Estonia

Politics:

• Analysis

  Estonia politics: Ruling party loses support

  On December 6th the justice minister, Kristen Michal of the ruling Reform Party, resigned amid accusations of involvement in illegal party financing. His resignation is not expected to revive the fortunes of the Reform Party, which has seen its public support halved in recent months, but it could give the party some breathing space to figure out how best to deal with growing voter alienation amid disillusionment with fiscal consolidation efforts. At worst, his resignation has increased speculation that the ruling coalition might need to be reformed again, albeit led by the Reform Party with the pro-Russian Centre Party as a junior partner.

  The latest public opinion polls by TNS Emor were published on December 7th by ETV, a public broadcaster. The poll is based on 500 interviews conducted on November 21st-28th. According to this poll, the Reform Party has lost almost half of its public support since August 2012. Had there had been an election in late November, the Reform Party would have received support from only 21.4% of the electorate, compared with 39% in August, making it the second-smallest of the four parties in parliament. The Reform Party's junior coalition partner in government, the Pro Patria-Res Publica Union (IRL), is supported by around 17.3% of the electorate.

  The largest party would have been the opposition Social Democratic Party (SDE), with 30% of the popular vote. The SDE has seen a tremendous increase in public support since it replaced Juri Pihl with Sven Mikser as chair in October 2010. The fourth-largest party in parliament, the pro-Russian Centre Party, received support from 24% of those interviewed. The Centre Party is led by the controversial Edgar Savisaar, the mayor of Tallinn. Mr Savisaar was one of the main figures in the moderate Rahvarinne (Public Front) in the fight for independence in the late 1980s and early 1990s, but he has since been linked to multiple scandals and is accused of maintaining close contact with the party of the Russian president. This has made him unpopular among the local populace.

  Uncertain coalition formations

  According to the latest figures, the government is supported by a mere 38.7% of the electorate against the two opposition parties' 54%. However, it is highly unlikely that the SDE would be willing to enter into closer co-operation with the Centre Party, which it considers to be overly influenced by Russian interests. Nonetheless, the Reform Party occupies a strong position within parliament, as it can form a majority with any of the other three partiers, whereas the only alternative not including the Reform Party would be a coalition consisting of all the other parties.

  The Reform Party has led the government since 2005 and participated in every administration since 1999. It is showing increasing signs of fatigue, plagued by multiple scandals, growing isolation from voters, an unwillingness to engage in dialogue with civil society, and an inability to carry through needed reforms, such as reducing public spending.

  On February 23rd the prime minister and Reform Party leader, Andrus Ansip, announced that he would not be standing again for the post of prime minister once his current term ends. Combined with falling public support for the Reform Party, this has led to increased speculation that Mr Ansip could resign in the near term. One possibility is that he will step down in order to pave the way for a new Reform Party-Centre Party coalition government under the enduringly popular Urmas Paet, currently the foreign minister. Although Mr Ansip has previously ruled out any co-operation with the Centre Party as long as it is headed by Mr Savisaar, the Reform Party and the Centre Party have co-operated together in government in 2002-03 and 2005-07.

  In line with the traditionally high level of instability in Estonian politics, we maintain our outlook that the next parliamentary election will be held in March 2015. However, in the light of the erosion of the support for the Reform Party, we cannot rule out a realignment of the ruling coalition. If the Reform Party swaps the IRL for the Centre Party, there is likely to be a turn towards increasing populism and even less willingness to carry through needed reforms.

  December 11, 2012

• Background

  Estonia: Key figures

  Andrus Ansip

  Previously the mayor of Tartu, Andrus Ansip rose to national prominence in 2004, when he became leader of the Reform Party. When the coalition between Res Publica and the Reform Party collapsed in early 2005, Mr Ansip took over as prime minister. He played a leading role in the Reform Party's victory in the parliamentary election in March 2007, but his political touch seemed to grow much less sure as the economy swung into recession. Nevertheless, he succeeded in pushing through stringent budgets in order to gain Estonian entry into the euro zone. His success in winning euro adoption—on which he staked much of his political capital—helped him to become the first prime minister in Estonia's independent history to win two successive elections, with the Reform Party again taking the most seats in the election in March 2011. His position as leader of the Reform Party over the forecast period therefore seems secure.

