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Lithuania, Estonia Clean Up Their Own Economic Houses
The Washington Diplomat / May 2009

By Larry Luxner

Latvia's two Baltic neighbors — Estonia to the north and Lithuania to the south — appear to be weathering the global economic storm far better than Latvia, though the current clouds of gloom are likely to hang over Eastern Europe until at least the end of 2009.

With 3.5 million people, Lithuania is the most populous of the three Baltic states. It also has the biggest and most diversified economy, a fact that has worked to its advantage, says Audrius Bruzga, Lithuania's ambassador to the United States.

"Our population is more dispersed throughout the country than is the case in Latvia or Estonia, so we are better-positioned to handle the burden of economic difficulties," Bruzga told The Washington Diplomat."We have also developed more of a manufacturing industry. We didn't let that slip away when the Soviet Union was disbanded. We didn't sell everything off, or plunge into the financial services sector. We maintained manufacturing capacity, and now that policy is paying off because we still benefit from exports."

Lithuania is distinctly proud of its long heritage. In the 14th century, Lithuania was easily the largest country in Europe. This year, in fact, its people celebrate the 1,000th anniversary of the first mention of the name Lithuania in written sources. Its capital city, Vilnius, has long been known as the "Jerusalem of Lithuania" for its tolerance of various nationalities and religions.

This year, Vilnius was chosen by the EU as one of Europe's two cultural capitals for 2009 (the other is Linz, Austria). And Lithuania's ambassador to UNESCO, Ina Marciulionyte, is currently being promoted as "the Baltic candidate" for director-general of that Paris-based organization.

Lithuania is today a net exporter of refined energy products, fertilizers and minerals. Its factories churn out an array of products ranging from welding machines to electrical appliances; it's also a leader in biotechnology.

Yet all that hasn't been enough to stave off a severe economic contraction that began last year, after nearly a decade of unparalleled GDP growth averaging 7 percent a year.

"Membership in the European Union gave us a tremendous boost," said Bruzga, who was Lithuania's ambassador to Finland on May 1, 2004 — the day 10 countries were simultaneously admitted to the once-exclusive club. "It was a great night. The moment the clock struck 12 midnight, we were all of a sudden members of the EU."

Bruzga said that amidst the euphoria that followed, "we perhaps neglected the sustainability effect of that growth. There was a growing gap between productivity and available credit. What we did wrong was underestimate that the economy goes in waves."

The 42-year-old ambassador — who was also posted to Tel Aviv and London before coming to Washington — predicted Lithuania will see a GDP contraction of at least 3 to 4 percent this year. But that could considerably worsen as the months pass. Unemployment is already at 10 percent and growing.

"The situation is very fluid," he said. "Revenues are decreasing, and there has to be an adjustment. We've had to restructure the energy sector, and we're still struggling with that. We are now underway, but a little short of time. We should have done that two years ago."

In addition, he said, "our government under Prime Minister [Gediminas] Kirkilas is trying to push through badly needed reforms in health-care and education, even in a time of crisis. It's like what President Obama is trying to do: cope with the effects of the financial crisis, but pushing through big reforms. It's not easy to manage both."

A tax reform package has been introduced, as have a series of budget cutbacks that "will limit spending so we are more or less in line with our ability to generate revenues," he said, adding that "to some extent, this embassy has been affected by the cutbacks."

In addition, a public-private stimulus package aimed at revitalizing the economy has been passed, giving extra help to businesses in the face of a credit freeze.

"Money is one thing, confidence is another. We need to bring confidence back into the business community," Bruzga said. "What the G-20 did in London was a good thing. So far, we haven't had any bank defaults. Lithuania's banking system is stable and credible."

He added: "The government is doing whatever it can to keep the situation from deteriorating further. To a large extent, we've been successful. We're in a better situation than Latvia. We don't have that big of a budget deficit. We haven't yet asked for outside help, and Prime Minister Kirkilas is determined not to — unless it's absolutely necessary."

Bruzga said he would like to see Lithuania make the euro its official currency as soon as possible.

"We have said that from the very beginning, adoption of the euro was in our interest. We came very close to introducing the euro two years ago, but we didn't qualify on one criteria: inflation. The goal remains, and we still want and need to, the sooner the better."

Bruzga said that in the long run, adopting the euro would boost exports and ease external pressures.

"We're paying the price for not doing that earlier," he told The Diplomat. "Keeping our currency pegged to the euro didn't do anything for the economy. It brought overall stability, but Lithuania has little leverage over the money markets, so we're totally dependent on the outside."

One problem Lithuania doesn't have to worry about anymore is being bossed around by the communists in Moscow. Like Estonia and Latvia, Lithuania was an independent nation before it was occupied by the Soviet Union in 1940 and absorbed into the USSR against its will.

In 1990, according to a government fact sheet, "Lithuania was the first of the occupied states to hand the USSR a fateful blow by reclaiming its independence." So it's understandable that Lithuanians bristle when their country is called a former Soviet republic.

"We're happy that the Soviet Union collapsed — good riddance!" Bruzga declared without hesitation. "You have to face reality. It was nonsense. The Soviet Union was not a sustainable entity at all. It was a criminal government based on force. It's simply out of the question that anybody should feel any nostalgia."

