"Splitting into two regions would motivate more investment outside Harjumaa, help harmonize regional income levels, and be in line with EU cohesion policy," Uku Varblane, head of research at Foresight Center, said.

The recommendation is based on the principle that the rate of support from the European Cohesion Fund depends on the income level of the region receiving support, i.e. the gross domestic product (GDP) per capita. Until the start of the current funding period (2021-2027), Estonia as a whole was one of the less developed regions, but by the start of the next funding period, in 2028, Estonia's income level is expected to rise above 90 percent of the EU average, which would reduce European Cohesion Fund support and increase the co-financing rate. In the case of the two regions, the area outside Harjumaa would still qualify for a higher rate of support.

The European Union's cohesion policy divides regions into three groups: more developed regions, with a per capita GDP of more than 100 percent of the EU average; regions in transition, with a GDP of between 75 and 100 percent of the EU average; and less developed regions, with a GDP of less than 75 percent of the EU average. However, the maximum rate of EU support depends on the income level of the region: 40 percent for more developed regions, 60 percent for transition regions and 85 percent for less developed regions.

Varblane pointed out that Estonia and Latvia are the only countries in Central and Eastern Europe that do not use the capital region distinction. However, Latvia's GDP is lower and it is likely to be one of the less developed regions in the funding period starting in 2027, with no change in its own funding rate. In all other countries, the area around the capital is a region in its own right.

The study concludes that this regional articulation is in line with the vision and rationale of EU cohesion policy. Its aim is to contribute to the convergence process of Europe's lagging regions, i.e. to harmonize their income levels. In the case of the Cohesion Fund, it is clearly stated that this is additional and temporary funding. This money cannot be used, for instance, to finance the core activities of the state.

While there are some formal requirements for changing a country's regional classification, such as that a region must have a population of at least €800,000, there is also some room for interpretation that allows for exceptions if there is good justification, the study states.

In addition, the authors of the analysis believe that it makes sense for Estonia to plan to prioritize and attract energy-intensive industries. Estonia has set a target of generating 100 percent of its annual electricity consumption from renewable sources by 2030.

The projected consumption to be taken into account when adding renewable energy capacity should be significantly higher than Estonia's current annual consumption of 8.5 terawatt hours.

The analysis refers to the position of the joint agency EAS and KredEx that it would be possible to attract to Estonia major industry projects with an energy demand of up to 5 terawatt hours.

The authors emphasize that Estonia's green energy development plan should not be an electricity export project. The focus should be on cooperation between renewable energy developers and energy-intensive producers, avoiding a situation where the state has to guarantee a fixed price to wind farm developers.

In the longer term, economists also see as an important development the proposal to make secondary education compulsory in Estonia, so that students do not have to make a career choice too early and can do so after completing upper secondary school.

"There is a clear problem with the quality of post-primary vocational education in Estonia (corresponds to upper secondary school grades 10-12, or ages 16-18, -ed.), as it does not provide the same level of secondary education as upper secondary school (grades 10-12, -ed.) and has one of the highest unemployment rates after graduation," Varblane said.

Proposals to improve Estonia's economy in the medium to long term include revising migration policy, introducing the concept of the e-worker, establishing an Estonian center of excellence for rare earth elements, and supporting businesses in relocating across the country.

In the short run, improving the supply of locally sourced wood raw materials and lowering transportation and energy costs for businesses through tax breaks would help Estonia regain its competitiveness. The analysis also proposes buying gas stocks to keep prices stable and putting in place measures to boost digitalization.

Economists also support government guarantees for major investments and the prudent use of public procurement to create new market opportunities.

"Analysis of Proposals Supporting Estonia's Economic Development" was commissioned by the Foresight Center, an independent think tank at the Riigikogu. The authors are economists Urmas Varblane, Raul Eamets, Annela Anger-Kraavi and Diana Eerma from the University of Tartu.

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