Every economic downturn brings changes to the market and Estonia is no different. The 2008 loan market collapse made Estonian companies think about financial reserves. The pandemic has changed e-Estonia's often individualistic business approach, as business leaders are calling for more state help. But the government doesn't seem to listen.
At the start of 2022, according to Estonian Prime Minister Kaja Kallas, Estonia is facing three major crises: in health, security and energy. All three are major and complex issues that have been developing for decades. Even the global pandemic, which has lasted since the start of 2020, has been a risk which scientists have positioned in the context of an ever-globalizing world since the mid-2000s.
If we want to overcome these kinds of major challenges, then major changes will be needed on all levels of society. Especially on the economic front. In e-Estonia, we pride ourselves on being an agile and innovative country, but the last couple of years have proved that we have overestimated our dynamic ability.
When the pandemic first hit in the second quarter of 2020, most industries (except tourism and hospitality) expected the problems to last only for a year before things go back to business as usual. This optimism was fueled by large consumer demand and financial reserves that most companies had acquired since the 2008 loan crisis.
2021 brought people back to reality. The pandemic's impact on supply chains was much greater than anticipated. To make matters "worse," the European Union came out with an ambitious green deal which has already raised CO2 and energy prices. At the same time, relations between Russia and the EU have descended to their lowest point since the end of the Cold War.
In these circumstances, where production prices are going up faster than profit margins, entrepreneurs have searched for lifelines to restore the business success that they had in 2019. But luck doesn't seem to be on their side. Even if one hardship seems to be solved, another curveball will fly their way smashing whatever success they have gained on the road to recovery.
This has made Estonian companies look towards the government. Politicians have answered these calls for financial help in a mixed fashion. Yes, during the first wave of Covid, the government led by Jüri Ratas lent a helping hand by issuing one of the largest wage support packages in Estonian history, yet at the same time told companies to revise their business models.
2021 started with changes to the government as the head of the liberal laissez-faire Reform Party Kaja Kallas took over the job from the Center Party's Jüri Ratas. This also dramatically changed the government's position on state aid, as the new Reform coalition, with Center now in the back seat, started to solve the economic crisis by means of austerity.
This worked for Reform Party ten years ago when they were leading the country out of the debt crisis. When other EU countries were saving their economic stability with large subsidies, however, the Reform Party approach of "minimal long-term help" ruptured the bond of trust which they had built with the private sector over decades.
At the start of this year, Kaja Kallas finally gave in as the Reform Party went along with a three-month financial aid package meant to soften the hike in energy prices. But we are not out of the woods yet, as the latest package mainly focuses on consumer problems and not so much on private sector issues. The prime minister says that providing help for the private sector is harder because of rigid EU anti state aid rules, but it seems that the biggest obstacle is the Reforms Party's own laissez-faire ideology.
Therefore, 2022 seems to be a crucial year of change as more and more companies are looking for security from the government. Even though the pandemic appears to be winding down, the security and green policy issues look to be emerging more fiercely than ever. So the main question for this year is how to find a balance between the free market and state aid to enable the Estonian private sector to sail through uncertain times.
This article appears in the latest edition of the Baltic Business Quarterly magazine published by the German-Baltic Chamber of Commerce in Estonia, Latvia and Lithuania, and is reproduced here by kind permission.
Editor: Marcus Turovski
Source: Baltic Business Quarterly