Professor: It is good that borrowing is no longer seen as taboo in Estonia

Rainer Kattel.
Rainer Kattel. Source: Arp Müller/ERR

Bolder borrowing during the Covid crisis did not end in disaster, and it is good borrowing is no longer seen as an ideological taboo in Estonia, Rainer Kattel, professor of innovation and public administration at the University College London, told ERR in an interview. He sees Russia's war in Ukraine and supply chain disruptions caused by Covid as the main causes of inflation.

You're in Tallinn from London for a few days, so let us begin with the United Kingdom. How would you describe life in the U.K. that you referred to as one of the poorest countries in Western Europe with no plan to remedy the situation on the pages of Postimees a few weeks ago.

Yes, this may come as a surprise to many, especially if we only visit London, which we see as a colossal and wealthy global city and one of the most important centers in Europe. But looking at how Great Britain has fared in the last 10-15 years, no matter how we slice it – productivity, wages or GDP – the U.K. seems to be falling behind its mainland peers. Salary growth has been much slower, growth of GDP has been much slower. Britain is lagging behind, especially if we take London out of the equation.

But even with London, Great Britain is poorer than the Nordics, Denmark, Germany, France today. It has been happening over the last few years, and I believe that the realization we have become poorer is quite strong among the locals. We can see it in such radical phenomena as Brexit, while there are other manifestations. We cannot be sure whether the trains are running every week, whether we can get to work because of strikes; whether we will be admitted to the hospital etc. We are looking at a rather heated political winter.

Yes, that was the trick also in the article. That the U.K. is one of the poorest countries in Western Europe if we don't count London. But what about applying the same caveat to other countries? If we took Paris out of the French GDP, Berlin out of Germany's and Oslo out of Norway's. Would we see the same effect?

It would not be quite the same, even though the capital tends to yield a fair share of a country's GDP everywhere – 10 percent in the U.K. and even more in France. Capitals play a crucial role, but I believe that one major difference is that these wealthier Western European welfare states have stronger redistribution systems.

A lot of effort has been made in the U.K. since Tony Blair's administration in the late 1990s to dial down benefits. The process has been especially pronounced over the last ten years, since [David] Cameron's cabinet. In other words, redistribution is much more modest in London, or let us say in the U.K. than it is elsewhere. That is also why impoverishment is faster than in other countries, especially outside of London.

How big is the difference in standard of living between London and other areas? How wide is the gap four hours out of London by train?

Yes, catching the train can also be quite interesting. Taking the train from London to Manchester, which takes a few hours, costs a few hundred pounds. It is absurdly expensive as these are privatized lines. It would cost a few dozen euros to go that distance by train elsewhere in Europe. It starts there. /.../

But the difference becomes clear going north, especially in major former industrial or port cities. Impoverishment is clear there. Small coastal towns where time seems to have stopped in the 1980s. It's like going back to Soviet days where the hotels or restaurants look like they're from 1985. It is surprising, and you would not expect the difference to be that great when setting out from London. And this kind of deindustrialization is ongoing. Brexit especially has lent it speed, with the auto industry and others forced to leave the U.K. as important and export have become so complicated and access to the European market is hindered. Financial services have moved out, but so has production.

How come? People from these less fortunate or impoverished regions were the ones who supported Brexit in hopes their lives would be turned around.

Absolutely. And this brings us to one of the great paradoxes of modern politics where politicians are brilliant liars. We will likely see it regarding Russia in Estonia's starting elections debate.

As concerns Brexit, it could be suggested that it was hoped the U.K. would gain in terms of political autonomy, serve as a kind of [European] Singapore. That was the hope. However, this would require very capable politicians and officials who could pull it off. The U.K. has none today. Rather, this administration has seen very weak politicians and very poor choices made. That is the reason, I believe, why Brexit has left the ordinary person, including the yes-voter, much worse off, especially outside of London. /.../

Let us talk about inflation that concerns the U.K. as well as Estonia, as well as the whole of Europe. October inflation was 24.1 percent in Estonia. The Eurozone average was 10.9 percent. I believe it was also on the other side of 10 percent in the U.K.

It has been like that for the last six months, I would say. Getting inflation under control is a key problem for many countries today, and I believe we will see steps by the ECB, Bank of England and the Federal Reserve that will not benefit the economy. Once central banks start raising interest rates, all activities become more expensive, which will impact investments. The question is where do we perceive the causes of inflation today. /.../

Where do you perceive them? The debate is happening in different places. Talking about the European Union, there is debate over the role of quantitative easing. This probably does not concern the U.K. What is the role of the Covid pandemic and its aftermath in terms of supply and demand chains? The role of Russia's energy blackmail and its war in Ukraine? How do you see their relative impact?

I believe there have been different phases. Unfortunately, they are happening one on top of the other, which is why differentiating between sources of inflation is difficult for the ordinary reader or listener. But energy prices are definitely pushing up inflation, which are clearly tied to Russia's war.

Politicians, based on their agenda, like to identify a single source. One group says it is Russia, its war and energy manipulation that's at fault. Others, who have had it in for the ECB all along, say that it's the central bank and its printing. Black and white perspectives. How do you see it?

I believe that quantitative easing has nothing to do with inflation right now. Before Russia's invasion of Ukraine, in countries where inflation had started to pick up, it followed supply chain issues in the Covid aftermath, especially as concerns China. Today, looking at sources of inflation, they are energy prices and energy-intensive food production. This is what is pulling price advance in Europe.

Quantitative easing makes for a very complicated topic, having pulled the stock market bubble for the last few years. It has gained in terms of speculative influence. This speculative influence had a major effect six months ago when people were speculating with cereals and oil prices. All of those prices have come down today. The price of grain is not high, meaning that food prices should also come down. But it's the energy component [driving prices].


When money didn't cost a dime and countries were basically paid to borrow, Estonia's attitude, as well as that of the ruling Reform Party, to loans and government bonds changed dramatically. You wrote in 2008 that "recommending a fiscal deficit earns one a mention in the president's New Year's speech and the label of traitor." That was the situation during the time of Andrus Ansip's cabinet in 2008. But things have changed, and Estonia is borrowing heavily. What is your take on this change of direction, and how has Estonia used the money it has borrowed?

Rather, if we're being accurate, the myth was busted by Covid in Estonia's case. The state was in trouble, and we saw that borrowing more did not end in disaster. I believe that this kind of fiscal policy has been a way of controlling the entire debate in Estonia, keep it from running away toward social policy and keep economic policy centered on enterprise.

But I also believe it is positive the myth has been busted, with the question now how to use the money. Estonia tends to use it for investments, at least it is trying to invest it in infrastructure and other areas, which I find to be sensible. The question is to what extent this infrastructure can manufacture new possibilities for companies and ideas. But I believe Estonia's loan burden is still very low in European context, while it's ability to service that loan is solid. I perceive no problems there.

More broadly, why have we been living in an ideological framework where public borrowing has been frowned upon. I believe all wallets need to be seen as one –that of the state, entrepreneurs and individuals. Seen together, public borrowing is a mechanism that makes it possible to invest when times are tough and lay the foundation for improvement. We should not see it as the kind of ideological constraint we used to. Therefore, I believe this change is good. Positive.



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Editor: Mirjam Mäekivi, Marcus Turovski

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