How Estonia has avoided EU's economic problems

View across Tallinn, Estonia to the Baltic Sea port Tallin is home to Skype as well as other technology start-ups

It currently has the fastest economic growth in the EU, so what is Estonia doing right when other nations are in so much financial trouble?

Eva-Maria Ounapuu is enjoying Estonia's boom.

She set up organic cosmetics company JOIK four years ago, turning her candle-making hobby into a business.

She received EU grants for machinery and marketing help, but says the Estonian government's business-friendly agenda helped too: "It has been quite easy.

"There was no problem with regulations and even finding places to sell has gone quite smoothly.

"You can report your taxes online so you don't waste valuable time on forms and things. We don't owe our growth to the government but they haven't put any obstacles in our way."

JOIK now employs four people and has moved to bigger premises. It has an annual turnover of 250,000 euros and is starting to export to neighbouring Baltic countries.

Eva-Maria Ounapuu, founder of JOIK cosmetics in Tallinn with her range of handmade organic products Eva-Maria Ounapuu says the Estonian government made it easy for her to set up her own business

It is a similar story for Estonia as a whole, as the country has come a long way since it joined the EU in 2004.

An initial influx of credit led to a construction boom and soaring house prices, but the bubble burst in 2008 and when the country found itself in the financial doldrums, it was forced to smarten up its act.

Labour laws were liberalised, the retirement age increased and public spending cut. But taxes stayed low to encourage business; trendy entrepreneurs were born.

Estonia's GDP grew by 8.5% in the first quarter of the year, the fastest growth of any EU economy. One of the biggest growth areas is technology.

Candle making at JOIK cosmetics Estonia exports mainly to the EU, but exports to its major markets, Finland and Sweden are declining

Skype the online software used by 200m people every month to make free or cheap video and phone calls over the internet, has its development office on the outskirts of Tallinn.

The software was invented in Tallinn by a Dane, a Swede and four Estonians.

Sten Tankivi, head of Skype in Estonia says: "You can view the country of Estonia itself as a start-up. It regained independence just 20 years ago and generally the society or culture here has very little hierarchy.

"It's very small and nimble and that sort of environment is very positive for entrepreneurship."

In January Estonia joined the euro. The resultant currency stability, along with those low corporate taxes (zero on reinvested profits), have made this tiny nation of 1.3m a very attractive investment. Exports are soaring and are up 53% on last year. This summer they reached the 1bn euro mark for the first time.

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But 70% of exports go to other EU countries and growth is steadily declining in its two major export markets, Finland and Sweden.

So how fragile is Estonia's economy?

It is still a net recipient of EU money but its contribution to the European Financial Stability Facility means membership is decreasingly profitable. Its 2bn euro contribution represents a third of the government's annual budget.

"We were invited to the wedding party but it turned out to be a funeral," says Andres Arrak, from the Estonian Entrepreneurship University of Applied Science.

Start Quote

Andrus Ansip

Of course we understand what the credit crisis means, but in Estonia it's not a hot topic for us”

End Quote Andrus Ansip Estonian Prime Minister

"We've had lots of money from the EU.

"We've renovated churches and roads. But now we're being asked to put money in to improve mistakes made in the past in Greece and other eurozone countries.

"It makes no sense. We should be investing in Estonia's future."

But Estonia's Prime Minister Andrus Ansip remains confident its growth will continue: "Of course we all have to be worried but our banking sector is doing well, our commercial banks are well capitalised and have quite remarkable reserves.

"State finances are in the best shape of any in the European Union because we still have 12% GDP reserves.

"So yes, of course we understand what the credit crisis means, but in Estonia it's not a hot topic for us."

Mr Ansip admits he has a hard task explaining why Estonia, the poor Eastern cousin, fresh out of troubled times itself, should bail out its richer Southern cousins.

Museum Lounge, Tallin Drinkers in the Museum Lounge say it is their duty to contribute to the EU bailouts

But support for the EU is unwavering among young Estonians relaxing over a glass of wine in one of Tallinn's fashionable new bars, Museum Lounge.

Memories of Soviet occupation, which only ended 20 years ago, are still fresh among the younger generation.

Ali is a school teacher who says she fully supports Estonia's contribution to the Greek bailout.

"I don't even understand what the discussion is about. We've been receiving a lot of money from the EU so now it's a good thing that finally we're in a position to help someone else. I think it's only fair."

Museum Lounge manager, Argo, agrees. "Estonia is looking West now, only West," he says.

And Estonia is willing to pay the price.

The World Tonight is broadcast weekdays on BBC Radio 4 at 22:00 BST.

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