Despite the mistrust that lingers between Russia and the Baltics, Bruzga said it's "inevitable and important that we have a relationship with Russia based on trust and cooperation. There's no other way. We have to be sure that all of us are on the same wavelength."

Of the three Baltic states, Estonia has been least affected by the global economic meltdown. That's partly because the tiny country — smaller than New Hampshire and Vermont combined — identifies more closely with Scandinavia to the north than to central Europe, which is the reference point for Lithuania, and to a lesser extent, Latvia.

Throughout the Cold War, Estonians in the capital, Tallinn, could easily watch Finnish-language TV broadcasts coming from Helsinki, only 80 kilometers away. Like the Finns and Swedes, the Estonians are predominantly Lutheran, whereas Lithuanians are mostly Catholic and Orthodox Christian.

"Estonia always promoted free trade, even before we joined the EU," said the country's ambassador in Washington, Väino Reinart. "Since 2004, we have been one of the EU's strongest promoters of a liberalized market, and obviously, our membership in the EU has benefitted our economy."

Between 2000 and 2007, the country's growth rate averaged 8 percent. But in 2008, it fell 3.6 percent. According to the Estonian Finance Ministry, GDP will tumble 8.5 percent this year, while the Bank of Estonia predicts a drop of anywhere between 5.5 and 8.9 percent — all of which explains why Estonia was smart to save its kroons for a rainy day.

"Since 2000, we were having budget surpluses every year, and we were able to accumulate reserves worth roughly 10 percent of GDP," said Rainert. "We knew that the good years would not necessarily last forever."

Like its Baltic neighbors, Estonia has seen unemployment jump from around 4.5 percent last year to around 10 percent now. Yet unlike Latvia and Lithuania, there's been no social unrest, and no widespread anti-government demonstrations.

"You can say Estonia has been more careful [than Latvia or Lithuania], which is clearly demonstrated by our reserves. It has not been necessary for us to approach the IMF or the EU for additional credit, which Latvia has been forced to do."

In fact, said Rainert, "Estonia is part of the consortium that put together the first credit package and made it available to Latvia last fall," so it is, in effect, a donor country rather than a borrower.

Services — dominated by tourism, finance and the IT sector — comprises 64.8 percent of Estonia's GDP, while industry makes up another 32.5 percent. Agriculture, once the mainstay of the region, contributes a minuscule 2.9 percent of GDP. Top markets for Estonian products are Finland, Sweden, Russia, Latvia and the United States, while leading exports are machinery and equipment (33 percent); wood and paper products (15 percent); textiles (14 percent); food products (8 percent) and furniture (7 percent).

With 1.98 million mobile phone lines and 780,000 Internet accounts for its 1.3 million people, Estonia is one of the most wired countries on Earth. Every gas station in Estonia offers free WiFi, more than 90 percent of banking is done online, and 90 percent of all 2008 tax returns were filed online in Estonia, the country that gave the world Skype.

"Estonia's population has traditionally been well-educated," said Reinart. "Even a century ago, we had a literacy rate close to 100 percent. We're future-oriented, and you've got to be inventive to be successful."

Reinart, 46, was born and raised on the island of Saaremaa, just off Estonia's Baltic coast. He studied radio electronics at Tallinn Technical University, and did post-graduate studies in physics at the Estonian Academy of Sciences.

In 1992, he joined Estonia's new foreign service, serving as the country's representative in Vienna before the Organization for Security and Cooperation in Europe from 1995 to 1999. In 2002, he was appointed Estonia's ambassador to the EU in Brussels, a job he stayed at until 2007 and his current transfer to Washington.

"I believe the government has been able to explain to the people what we're faced with," Reinart said, praising the current leadership of Prime Minister Andrus Ansip. "He has taken measures to cut back public spending, which is necessary to meet the EU's criteria to join the eurozone," an achievement Reinart says will be likely by 2011. "We've got to keep our budget deficit below 3 percent. Our public debt is supposed to be below 60 percent of GDP. In Estonia, it's only 5 percent. Inflation used to be relatively high, but with all likelihood, we will meet the eurozone's inflation criteria by November of this year."

Elimination of the Estonian krone, currently pegged at 15.646 to the euro, would do away with currency risk, said Reinart.

Despite Estonia's relative stability compared to its two Baltic allies, prominent political scientist Rhine Toomia warns that the Estonian government could collapse within a few months as the economic situation continues to decline.

"A critical time should come sometime by summer, and elections will make it even worse," he told a radio program in mid-April. Roomla said the coalition government headed by Ansip had been near collapse several months ago, when there were fears it wouldn't be able to survive negotiations over budget amendments.

Ansip himself warned that Estonia's unemployment fund is on the verge of bankruptcy as it struggles to make payments, leaving only 80 million kroons ($6.8 million) out of a total budget of 2.7 billion kroons ($229 million).

Yet so far, Reinart's 11-member embassy on Massachusetts Avenue hasn't been affected much by the latest austerity directives from Tallinn.

"We have not been prevented from carrying out our day-to-day activities by any means," he said. "We are doing pretty well."

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