Memories of harsh austerity in the wake of the global financial crisis are motivating Estonia to end what’s been the continent’s greatest aversion to borrowing.
The Baltic region became the poster child for the kind of public spending and wage cuts that later ravaged nations like Greece. Estonia remains the European Union’s least-indebted member-state — without a single government bond.
The Covid-19 pandemic is changing that, with a 10-year debt sale of at least 1 billion euros ($1.1 billion) due in the coming weeks. Another of a similar size is planned for the fall and a third is possible next year, with maturities of up to 15 years under discussion, according to Finance Minister Martin Helme. Money will be channeled into investment to boost economic growth.
“In the previous crisis, there were policy mistakes that deepened our recession,” he said in an interview in Tallinn. “This total austerity that was imposed very strictly then made the situation worse and we have to take a different approach.”
As well as contributing to the steepest recession in Estonia’s history, the post-2008 policies prompted an exodus of workers from the Baltic region to Europe’s west, where salaries are higher. Austerity — which reached 9% of gross domestic product in 2009 — also stoked resentment at home that facilitated the rise of right-wing parties like Helme’s EKRE, a junior partner in Estonia’s one-year-old government.
After adopting the euro in 2011, Estonia has increasingly debated whether it should borrow more for investment, with such calls intensifying after the European Central Bank first embarked on quantitative easing. Defenders of the country’s austere stance say the policies were justified to successfully join the euro region and boost exports, while it would have been tricky to borrow in Estonia’s old currency.
Helme said the pandemic made a bond sale “unavoidable” in the face of economic-rescue costs and lost tax revenue. But the change also reflects a view that this is the only way to close the wealth gap with richer neighbors more quickly.
“If other countries have over decades accelerated their economic growth this way, among other things by bringing investments forward through borrowing, I think we shouldn’t be ruling out this option due to some inflexible ideological denial,” Helme said.