  Edgar Savisaar

  The founder and undisputed leader of the Centre Party, Edgar Savisaar is a controversial figure who is sometimes accused of having an authoritarian style. He served as prime minister during the restoration of Estonian independence in 1990-92, and was the economy minister in the coalition with the Reform Party in 2005-07. The Reform Party's victory in the parliamentary election in 2007 prevented Mr Savisaar from becoming prime minister again, and he chose to take on the role of mayor of the capital, Tallinn, once more, rather than to lead the opposition forces in parliament. Ahead of the general election in March 2011 Mr Savisaar approached Vladimir Yakunin, a former KGB agent and currently the president of the Russian state-run railway company, for funds, apparently for the construction of a Russian Orthodox church in Tallinn. This caused controversy, and the Centre Party performed less well than expected. The Centre Party appears to be losing some ground to the Social Democratic Party (SDE) as the largest opposition force. However, Mr Savisaar's position as the head of the Centre Party is secure, and he remains the most prominent opposition voice in Estonian politics.

  Toomas Hendrik Ilves

  Toomas Hendrik Ilves is the son of Estonian emigre parents and was brought up in the US. As foreign minister he was instrumental in Estonian accession to the EU. In 2004 he was elected to a seat in the European Parliament with a strong personal vote, and had been expected to apply himself to European affairs. However, he agreed to stand in the presidential election in 2006 and, benefiting from the support of the Reform Party and the Pro Patria-Res Publica Union (IRL), defeated the incumbent, Arnold Ruutel, a former leader of the Estonian People's Union. Mr Ilves has performed well as president, and is likely to win re-election to a second term in August 2011, having the support of the Reform Party, the IRL and the SDE. He has established a good reputation among Estonia's EU partners and will continue to focus his efforts on gaining a central role for Estonia in EU affairs.

  Mart Laar

  Mart Laar was prime minister in governments led by the Pro Patria Union in 1992-94 and in 1999-2002. He was the candidate for prime minister of the IRL during the 2007 parliamentary election campaign, but, following a dispute with the Reform Party, did not become a minister in the coalition government that took office after the election. Mr Laar returned to government following the election in 2011, when the Reform Party-IRL coalition won re-election. He is currently serving as defence minister and is likely to remain the IRL's most influential figure.

  July 06, 2011

• Structure

  Estonia: Political structure

  Official name

  Republic of Estonia

  Legal system

  In 1992 the Estonian State Assembly, the Riigikogu, declared legal continuity between the 1918-40 republic and the current state. A new constitution was adopted in 1992 by referendum

  National legislature

  Unicameral assembly, the Riigikogu, of 101 members. All members are directly elected, but parties need a minimum of 5% of the vote to enter the Riigikogu. Members can later sit as independents. The Riigikogu's term is for four years

  Electoral system

  Proportional representation. There is universal suffrage for Estonian citizens (as defined by the reinstated 1938 citizenship law) over the age of 18, whether resident in Estonia or abroad. Other residents, mainly Russians and other minorities, cannot vote in general elections, but are able to vote in municipal elections

  National elections

  Last elections: presidential (August 29th 2011); parliamentary (March 6th 2011). The next parliamentary election is due to be held in March 2015 and the next presidential election in August 2015

  Head of state

  President, currently Toomas Hendrik Ilves, who was elected to a second five-year term in August 2011

  National government

  A coalition government led by Andrus Ansip, comprising the liberal Reform Party and the conservative-nationalist Pro Patria-Res Publica Union

  Main political parties

  Reform Party (33 seats in the Riigikogu); Centre Party (26 seats); Pro Patria-Res Publica Union (IRL; 23 seats); Social Democratic Party (SDE; 19 seats)

