It is a long time since Estonia was a subject, not an object in international affairs. I doubt anyone is alive today who has even the dimmest childhood memory of the Tartu Peace Treaty negotiations (though I would be delighted to be proved wrong if a precocious nine-year-old is now a lively centenarian). From the Anglo-German naval agreement of 1935 onwards (in which Britain withdrew from the Baltic, turning the small countries of the region into the playthings of Hitler and Stalin), Estonia has had to accept the hand that history dealt it.
That was most painfully true during the years of foreign occupation. In the late 1980s, Estonia began to determine at least its domestic policy. The non-violent courage of the ‘Singing Revolution’ won plaudits from abroad – at least among the handful of observers who took any notice of events in the ‘tiny Soviet Baltic Republic’. After 1991, the scope for action broadened. Estonia chose to adopt liberal economic policies, to flatten taxes, reintroduce the kroon, privatise state assets speedily and transparently, and to pursue Euro-Atlantic integration.
Yet the country remained a demandeur. At best it could meet the rules set by outsiders, and complain if they were unfair. Estonia shed the unwelcome and patronising attention of the OSCE’s monitors, making a success of its citizenship and language laws. Hard work by Estonian diplomats gained increasing respect both in bilateral relationships and in access to multilateral agreements. Estonian politicians such as Lennart Meri, Mart Laar, Siim Kallas and Toomas Hendrik Ilves won international attention for their personal blends of intellect, eloquence and charisma.
However, until quite recently Estonia was still an outsider trying to get in. It was other countries – bigger, older, better-connected – that set the rules. I noticed the first hint of a change at a NATO conference in Oslo, where a Norwegian diplomat was listening with interest to an Estonian official explaining the complexities of EU security policy. That struck a new chord: Norway, by its own choice on the outside of the EU, was listening to a member state on the inside. I noticed a similar conversation in Brussels: an Estonian was chatting about NATO to an attentive Swedish official. Again, it was the same story: Estonia on the inside, Sweden, normally so self-assured, on the outside.
Estonia’s entry into the eurozone, coupled with the debt crisis that has now redrawn the map of Europe, has driven home the change. Estonia is now part of the ‘politburo’ of the eurozone. Denmark is out. Sweden is out. Norway is out. Britain is out. But Estonia is in.
But with a difference: unlike many other countries, Estonia is not frightened of the financial markets.
That is chiefly because of the remarkable restraint shown by governments in the past 20 years in avoiding the build-up of government debt. It is worth remembering that Estonia, Latvia and Lithuania were all reborn in 1991 with no external debt at all – and with some assets, recovered from the Bank of England and other custodians of their prewar gold reserves. Since then Latvia and Lithuania have accumulated debts of nearly 40% of GDP, doubtless with the best of intentions, but creating a vulnerability to external markets and a burden for future generations. Estonia hasn’t. (The debt burden would be justified if Latvia and Lithuania had invested the borrowed money in ways that would benefit future generations, and lead to greater economic growth in future. But they didn’t.)
This debt-free status is a huge advantage, not just over other ex-communist countries but against any other country in the EU. Even mighty Germany is facing the embarrassment of a bond auction where investors choose not to risk their money on government debt. Estonia doesn’t need to worry about that. It has a debt to GDP ratio of less than 7% – by far the lowest in the eurozone. Anyone wanting to speculate against Estonia has a problem: it has no bonds to short, no auctions to boycott. The closest instrument is credit-default swaps – which price the theoretical possibility that Estonia will in the next five years borrow some money and not pay it back. But these are thinly traded and signify little, since the CDS market was eviscerated by the ruling that Greece’s default on its debt is only a voluntary gentleman’s agreement.
Financial technicalities aside, Estonia’s position has never been stronger. It has the fastest growing economy in the European Union, the lowest debt and the most vigorous entrepreneurial culture. The business environment is clean and friendly. Enefit (as we must now learn to call the Estonian energy company Eesti Energia) is just the most prominent of the Estonian companies making acquisitions abroad – first in Jordan, now in America.
To some extent this is true of many of the so-called ‘East European’ countries. Poland is the diplomatic and economic heavyweight of the region, as Radek Sikorski’s remarkable speech in Berlin in late November demonstrated. Every one of the EU-10 – the new(ish) members of the union – has falling unemployment, growing economy and a manageable deficit. That is not the case in the supposedly more solid 15 countries of the old EU.
But Estonia is in a class of its own. An interesting example of its newly shiny image came from the FutureBrand Country Branding Index, which measures 113 countries according to their international image. The latest edition, published at the end of November, said:
“The biggest rising star in the region as well as in the entire CBI is Estonia, with a twenty-three place leap overall and significant improvement across every dimension.”
Estonians (like anyone else) enjoy praise, but (unlike some other countries) tend to discount it. Despite knowing the country for more than 20 years, I am still wrestling with the intricacies of the national psyche, and I do not offer any definitive analysis here of the baffling mixture of smugness and scepticism that greets outside approbation.
