscal stimulus policies categorically. It is not yet late to ensure a proper sequencing of fiscal expansionary relief  instruments, with the goal of preventing further increase of   high-unemployment (already about 17%, and net financial assets of households in the red, industrial output in free fall etc) and soften the likely double-dip recession (one neighbour country already signalling about preparing for that by new future transit-blockades, so have euro-sceptics activated activities against euro-zone enlargement).

Second, but Estonia should rush to “harmonize” and seek better time-consistency (crisis-contingency) with the EU Commission at least to the extant Maastricht inflation criterion: in present form it is also non-transparent and technically defective, and with that may cause for Estonia irretrievable socio-economic and credibility losses. It seems at the moment the Estonian Government is incompetently going in the end of the year to deflate county dawn to fulfil the first part of the inflation criterion (level of inflation < i+1.5%, average three-best inflation), thereby the second part of it (stability and sustainability of ) stays almost certainly unfulfilled (the trouble is that Estonian ruling macro-economic experts are mainly not competent enough to understand the existence of the second part of inflation criterion (stability and sustainability of prices), although in 2006 Lithuania failed just this that component (BTW, it seems that Estonian proposals  for the amendment of Maastricht inflation criterion thus far have been incompetent).

And perhaps in the hyper-crisis situation, it may be rational for new Commission to move beyond a rigorous adherence to the hole stability and growth pact altogether and rewrite it to be more state-contingent (decision theoretically) and charitable to micro-member states with a past in half of century in the occupational centralised planning limbo with huge economic and human capital losses.

Third, instant reform of the Estonian tax system is probably necessary: in the sense of harmonization of moral competition with member countries, for enhancement of Estonian socio-economic sustainability, lowering the risks of domestic capital flight without domestic taxing and avoiding worsening of the Estonian international investment position. And most importantly, presently there is a lack of balance between tax laws and national pension law, the income tax law is biased towards incompetently low capital income taxation, absolutely unbalanced, that has almost certainly had regrettably vast opportunity costs for national economy. 

Fourth, the crisis has shown that macroeconomic policy in the Baltic-Rim area needs to be better coordinated regionally, especially when it comes to post-crisis management, e.g. “free” movement of “all kind” of labour, credit, investments, financial obligations, and most importantly to the Baltic-See protection against third-parties contaminating activities etc. It seems resonable that the Commision has to intoduce a Baltic-Rim Coordination Centre.

Fifth, the coordination mechanism of the Estonian public knowledge space building should be basically adapted to the IT and liberal non-censorship conditions. Unfortunately at present such significant indicators as Estonian high national gross external debt (this year my forecast about 140% of GDP), current account chronically with relatively high deficiency, international investment position retreating, Estonian economic inequality index by quintiles barbarically high compared to nearby Nordic countries, net financial assets of households in read etc – are, alas, from the Estonian public knowledge space by self-important administrative and incumbent political camp rhetoric, in overshadowed position in mass media and administrative statistics, thus helping to play down cognition of real severity of the present national economy situation, and not enabling to make high quality forecasts – so probably significantly magnifying national socio-economic sustainability risks.  It slould be organized that the freedom of speech clauses are not extended to the tax-law, pencion-law, foreign-trade etc matters, and especially not to the last occupation and foreign policy matters, most imprtantly not to insulting and slandering the European Union and bousting against member-countries. 

PS2: „Open Europe Forum“ Tallinn 16.IX 09 programmis on minu töökohaks märgitud „economist“ – seega mitte TLÜ ega ka TTÜ, rõhutatult märkisin kõigile selles seltskonnas, ka Ambrose’le, et olen tavapensionär, muidugi on seal minu nimega seotud ka mõningaid andmeid, milliseid näen esmakordselt.

Vabandades, Ülo Ennuste prof DSc


September 21, 2009 - Posted by | Uncategorized

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