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Economic recovery in the Baltics: “The situation is much better than in 2008”

Written by on 29 mai 2020

All countries in Europe are slowly relaunching their economies. The European central bank now plans to unveil 750 billion euros to help its member states.

And three smaller nations are recovering well from the coronavirus crisis : the Baltic states, Lithuania, Latvia and Estonia. They now have reopened their borders between each other. So, might their economies survive the crisis relatively unscathed, unlike several European counterparts ?

Talking to us from Estonia today, Tõnu Palm, chief economist at the Luminor Bank, the third biggest bank of Estonia.

So tell us, how does the Covid-19 situation in the Baltics look like right now?

On average the Baltic states have been affected slightly less if we compare the Baltic countries to other European countries. The reason being probably is that we came from a very high speed of gross. Estonia last year had close to a 5% gross, so there is a motion coming into the Covid-19 crisis. But now of course, we start to be affected. Some of the most affected sectors are doctors and catering, sectors which consumers can avoid during the lockdown.

What measures are the governments taking to relaunch the economy ?

Of course the first measure was taken by the European Central Bank to support the markets. From governments, it’s really mainly three different elements. One is the wage support measures, similar to like Germany have implemented. The second element was actually done by the Estonian Credit Agency together with banks to refinance by giving liquidity loans. And the third support measure is related to budget, which means more investments.

More specifically, which sectors does the state want to invest in the most ? Is more public money going to go to hospitals and the health care system after the pandemic ?

We had a €250 million wage support measure, and it would be decided that it would run until June. And as things are now reopening, it has helped in the first few months at least. However, the risk that unemployment will increase after the measure has been phased out for after June. So investment on the state’s side will be on infrastructure.

There is some money for the medical sector. However the big part of the money goes from budget-wise to provide the credit but the infrastructure is the biggest part, so the construction sector will receive quite a bit of the money and that has helped definitely. But since we are open economies we really rely on exports, and that’s why it’s not just the situation here but also how the EU as a whole will recover from this Covid-19 crisis.

As you just said, Baltic states are small countries with very open economies. But the main discourse right now in the EU is on relocating production to consume locally and trade less with further away countries. Do you fear a return to protectionism in Estonia, Latvia and Lithuania?

“I would say that there is, but it’s more with developed markets. The trade balances have been hugely imbalanced globally for quite a long time. Having them more balanced will be a long-term help. I would say that one issue that needs to be discussed is that Europe will benefit from Covid-19 to use more clean technologies. And to take benefits for climate change.

I would not call it protectionist. But in the future we should try to establish similar standards for climate protection and Carbon Dioxide quotas so that if we trade with other partners, we will not import products that protect the climate less. That would put European producers into unfavorable situations, so that they try to manage better and find more sustainable energy solutions, which should rather be a more global aim.

The Paris Climate Agreement, it’s very difficult to move without other big economies too. In that sense, the protectionist discussion is more in a sense of climate. We should try to aim for better global management in terms of sustainability. We can’t just be clean and green when others don’t follow it.

But are the infrastructure projects that the governments are pushing for compatible with goals of sustainability?

“Infrastructure and part of the investments will go into renovating houses. One of the easier routes down the line is to increase energy efficiency –new smart cities, and transport fleets and so we will have a more digital economy in the future with more electrification and a better energy connection framework. Small streets that will require a good gas transportation.

We also have to think in Europe about how to stock energy efficiently. Investments will therefore be smart infrastructure, not just in buildings and roads but in technologies. We should also look after people who will be unemployed after the crisis. It’s easy to get funds for infrastructure, but we need to compete in Europe in 5G, robotics and telecommunication. So I think Europe needs to be competitive for the better greener vision.

So all in all, will the Baltic states recover quickly from the coronavirus crisis?

The Baltic situation is much better than what we had back in 2008. Now we benefit from support from the European Central Bank. There is no reserve of liquidity in that sense in that the banks were highly capitalized. The imbalances were much stronger, so we don’t expect as harsh GDP drops as we saw in 2008 because there are much stronger balances. Nevertheless, it’s a big challenge and we are seeing unemployment increasing in Europe. In UK, there are 8 million people. The question is, are we able to maintain these low unemployment rates after the support programmes run out ?

Then we can think about structure down the line: how to compete more in Asia. It is leading in 5G, telecommunications robotics, nanotechonology, telemedicine. Europe really needs to invest into these Research and Development areas to be competitive. Only when we are competitive can we encourage others to be more green and to tackle climate issues, because they need more investment initially. So we need growth to be able to invest more in a greener future.

Thank you so much Mr Palm, chief economist of the Luminor Bank in Estonia for talking to us today from Tallinn!


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