Trajectory and destination are not the same thing, of course. Estonia is not even the richest country of the EU-10. By the standards of the old EU it is still poor. Wages and pensions are low; public services such as health care still stingily financed. It will be decades before Estonia catches up Finland or Sweden in every respect.
But from a psychological point of view, the Rubicon has been crossed. Estonia is the only country in Europe that is a member of both the eurozone and NATO, and obeys the rules of both clubs. It easily meets the debt and deficit criteria for the eurozone. It is one of the very few countries in NATO that comes even close to spending 2% of GDP on defence. Estonia, once such an outsider that it was not even on the map of the world, has become the quintessential European insider. At a time when other countries are breaking the rules, Estonia has shown it is possible to keep them – and prosper.
It is still vital to avoid complacency. Whatever new configuration takes shape out of the current mess in the eurozone will not automatically include Estonia. Germany may adopt a tight fiscal über-union with the Netherlands and Austria, perhaps also Finland. Will it include Estonia too?
Moreover, the immediate tactical victory does not guarantee the ultimate strategic one. The overwhelming priority for Estonian economic policy is to preserve competitiveness as wage costs rise. That will require a continuing effort to foster innovation, to raise and maintain education standards and to improve roads, railways and other public infrastructure.
But the deeper question is a psychological one. How will Estonia deal with its new position on the high ground? Two decades of polite supplication create habits that will not disappear overnight. Here the experience of those Estonians who have already been on the ‘inside track’ will be useful. These are more numerous than many Estonians may realise. One big asset is e-government. I was surprised when visiting Hyderabad in India four years ago to be quizzed enthusiastically by local Indian e-government experts about the way Estonian municipal parking charges operate. Estonian evangelists for e-government such as Ivar Tallo are already used to dealing with outsiders eager to learn from Estonian expertise.
A related field is Estonia’s cyber-security capability. The NATO Centre for Excellence and Estonia’s response to the Bronze Soldier cyber-attack have given a huge boost to the country’s reputation. On a recent visit to the National Security Council in Washington, I was interested to see how seriously my American hosts took Estonian ideas on a ‘cyber national guard’.
Skype and other IT and high-tech companies complement this image. Estonia’s position is only a niche compared with, say, the huge influence of Indian software companies. But it drives home the point that Estonia is a place where you get solutions, not problems.
Lurking in the shadows is Estonia’s reputation in the intelligence and security field. This is not a subject that people discuss freely. But while researching my book about East-West espionage (which includes a big chapter on Herman Simm) I have noticed that both the Information board (Teabeamet) and the Estonian Security Police (Kaitsepolitseiamet) enjoy a level of respect among partner governments (one that is noticeably lacking for some other countries in the region).
It is also worth mentioning Estonia’s reputation as an economic reformer. The sacrifices made in Latvia in the past two years are so spectacular that they have deservedly captured the attention of the outside world. But those sacrifices were necessary because the mistakes of the past were so grave. Estonia’s record in macro-economics is not perfect (those responsible for the loose credit and construction boom in the past decade have yet to be brought fully to account). But the overall verdict of the past 20 years is a good one. Estonia has a lot to say about tax policy and economic flexibility. At a time when Europe seems to be keen on making tax systems still more onerous and complicated, the lessons of Estonian economic history may be particularly apposite.
The task for Estonia now is to build on these specific successes, but in a far more favourable context. It would be premature to speak of an ‘Estonian model’, and any trace of arrogance or bombast will go down badly among countries that are belatedly waking up to economic realities and the costs of past mistakes. But weaving together Estonia’s successes in public administration, economic liberalism and national security into a single narrative will reinforce the virtues of all the story’s components.
This will require something of a shift in Estonian diplomacy. I cannot remember who said it (and Google doesn’t help) but the stereotypical view of an Estonian representative at an international meeting was once neatly described as “a pretty girl with a laptop sitting quietly in the corner.” That stereotype is of course unfair, but not completely so. Estonians are not good, yet, at selling their country as a broad concept in big meetings; they do far better in small gatherings, talking about specifics.
It would be sad if that continued. Estonia is a success story of continental significance. The rest of Europe (and not only Europe) is aching for ideas about how the state can be lean, clean and accountable to society. It yearns for an entrepreneurial culture that truly favours the new and the talented, rather than the old, strong and greedy. It wants to hear about a dynamic form of capitalism which is not just camouflage for a system in which greedy bankers pocket their winnings and dump their losses on the taxpayer.
In short, Estonia’s rise comes at a time when the rest of the world is, finally, ready to listen. The barriers of ignorance and prejudice that surrounded Estonia in 1991 have been swept away, partly by time, and partly by Estonians’ own successes and efforts. The only thing stopping Estonians from making the most of this historic opportunity is their natural modesty. That is indeed an attractive quality. But it has its place. And now is not the time for it.
Edward Lucas
Diplomaatia 100
diplomaatie.ee
