In 2011, a major shift occurred for the Estonian economy: the country abandoned the kroon and adopted the euro. Although this was an extremely significant and far-reaching change, it did not alter Estonia's fiscal policy.

The euro has offered Estonia important opportunities compared with the kroon, but those opportunities have largely gone untapped. One could even say that the failure to take advantage of the benefits offered by the European Union's single currency did not mitigate risks but instead created new ones — many of which have materialized and negatively affected Estonia's competitiveness and the well-being of its residents.

Own currency, own risk

When Estonia had its own currency, the kroon, it meant the country was responsible for both its monetary and fiscal policy. It had to maintain the value of money, control inflation, ensure currency stability and preserve international trust. All of this required strong discipline.

During the kroon era, protecting the currency was a priority, particularly because the kroon operated under a currency board system: it was pegged at a fixed exchange rate to the German mark (and later the euro). This meant that the Bank of Estonia could not print additional money or freely change interest rates — monetary independence was limited, but that limitation was necessary to ensure stability. Trust from financial markets had to be earned.

Had the state begun to take on large amounts of debt or increase the deficit during the kroon era, it could have put pressure on the exchange rate. Markets might have started to question the kroon's sustainability, potentially leading to a currency crisis. Therefore, fiscal discipline and a balanced budget were, quite literally, the first line of defense for economic policy under the kroon. It was more important to err on the side of fiscal conservatism than to risk even the slightest doubt about the kroon's reliability.

Shared currency, shared risk

The transition to the euro meant that Estonia's economic framework changed completely. Estonia handed over almost all of its monetary sovereignty to the European Central Bank (ECB). The Bank of Estonia no longer sets interest rates or controls the money supply — those decisions are now made in Frankfurt.

The euro also represents shared trust. Its strength is backed not only by Estonia but by the overall economic and political strength of the euro area. Estonia's share of the eurozone economy is extremely small. This means that if the Estonian government takes on moderate debt in accordance with eurozone rules, it has virtually no impact on the currency's stability. In other words, when drafting its national budget, Estonia no longer needs to factor in the goal of maintaining currency stability; the focus is now almost entirely on growing the economy and strengthening state capacity.

In essence, switching to the euro gave Estonia an enormous gift from the European Union: the ability to borrow large sums on extremely favorable terms. From 2015 to 2020, Estonia had the opportunity to take out ten-year loans at an annual interest rate of about 0.3 percent. This money could have been used for major investments in profitable projects such as infrastructure, energy efficiency, education, healthcare and more.

Many of those investments would have paid off simply through inflation, since making the same investments today is significantly more expensive. And of course, some of those investments would have generated cash flow that could have been used to repay the low-interest loans. With borrowing available at such low rates, one didn't need to be an investment genius to find low-risk opportunities that would yield solid returns.

Estonian politicians, however, took the opposite approach and declined to take advantage of the near interest-free borrowing opportunities. Instead, they clung to an extremely conservative fiscal policy rooted in the 1990s — an approach that has led to problems in the context of the euro.

This conservative fiscal policy was presented as risk avoidance, but in reality, it meant abandoning strategic investments. That didn't reduce risk — it created new ones.

In light of the crises of the 2020s — the COVID-19 pandemic, inflation and the energy crisis — it became clear that excessive caution was, in fact, a systemic risk. When a response was finally needed, it had to be done with expensive loans, hastily and at the last minute. Decisions shaped by the time and place of the 1990s turned out in the 2020s not just to be ineffective, but outright harmful. Today, we face a budget deficit amid high interest rates and a sharp increase in the tax burden.

Good intentions morph into risk

It raises the question: why has Estonia made these kinds of mistakes, especially when no politician wishes harm on the country?

The strict and conservative fiscal policy that ultimately proved risky had its roots in the kroon era. At the time, it was a successful and justified approach — trust from financial markets had to be earned and the currency board system left no room for monetary flexibility.

Because the kroon-era fiscal policy brought success, politicians got the impression that this was the "right" and "responsible" way to act in the euro era as well. They failed to grasp the fundamental difference between the Estonian kroon and the euro, and the opportunities that the euro offered.

Unfortunately, kroon-era attitudes persisted — not merely as tools, but as ideological dogmas. The sacred principle of a balanced budget, an absolute aversion to public debt and the framing of borrowing in terms of "moral hazards" began to shape policy even when the circumstances no longer required it.

In Estonian political rhetoric, the avoidance of borrowing was often presented as a moral principle: "debt belongs to others," "we must not live at the expense of future generations" and "borrowing is the lazy solution." These sound like old folk sayings — and that's exactly what they are — but we must keep in mind that this "folk" often had no more than a third-grade education, meaning they were quite poorly informed. They lacked access to financial knowledge. The folk wisdom of avoiding debt made sense in their context — after all, no one should lend to someone with a third-grade education. But mechanically transplanting this philosophy into 21st-century international macroeconomics is absurd.

As a result, a kind of "moral finance" emerged in Estonia, where avoiding debt became a virtue in itself — regardless of whether it made economic sense, served the national interest or yielded returns. Decisions were guided by historical beliefs rather than present-day realities.

This attitude was further reinforced by international attention. Estonia's low public debt was frequently highlighted in foreign reports and articles. For example, Estonia was mentioned as one of the few countries that managed to keep debt levels below 10 percent of GDP in the wake of the eurozone debt crisis.

While Estonia's low debt was indeed occasionally noted in foreign media — typically in comparative charts and comments in international economic reports — the influence of these mentions on domestic politics was disproportionate. Information was disseminated selectively: the signals that reinforced existing beliefs about the virtue of debt avoidance were amplified, while the same sources were ignored or downplayed when they pointed to insufficient investment or future risks.

This selective use of information shaped a misleading perception — as if Estonia's fiscal direction was universally exemplary. In reality, this pseudo-prudence meant Estonia looked good on certain charts but missed out on many investment opportunities. The country passed up chances to strengthen its economy, improve services, raise people's well-being and maintain competitiveness.

In truth, the moral principle in economics isn't about avoiding debt — it's about using resources skillfully and responsibly. When capital is cheap and supported by productivity, using it wisely is a matter of sound judgment, not weakness. Ignoring this isn't ethical — it's harmful. Smart investments have the ability to pay for themselves and generate income without the need to raise taxes. These revenue-generating opportunities have been foregone when decisions were based on the simplistic idea that "borrowing is bad, not borrowing is good."

Estonia's failure to use its borrowing capacity for profitable investments is comparable to a hypothetical scenario in which Norway knows it has oil and gas reserves underground but, out of some moral principle, refuses to tap into them to benefit current and future generations — choosing instead to follow the example of its "forebears," who also didn't sell oil in their day. The difference is, Norway's natural resources will remain, but Estonia's borrowing capacity may not.

Estonian economic policy is now in need of change. It's time to move beyond contextless dogmas and adapt to the actual economic reality — where bold and well-planned investment is one of the best ways to secure stability, generate income and improve well-being.

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