  Council of Ministers

  Prime minister: Andrus Ansip (Reform)

  Key ministers

  Agriculture: Helir-Valdor Seeder (IRL)

  Culture: Rein Lang (Reform)

  Defence: Mart Laar (IRL)

  Economic affairs & communications: Juhan Parts (IRL)

  Education & science: Jaak Aaviksoo (IRL)

  Environment: Keit Pentus (Reform)

  Finance: Jurgen Ligi (Reform)

  Foreign affairs: Urmas Paet (Reform)

  Interior: Ken-Marti Vaher (IRL)

  Justice: Kristen Michal (Reform)

  Regional affairs: Siim Valmar Kiisler (IRL)

  Social affairs: Hanno Pevkur (Reform)

  Central bank governor

  Andres Lipstok

  January 09, 2013

• Outlook

  Estonia: Key developments

  Outlook for 2013-17

  • Since the election in March 2011, a centre-right coalition of the Reform Party and the Pro Patria-Res Publica Union (IRL) has had a parliamentary majority. Policy disputes and waning popularity are testing the coalition.
  • Politicians will continue to back the fiscally conservative German position with regard to the debt crisis. Interest rates could prove too low for Estonia's transition economy, resulting in higher inflation later in the forecast period.
  • The budget deficit will remain within the EU-mandated deficit limit of 3% of GDP in 2012-15, before returning to surplus from 2016. The government's approach to fiscal consolidation will stoke tensions with unions.
  • The euro zone recession in 2012-13 will have a negative impact on Estonian growth, and we forecast a further deceleration in real GDP in 2013, to 2.6%. We forecast average annual real GDP growth of 3.4% per year in 2014-17.
  • Inflation will remain elevated in 2013, at an average of 4.2%, owing to high global fuel and food prices, and the liberalisation of electricity prices. Inflation will remain robust in 2014-17, in part reflecting rising energy costs.
  • The current account is estimated to have returned to deficit in 2012 owing to a widening of the trade deficit. The trade deficit will grow in 2013-17, resulting in an average current-account deficit of 5.2% of GDP.

  Review

  • Civil society groups have called on the political establishment to increase transparency and responsiveness amid accusations of questionable party financing and nepotism.
  • The latest public opinion polls, published on December 7th, revealed that the Reform Party has lost almost one-half of its public support since August 2012 amid political scandals and growing isolation from voters.
  • Parliament has approved the state budget for 2013, projecting a narrowing of the budget deficit to 0.7% of GDP. Continued respectable real GDP growth will help to finance higher wages and pensions.
  • Real GDP expanded by 3.5% year on year in the third quarter, underpinned by robust domestic demand.
  • Industrial production grew for a third consecutive month in November, rising by 6.5% year on year, owing to strong external demand for electronics.
  • The unemployment rate decreased in the third quarter to 9.7%, from 10.2% in the second quarter.
  • Consumer price inflation fell by 0.1% month on month in December as food prices eased modestly. This brought annual inflation for 2012 to 3.9%.

  January 09, 2013

Economy:

• Background

  Estonia: Country fact sheet

  Fact sheet

  Annual data	2011a	Historical averages (%)	2007-11
  Population (m)	1.3	Population growth	-0.1
  GDP (US$ m; market exchange rate)	22,200	Real GDP growth	-0.2
  GDP (US$ m; purchasing power parity)	27,459b	Real domestic demand growth	-3.1
  GDP per head (US$; market exchange rate)	16,564	Inflation	4.9
  GDP per head (US$; purchasing power parity)	20,489b	Current-account balance (% of GDP)	-3.3
  Exchange rate (av) €:US$	0.72	FDI inflows (% of GDP)	7.7
  a Actual. b Economist Intelligence Unit estimates.

