Estonia and the European debt crisis.

• Author: Parts, Juhan
• Position: Essay

Estonia has had a quick recovery from the recent recession and its economy is in better shape than before the crisis. It is now much leaner and significantly more capable of handling international shocks. After a sharp contraction, in which GDP contracted by over 14 percent in 2009, GDP growth rebounded quickly, growing at a rate of 3.1 percent in 2010 and 8.3 percent in 2011.

Labor productivity has grown faster than real wages, which has increased the competitiveness of Estonian firms in the world markets. Estonian exports grew 22 percent in 2010 and 25 percent in 2011. This is a result of the rapid increase of high value-added exports by the manufacturing sector, which has also been the main job creator since the crisis. Indeed, export growth has been the main driver of the Estonian economic recovery.

Paul Krugman (2012) has pointed out that Estonia has not reached its pre-recession level of GDP, but that is because Estonia was hit particularly hard by the financial crisis in 2008 and 2009. Significant export markets disappeared and the domestic housing bubble deflated. GDP shrank by 3.7 percent in 2008 and 14.3 percent in 2009, making it the third-deepest recession in the European Union. This contraction was a result of two main factors: the fact that Estonia is a small open economy, and the previous rapid credit expansion that had significantly boosted domestic consumption. Another metric showing the extent to which Estonia was hit by the recession is the unemployment rate, which climbed to 17 percent in 2010. However, just as with economic growth, Estonia has recovered quickly from the nadir of 2009; there has already been a rapid decline in the unemployment rate to 12.5 percent in 2011, and it is expected to fall further to 10.5 percent in 2012.

It is important to understand that the low unemployment rate of the boom years was not built on a solid foundation, as the credit bubble created many unsustainable jobs in construction and retail trade with low productivity. It will take years to bring down the unemployment rate as there is mismatch between demand and supply of workers with particular skills. It is also important to keep in mind that Estonia experienced some of the most spectacular GDP growth rates in Europe in the second half of the 1990s and early years of the last decade. Per capita GDP at purchasing power parity, measured in 2009 U.S. dollars, was $5,657 in 1993 and reached almost $21,000 in 2007. The unemployment rate decreased to below 5 percent in 2007. While Krugman is correct that Estonian GDP may not yet be back to its 2007 level, the Estonian economy has recovered quickly and is certainly stronger and more...