Estonia is One of the Three Baltic States

Estonia is one of the three Baltic states that has membership within the European Union. After independence in 1918 and a fifty-year incorporation into the Soviet Union, the Republic of Estonia finally regained its independence in 1991. After leaving the Soviet Union, Estonia struggled as it converted to a more capitalist economy.

The Russian Economic collapse of 1998 hindered the transformation and the economy as a whole, but it soon recovered, and Estonia joined the World Trade Organization in 1999 before joining both NATO and the EU in 2004. Membership of the OECD was confirmed by 2010 and Estonia officially adopted the euro in 2011.

With over 45,227km2 in total land area, Estonia has little arable land and is thus primarily a society focused on the digital age with over two-thirds of its population involved in the tertiary section. The country is so technologically infused that it has had e-residency since 2014, allowing for individuals and business's outside of the country to easier conduct business there and elections through the internet have become even more viable than in-person polling. Estonia's future plans as stated by the Prime Minister of Estonia, the de facto ruler of the state, rest on Estonia becoming the ?genetic backbone of Europe' where Estonia's investment in IT and the Biology sphere hopes to gain a niche within the European Economic Market.

It should be noted that out of all three of the Baltic States, Estonia has the lowest amount of GDP, resting only at about 25.92 billion USD, and is the poorest eurozone country. This however, makes it a haven for corporations, particularly those from Scandinavia, to find refuge with Estonia, controlling over half of all of its FDI investment. Additionally, Estonia's GDP per capita rests at a comfortable 19,704.66 USD, significantly higher than that of its Baltic brother nations.
Estonia's growth thus far as shown in Figure 1 has tended to be steady with a major dip in 2009 similar to what happened throughout the

Eurozone including the Czech Republic resulting in a crippling blow to the economy that it has taken some time to get out of. Nowadays, Estonia's economic growth is projected to reach 3.5% in 2019, before slowing to 2.3% in 2020 in line with weakening external demand. Increasing real wages will support healthy consumption growth with investments set to pick up, supported by strong business confidence and the recovering housing market.

The pace of domestic demand is expected to continue to sustain growth in 2018 albeit only a temporary negative budget balance level. The decline in the labor force appears to be limiting new gains in terms of jobs. Additionally, wage rises, in part, are eroded with higher inflation and indirect taxes on such products as alcohol, tobacco, fuel, hospitality, and catering.

With the return of European funding in 2017, public infrastructure investment continues to grow, along with private investment in equipment, due to the high production capacity utilisation rate in response to fixed external demand, which has absorbed seventy percent of industrial output. In addition, businesses are enjoying tax exemptions on reinvested profits up to 100% with personal incomes still taxed at twenty percent to make re-investment seem more appealing.

Exporters are finally managing to process the impact of the Russian recession and counter-sanctions though not without drawbacks to the economy. Dairy products, fish, and alcohol have found substitute markets in Scandinavia, and also outside Europe, helped by the depreciation of the euro, serving to sustain Estonia's Gross Domestic Product.

In contrast, rail and road transport has been hit by the drop-in equipment transit to Russia mainland and the Kaliningrad outreach, especially with the Russia Federation favouring its own ports. This does not affect Estonia on a wide basis due to Estonia's abundance of shale oil supplying it with all the electricity that it needs although gas trade with Russia does pose a potential problem.
Over three-fourths of Estonia's exports go to the EU, while 7% goes to Russia and 4% to Norway, respectively. Estonia is dependent on the EU for most of its trade making it highly dependent as trade constitutes about 155% of Estonia's GDP as shown by the graph though more recent dates put the sum even higher into the ~180% percentile.

Needless to say, Estonia's economy is highly dependent on trade leaving it open to external shocks but more on that later. A negative of such dependence is that Estonian subsidiaries often function as outsourcing sites for Scandinavian parent companies with more than 90% of the banks operating in Estonia under Scandinavian ownership. Though this is not entirely bad as it brings with its significant sums of Foreign Direct Investment.

Foreign investors, mostly Nordic, have made considerable investments into high technology and communication networks in order to modernise the technological communications infrastructure in Estonia. As a result, the Estonian telecommunications sector is one of the most developed in Central and Eastern Europe with some of the best DSL rates on the continent as a whole.

As foreign companies dominate in several sectors of the Estonian economy Estonia is now one of the leaders in Central and Eastern Europe in terms of foreign direct investments (FDI) per capita. The stock of total FDI peaked at 18.4 billion EUR as of 31 December 2016 with over 48.3% of foreign investment coming in from Scandinavian countries, Sweden and Finland in particular.
A remarkable point to make is that Estonia is nearly energy independent, supplying over 90% of its electricity needs with locally mined oil shale. Alternative energy sources such as wood, peat, and biomass makes up about nine percent of primary energy production. Estonia imports much needed petroleum products from western Europe and the Russia Federation. Resources such as oil shale energy, telecommunications, textiles, chemical products, banking, fishing, timber, shipbuilding, electronics, and transportation are key sectors of the economy.