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  Background: Estonia regained independence in 1991. The first post-independence government established a free-market economy. Despite the instability of successive coalition governments-the current government is the 15th since independence-Estonia has pursued policies that are economically liberal and open to foreign investment. Politics is dominated by the centre-right, but personality clashes have historically made it difficult for the various right-wing parties to work together. Following its victory in the parliamentary election in March 2007, the Reform Party formed a coalition with the Pro Patria-Res Publica Union (IRL) and the Social Democratic Party (SDE), but the SDE left the coalition in May 2009. Following the parliamentary election in March 2011, the Reform Party and the IRL remain in a coalition and govern for a second term of office.

  Political structure: Estonia has a unicameral legislature, the Riigikogu, with 101 members who are chosen in direct elections by proportional representation. The president is the head of state, but most governmental powers rest with parliament. The president is indirectly elected, either by members of the Riigikogu or, if parliament cannot muster sufficient votes for the leading candidate, by a broader electoral college made up of members of parliament (MPs) and representatives of local government.

  Policy issues: Estonia joined the euro zone in January 2011. In the deteriorating external environment, policy efforts will focus on maintaining macroeconomic stability. Throughout the forecast period the government will focus on attracting increasing levels of foreign direct investment (FDI).

  Taxation: Estonia has a flat system of personal income tax, with the single rate at 21%. Social security contributions are high, at 33%. Estonia only levies corporate income tax on distributed profits, which has led to tensions with other EU members. Value-added tax (VAT) is levied at 20%, having been raised from 18% in July 2009.

  Foreign trade: Estonia has an open economy. In 2011 exports (fob) amounted to US$16.8bn and imports (cif) amounted to US$17.1bn. The current account recorded a surplus of US$477m (2.1% of GDP) in 2011, compared with a surplus of US$550m (2.9% of GDP) in 2010.

  Major exports 2011	% of total	Major imports 2011	% of total
  Machinery & equipment	27.5	Machinery & equipment	27.3
  Mineral products	17.3	Mineral products	18.0
  Foodstuffs	8.4	Chemicals	12.5
  Timber products	7.7	Foodstuffs	9.8
  Leading markets 2011	% of total	Leading suppliers 2011	% of total
  Sweden	15.6	Finland	12.5
  Finland	15.0	Latvia	10.8
  Russia	11.0	Sweden	10.6
  Latvia	8.0	Germany	10.2

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  January 09, 2013

• Structure

  Estonia: Economic structure

  Data and charts: Annual trends charts

  
  

  

  January 09, 2013

• Outlook

  Estonia: Country outlook

  Estonia: Country outlook

  FROM THE ECONOMIST INTELLIGENCE UNIT

  POLITICAL STABILITY: A centre-right coalition, comprising the Reform Party and the Pro Patria-Res Publica Union (IRL), was re-elected for a second term following the parliamentary election in March 2011. Between them, the two parties control 56 of the 101 seats in the Riigikogu (parliament), up from 49 seats previously. Andrus Ansip of the Reform Party is the prime minister. The two parties have a successful track record of governing together. There is a broad consensus across the political spectrum on a pro-market policy stance. However, policymaking will continue to be hampered by intra-coalition disagreements. In addition, there are growing signs that the government's approach to fiscal consolidation is stoking social tensions, with unions and business associations coming out against aspects of its policy. A national teachers' strike was held in early March--the largest strike in Estonia since the country gained independence--demanding higher wages. A month-long nationwide strike by medical personnel was held in October 2012, with unions demanding wage increases. Should popular pressure against austerity mount, the government might be tempted to loosen fiscal policy.

  ELECTION WATCH: The next parliamentary election is not due until March 2015. The Reform Party remains the largest party in parliament following the election in 2011, having benefited from achieving euro adoption in January 2011. The strong performance of the Social Democratic Party (SDE) and the relatively poor showing of the Centre Party suggest the possibility of political realignments over the forecast period. By the next election the SDE could emerge as the strongest centre-left organisation, as the Centre Party loses support. A scandal over the selling of residence permits to wealthy foreigners highlights divisions within the IRL. In February 2012 60 members left the IRL, many to join the "Free Patriotic Citizen" group, which was established in late 2011 to promote a national-conservative outlook. An election to the European Parliament is due in 2014. Significant political disputes over the general policy direction are unlikely.

