Why Are the Observance of Free Trade Principles and the Adoption of the Euro Important for Estonia?

Why are the Observance of Free Trade Principles and the Adoption of the Euro Important for Estonia?

Signe Ratso Director for WTO Affairs of the European Commission

As I am writing these lines, more than a year has passed since the beginning of the global economic and ﬁ nancial crisis. Unlike Estonia, quite a few European countries are already recovering from the crisis and both the European Commission and various ﬁ nancial institutions are forecasting positive, although modest, economic growth in the EU during the next year.

In retrospect one could say that the entire economic crisis in Western Europe and the U.S. has popularised Keynesian ideas, which envisage relatively great government interven- tion in the economy, especially keeping in mind the formidable amounts that countries have spent to stimulate their economies. On the other hand, Adam Smith’s laissez-faire principles have been called into question, especially considering the diminishing popularity of these ideas among the populations of countries suffering from high unemployment. In accordance with an old Estonian saying, “one’s own shirt is always closest to one’s skin”, thus why should we risk losing our jobs to Chinese sewers or Central European car manufacturers?

In this connection, the question arises as to whether Estonia made the correct strategic decision at the beginning of the 90s when it chose the path of free trade, by abolishing all import and export restrictions and continuing in this direction for years until joining the EU Customs Union. The common EU foreign trade policy is all-in-all very liberal in the global context, if we ignore the protection of the agricultural sector.

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In order to answer this question, we should think ﬁ rst about the choices that Estonia has had. At the Exports and foreign invest- beginning of the path to the restoration of inde- ments have been the most im- pendence, one of the important goals was to tear portant engine for the Estonian Estonia free from the Soviet economy and to inte- economy for almost a decade. grate it into Europe – after all, at that time a total It was only during the last pre- of 97% of Estonia’s exports went to the east. Since crisis boom years that the ratio Estonia lacked a sufﬁ cient internal market or trade of growth resulting from inter- relations with Western Europe, the only logical nal demand, extremely favour- choice was an open economy, a taxation system that able loans and the real estate promoted business, and an orientation toward ex- bubble increased. ports and foreign investments. Exports and foreign investments have been the most important engine for the Estonian economy for almost a decade. It was only during the last pre-crisis boom years that the ratio of growth resulting from internal demand, extremely favourable loans and the real estate bubble increased.

During the current period of economic decline, is there any reason to amend one’s policies? Estonians like to compare themselves to others and naturally to take into consideration what others think of them. Although comparing oneself to those who are more capable is constructive, one must unfortunately recognise the fact that Es- tonia lacks the resources that the majority of Western European countries have uti- lised to stimulate their economies. Unlike them, however, we have not needed to use taxpayers’ money to stimulate the ﬁ nancial system and banks – rather, the Nordic countries have contributed to maintaining the liquidity of our “common” banks.

However, in comparing the situation of Estonia to the others that started from simi- lar positions, it is interesting to read the assessment provided in the EBRD annual report on how the “transition economies” have coped with the crisis. The authors of the report recognise that, although the transition countries have faced greater diffi culties during the crisis than their more developed neighbours, they have never- theless survived the crisis well, and fortunately there has been no signifi cant back- lash against reforms, like collapse of political systems or the growth of populism or protectionism. As far as the extent of the reforms and their implementation (taking into account the relative importance of the private sector in the economy, trade and competition policies, the strength of institutions, including fi nancial institutions, general infrastructure reforms, etc.), Estonia along with Hungary continues to be at the top of the list.

In regard to the spread of protectionism in world trade, the fears that there would be a recurrence of the wave of protectionism that followed the global economic crisis in

42 WHY ARE THE OBSERVANCE OF FREE TRADE PRINCIPLES AND THE ADOPTION OF THE EURO 2010 IMPORTANT FOR ESTONIA?

the 1930s have fortunately proven to be unfounded. As recognised by the so-called “protectionism Countries themselves, rather monitoring report” compiled by the WTO Secre- than their trading partners, tariat, which was completed for the WTO Ministe- have the most to gain from the rial Conference by December 2009, countries have reduction of trade barriers. been reluctant to establish measures that restrain trade, and such measures apply to only 1% of the world trade. On the other hand, there are many countries – especially those with high tariffs and other trade barriers – that have unilaterally reduced these barriers in order to stimulate their economies. This again conﬁ rms a fact well-known to economists – countries themselves, rather than their trading partners, have the most to gain from the reduction of trade barriers.

Then again, economies are also undoubtedly impacted by extensive stimulus packages, especially those directed at speciﬁ c sectors (for instance, the car industry). In these cases, it is hard to determine whether the stimulus package has helped to preserve the competitiveness of a viable company or to just keep an uncompetitive company or sector aﬂ oat. In the latter case, the correct solution would be to make structural changes.

In addition to customs barriers, other more hidden behind-the border barriers exist that have intensifi ed during the crisis, for instance, favouring domestic bidders in government procurements in the U.S. and China. The most effective anti-crisis measure in global trade would undoubtedly be the conclusion of the WTO Doha Development Round. This would be the most reliable guarantee against the proliferation of protectionism by signifi cantly restricting the possibilities for countries to raise customs tariffs, since as a result of the Doha Development Round the difference between the levels of WTO “bound” customs tariffs and those applied by countries (primarily developing countries) would be reduced. However, one must unfortunately admit that despite the dec- larations made at the highest political level of the G20 member states to complete the Doha Round of negotiations during 2010, political will has yet to turn into the neces- sary practical steps. The European Union member states, including Estonia, consider the successful completion of the Doha Round to be very important, since studies show that the EU economy would benefi t most from the conclusion of the agreement as compared to other trading partners.

As mentioned above, open economic policies have signiﬁ cantly helped Estonia to integrate into the EU internal market. The most important stimulus that is missing to date is the adoption of the euro. Much has been said and written about the positive impact of the euro on the Estonian economy and its trustworthiness, as well as on investor conﬁ - dence. Along with the internal market, the euro and the Economic and Monetary Union

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have been among the most successful European Union projects, which have helped to integrate Along with the internal market, the economies of the EU countries and to increase the euro and the Economic and their international competitiveness. Monetary Union have been among the most successful Working in the European Commission, I am often European Union projects, which asked questions about Estonia’s economy. Only re- have helped to integrate the cently I was asked how the Estonian economy was economies of the EU countries faring, and whether Estonia was the Baltic country and to increase their interna- being monitored by the IMF. I was able to answer tional competitiveness. that, thanks to the reserves set aside during good times, Estonia’s situation was signiﬁ cantly better than many observers tend to assume. I was also able to add that if Estonia will be able to keep the 2009 budgetary deﬁ cit under 3% of GDP (to date it is one of the few EU member states that has done so) and prove sustainable compliance with the Maastricht criteria, Estonia might become the only country to adopt the euro in 2011.

In summary, one can say that for a small country like Estonia, which depends heavily on the outside world, an open economy oriented to exports is the only possible choice and accession to the euro zone will certainly help to stabilise the economy and provide a more effective basis for economic recovery.

In conclusion, I quote Jacques Delors, who served three consecutive terms as Presi- dent of the European Commission when the uniﬁ cation of the European Union domestic market was completed and the foundation was laid for the monetary union: “The European model is primarily a social and economic system that is based on market forces, because no computer in the world can process information better than the market.”