The recession caused by the collapse of the Housing Bubble in 2008 and 2009 was extremely determinantal to the Estonian economy, more so than even the collapse of the Russian market in 1998. Estonian GDP dropped like a hardball by over 21.7 points, as seen in the graph under Estonian's Gross Domestic Product, representing the biggest drop off since the re-establishment of independence after the Singing Revolution.

With Estonia's small population and stable economy, it is unlikely that Estonia will ever be threatened from internal shocks but only rather from external ones. However, not all shocks have to be bad and there are future possibilities for good demand shocks.
The Hyperloop, a mega-project brain child of the EU, seeks to shake this up by building up hyper fast trains that would travel from Poland and through all of the three Baltic countries including Estonia to allow for faster and more efficient transportation, linking up the Baltic states properly to the European Union in terms of transportation as previously there have only existed two hypersonic belts going down vertically from Eastern Germany to Austria and then into Italy and another one going from Western Germany through Southern France and into Spain.

Internal supply shocks are unlikely to occur from an increase in taxes as those have been kept steady for an extended period of time with Estonia being one of the first countries to adopt the flat rate tax which currently sits at 20% down from the 27% that it was at when it was first introduced.

If an internal supply shock were to occur and there is one on the horizon though it be distant off, then it would be the one related to the shrinking demographic of Estonia with there being even today a high demand for skilled labour that the citizens of the country cannot match due to just a general lack of citizens with such skills and emigration.

Currently Estonia is challenged by a shortage of labour both skilled and unskilled, although the government has amended its immigration law to allow easier hiring of highly qualified foreign workers, and wage growth that outpaces productivity gains. The government is also pursuing efforts to boost productivity growth with a focus on innovations that emphasize technological start-ups and e-commerce.
The annual average unemployment rate was 6.8% in 2016 and 6.2% in 2015. The unemployment rate additionally increased to 7.8% in 2017.

By the end of the forecast period which is 2019, the unemployment rate is projected to increase by 9.5%.
Overall Estonia lacks managers, IT staff, Health professionals, Legal representatives and teachers at vocational institutions. Occupations that are currently experiencing a surplus in Estonia are shop and street sales workers, manufacturing labourers, mining and construction workers, transport and storage labourers and hand cleaning workers.

Given Estonia's relatively high GDP per capita at over 19,704.66 USD, it's a surprise to find out that it has significant troubles with unemployment, afterall over 99.8% of the country is considered literate and most students attend and finish high school. But Estonia's population of 1.3 million is what heightens these figures and every fifth person lives in relative poverty (22%) with 8% living in absolute poverty.

The number of students attending vocational schools has been on the overall decrease as the share of older students attending higher education has been steadily increasing, only furthering the gap in the Estonian labour market.
So it should come as no surprise as to Estonia's eagerness to open borders to migrants but limited opportunities tamper with people's want to live in such places as Estonia and no amount of FDI in this regard can help change such an opinion with much more lucrative titans opening their doors to skilled migrants in mainland Europe and across the Atlantic.

Estonia largely follows the rule of political, economic and social law as decreed by Brussels. Estonia benefits greatly from the European Union, being more of a receiver than a provider, receiving a net of over 494 million euro in funding from the political bloc and that is already including Estonia's contributions to the EU in the first case.

Since the monetary reform of 1992 and before the switch to the Euro in 2011, the realisation of Estonia's monetary policy has followed the framework of the currency board; the currency board is a special arrangement in monetary policy realisation where unusually strict restrictions govern some noteworthy operations conducted by the central bank.
In Estonia, such restrictions were and still are specified in the Central Bank Act that safeguarded the Estonian kroon and now the Euro. The law has two restraints on the realisation of monetary policy in this regard. The aim of the first was to secure the fixed exchange rate between the Estonian kroon and the Deutschmark and starting from 1999, automatically with the euro as well until Estonia switched adopted the euro.

The other restriction forbade the central bank from issuing uncovered money, for example, its commitments such as the cash in circulation and deposits kept in the central bank, must be covered by high-quality foreign currency reserves which is now a dropped stipulation though reserves are still kept of the eight global currencies including the American Dollar and the Russian Rubel.
Such foreign assets can be the foreign currency deposits in the reliable commercial banks in a developed country, or investments in the developed countries' low-risk bonds which is still done in high parts by Estonia in both Romania and Italy.

The aim of such monetary policy strategy was to ingress price stability by tying the exchange rate of the domestic currency with reliable foreign currency that was vital for the Estonian economy though has now lost much significance. The requirement to maintain a high level of foreign reserves came from the necessity to secure the credibility of such a tie, without which the interest rate would stay unnecessarily high and would cause needless expenditure for the economy in pursuing the aims of its monetary policy.