  INTERNATIONAL RELATIONS: With the euro zone crisis persisting, leading Estonian politicians have been trying to position the country as part of the fiscally responsible, integrationist core, in case the single currency breaks up. The other main strand of foreign policy will be the attempt to stabilise relations with Russia, although periodic downturns in relations, often related to historical events, could hinder efforts.

  POLICY TRENDS: As a member of the euro area since the start of 2011, Estonia finds itself close to the centre of a financial crisis. In terms of the resolution of the euro zone debt crisis, Estonia has assumed a position close to that of Germany. Policymakers are keen to ensure that if the euro zone fragments and a new core currency union emerges, based around Germany, Estonia will be included. In late January 2012 an Estonian parliamentary committee approved the "fiscal compact" (a treaty that aims to enforce budget discipline in the euro area) for euro zone members. In February the government approved a second euro zone bail-out package for Greece. In August parliament gave final approval to the European Stability Mechanism (ESM). However, there is a growing perception within Estonia that it is unjust for a small, relatively poor country to have to help the bail-out of some much larger and richer economies that also use the single currency. This is adding to popular misgivings about the wisdom of adopting the euro in the first place--misgivings that political leaders have been keen to rebut by stressing the long-term economic and geopolitical benefits.

  ECONOMIC GROWTH: Estonia has made a rapid recovery following a double-digit GDP contraction in 2009, with real GDP growing by 8.3% in 2011, driven by manufacturing exports, gross fixed investment and domestic demand. In January-September 2012 real GDP growth decelerated to 3.1% year on year (by 3.4% in the first quarter, 2.2% in the second quarter and 3.5% in the third quarter). Domestic demand supported growth, whereas manufacturing and real estate were a drag on the economy. Although GDP growth in the first three quarters of the year was robust compared with other EU economies, growth has decelerated significantly compared with the year-earlier period.

  INFLATION: Consumer price inflation averaged 5% in 2011, driven largely by food prices and housing costs, including the cost of energy. Inflation pressures eased in 2012, with consumer prices increases averaging 4% year on year in the first 11 months, despite global oil prices remaining high owing to supply-side risks, and food prices rising owing to a bad global harvest. These upward pressures were, however, partially offset by weakening domestic price pressures, in line with the slowing economy. The Economist Intelligence Unit therefore estimates that annual inflation averaged 3.9% in 2012. The liberalisation of electricity prices in January 2013 will contribute to inflationary pressures in the year, pushing inflation to 4.2%. Inflation will remain erratic thereafter, in part linked to the expected pattern of growth in energy costs. The depreciation of the euro against the US dollar could prevent faster disinflation early on by keeping import costs high. Low euro zone interest rates could exert upward pressure on prices later in the forecast period.

  EXCHANGE RATES: Estonia adopted the euro on January 1st 2011 at EEK15.65:EUR1, the same rate at which the kroon was pegged during Estonia's time in the EU's exchange-rate mechanism (ERM2). Although not our central forecast, there is a high risk that several countries will exit the euro zone over the coming years. Such fears largely explain the volatility of the euro, which has fluctuated in a range between US$1.20:EUR1 and US$1.35:EUR1 during 2012. In recent months the euro has strengthened moderately in response to a promise of more determined European Central Bank (ECB) action. Central bank intervention has helped to stabilise financial markets, but the euro will remain volatile in response to shifting risk appetites, protracted economic weakness and lower reserve accumulation by China. We forecast average exchange rates of US$1.29:EUR1 in 2013 and US$1.26:EUR1 in 2014-17.

