Visions for Europe - Making the best out of the crisis

22 January 2013

Estonia was a non-euro member with a huge housing bubble when Lehman Brothers collapsed in 2008. There was no real option of a bailout, and it couldn’t get loans at reasonable rates. Devaluation was a non-starter too. Businesses could no longer get loans, said Toomas Hendrik Ilves, President of the Republic of Estonia.

Estonia could do very little other than cut costs. Government salaries were reduced by 20%, and other salaries fell by 10-20%. The country’s GDP declined by 20% and unemployment rose to 18-19%. There were no cuts to social welfare or pensions, so the safety net remained intact. But the situation was particularly painful for public employees, Ilves said.

Despite the pain, it worked: last year Estonia had 8% growth and a total debt of 6-7%, and the budget is balanced. As a NATO member, 2% of GDP goes on defence, he said.

In these conditions of severe depression and major cuts, you can imagine the issues with ratifying the ESM (European Stability Mechanism) and the EFSF (European Financial Stability Facility), but both were eventually passed by the government and the parliament with large majorities, President Ilves said.

Estonian public opinion, on the other hand, is 75% against the ESM and the EFSF, and people are really, really angry, said Ilves, pointing out that minimum salaries in Greece are 10% higher than the average wage in Estonia.