According to the currency board's restrictions, the realisation of monetary policy is based on operations on the currency market where the Bank of Estonia is compelled to buy or sell the euro in acquiescence with the demands of the market.
Other means of influence of the monetary policy have had either partial significance or have had only a brief impact when the function of the capital markets has been disrupted.

Due to Estonia's currency board's high standard of automatization in the technology of monetary policy realisation, more importance has been given to the development of the efficiency of the monetary policy's operational framework, for example, updating the system of compulsory reserves, ensuring smooth currency movement between the central bank and financial sector among others, maintaining the stability of the financial sector and informing the public sphere of the developments of the monetary policy and of the influence of economic policy as set by European legislature.

The official currency of Estonia is the euro succeeding the Estonian kroon in 2011. Till 2011 the Estonian monetary unit was kroon, which was adopted after the monetary reform of the twentieth of June in 1992. The official rate was one Deutsche Mark (DEM) to eight kroon's (EEK). The Soviet roubles were exchanged with the kroon at a rate of 1 kroon = 10 roubles. When the Deutsche Mark was replaced by the euro, the Estonian kroon was pegged to the euro at a rate of one EUR to 15.6466 EEK.

From the first of January 2011 the official currency in Estonia has been the euro. The conversion to the euro shadowed the existing exchange rate. So, during the contemporary history of the Estonian kroon, its exchange rate had never been changed.
Estonia's own monetary system was based on the Monetary Committee, meaning that, for every kroon in circulation, in its National Bank there was foreign currency consisting of euros and dollars or gold in the same value. The system of the Monetary Committee was chosen to lessen the influence that speculation in foreign currency would have on the Estonian economy and to guarantee the firmness of its monetary system.

For Estonians, introducing their own money was a step on the road to Estonian independence and sovereignty, and because of that giving up the kroon was a painful process. Before adopting the euro, the percentage of its supporters was only slightly over fifty percent, but then it grew. There were many motives to switch to the euro. Primarily, Estonia had promised to enter the euro zone when joining the European Union in 2004 and to do that properly it needed to adopt the euro as it promised.

Secondly, because of the fixed exchange rate of the kroon the euro was already in wide circulation and use in Estonia. Thirdly, at the end of 2008 and the beginning of 2009 and at times even before that, the outside world had little trust in the Estonian kroon which is no surprise given the uncertain nature of the Baltic states as a whole. Even though Estonia switched to the euro at the existing exchange rate it was still occasionally thought that Estonia would devalue its currency to solve its economic problems and that this would make the life of Estonian entrepreneurs extremely difficult which it did not. The fact that nearly all loans in Estonia were in euros also contributed to this line of thinking.

The biggest change in the adoption of the euro was in the amounts and numbers which suddenly became a lot smaller but the large proportion of coins in circulation was also something that needed getting used to. Adoption of the euro meant that the costs of borrowers, travellers and companies became smaller because they didn't have to exchange kroon's for euros or euros earned through exports for kroon's. Interest rates fell as well. In addition, it was clear that prices increased in some cases, especially after the official price control ended in the middle of 2011 where many merchants and service establishments tried to make prices attractive by rounding them up. In the current day, Estonia uses the euro which has the same exchange rate as all the other euros used in the entirety of the European Union.
Overall the inflation of Estonia has been steady, increasing at about four percent per year with the biggest curvatures occurring during the financial crises with the crises rising inflation up to eleven percent before policies introduced by the central bank combatted this rapid increases and brought inflation into the meagre negatives though not for long.

It should be noted that the four point five percent increase is actually the largest in the entire European Union with Lithuania following close behind with four point two and the United Kingdom coming in third at three point one percent for 2017 with the average inflation rate being one point eight, showing that while Estonia's business environment is ranked one of the best by the OCED, its national currency isn't as stable as its marketplaces.

Shown by Eurostat, the largest upward impacts to the European Union's annual inflation came from fuels for transport (+0.21 percentage points), heating oil (+0.07 pp) and milk, cheese and eggs (+0.05 pp). Telecommunication (-0.11 pp), garments (-0.07 pp) and social protection (-0.04 pp) had the largest downward impacts.

This shows that sanctions placed on Russian by the European Union had an adverse effect on the Estonian economy with fuel, natural gas and dairy; products usually imported from the sanctioned country rising the national inflation rate as the procurement of such supplies becomes uncertain.

On the other hand, the foreign investment and procurement of companies in Estonia by Scandinavian powers such as Finland and Sweden shows a positive effect on inflation with the largest affected area, being telecommunications, getting the biggest development in the country and thus increasing the perceived stability in the tele-communicative infrastructure of the country.

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