  EXTERNAL SECTOR: The current account is estimated to have returned to deficit in 2012, following a surplus of US$477m in 2011, equivalent to 2.1% of GDP, and of US$550m in 2010, equivalent to 2.9% of GDP. The current-account deficit is estimated to have widened to around 1.5% of GDP in 2012 as strong import demand and high import prices--especially for fuel--combined with weak export performance eroded the trade balance. Despite the income balance improving owing to a slowdown in the growth of repatriated profits from foreign firms, this has been offset by the fall in the services and transfers surpluses. In 2013 the widening of the trade deficit will push the external account further into deficit. We forecast that the current-account deficit will widen to 6.5% of GDP by 2017. Foreign direct investment (FDI) inflows should cover the current-account deficit in 2012-13, after which inflows will cover on average around 80% of the deficit.

  January 09, 2013

• Forecast

  Estonia: Country forecast summary

  Country forecast overview: Highlights

  • The centre-right government, comprising the Reform Party and the Pro Patria-Res Publica Union (IRL), won a second term at the election in March 2011. The coalition has a five-seat majority in the 101-seat parliament. Policy disputes and declining popularity are testing the unity of the coalition. We still expect the next election to be held in 2015, although we cannot rule out a realignment of the ruling alliance.

  • Estonian politicians will continue to back the fiscally conservative German position on the euro zone debt crisis. Estonia's participation in euro zone bail-outs is likely to remain politically contentious, with some claiming that it is unjust for a small, relatively poor country to have to help the bail-out of larger and richer economies in the single currency.
  • Following real GDP growth of 8.3% in 2011, economic growth is estimated to have slowed sharply in 2012, to 3%, as the euro zone entered recession. Ongoing euro zone recession in 2013 will weigh on Estonian growth, and we forecast a further deceleration to 2.6% in this year. Growth is forecast to average 3.4% per year in 2014-17.
  • The Economist Intelligence Unit forecasts that annual inflation will average 4.1% in 2012-13 owing to rising global food and energy prices, and the liberalisation of domestic electricity prices in 2013. Inflation will oscillate in 2014-17 broadly in line with global energy costs.
  • Fiscal consolidation will prove increasingly challenging as unemployment remains high and the prospects for external demand worsen. The government's approach to fiscal consolidation has stoked tensions with public-sector unions. After the modestly expansionary budget in 2012, which is estimated to have resulted in a deficit of 2.4% of GDP, we expect a return to fiscal conservatism from 2013 onwards. The budget deficit is forecast to run diminishing deficits until 2015, before returning to surplus in 2016-17.
  • Estonia joined the euro zone on January 1st 2011. The interest rates of the European Central Bank (ECB) could prove too low for Estonia's transition economy, resulting in higher inflation later in the forecast period. Policy will focus on efforts to maintain macroeconomic stability and to ensure a sustainable economic recovery. Estonia will continue to argue against a harmonisation of corporate tax levels within the EU, but will back Germany on the issue of EU debt relief and support for the euro.
  • The current account returned to deficit in 2012 as export growth lagged behind import growth. With this trend continuing, and the income balance deteriorating, we forecast expanding deficits in the forecast period.

  

  January 09, 2013

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Country Briefing

Land area

45,277 sq km

Population

1.34m (mid-2010; government estimate)

Main towns

Population in '000 (January 1st 2010; government estimates):

 Tallinn (capital): 399

 Tartu: 103

 Narva: 66

 Kohtla-Jarve: 44

Climate

Cool continental; average mean temperature in Tallinn (30 year average): -5.5°C in January and 16.3°C in July

Languages

Estonian (a member of the Finno-Ugric group) is the state language and the first language of two-thirds of the population; Russian is the first language of around 25% of the population

Weights and measures

Metric system

Currency

Euro, which replaced the Estonian kroon on January 1st 2011 at the rate of EEK15.64664:€1

Time

Two hours ahead of GMT in winter, three hours in summer

Fiscal year

Calendar year

Public holidays

January 1st, February 24th (Independence Day), Good Friday, May 1st (May Day), Pentecost, June 23rd (Victory Day), June 24th (Midsummer Day), August 20th (Restoration of Independence), December 25th-26th (Christmas)

January 09, 2013