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Cost of progress

Tallinn, EE (View on map)

Out of the three Baltic countries, Estonia is definitely the most developed one. Its closeness to Finland and Sweden has helped it make quick progress after the collapse of the Soviet Union. Strict monetary policies and the fanatic support to foreign investors have caused an explosion of commercial activity. EU membership in 2004 further boosted the people`s confidence in the economy. Today, I am trying to find out how people are taking advantage of their newly acquired financial freedoms.

Marju (22): `Estonian people have massively started taking up loans, even for everyday shopping`

Siin (20) says that fashion design shops like Armani and Hugo Boss have started to appear in Estonia. M?rt finds that the appearance of newer and smarter cars shows that Estonia is quickly moving forward. Under Soviet times, cars were not sold but assigned and food or clothes where not sold for money but for coupons. People did have money, but they could not buy a great deal with it.

Luxury items
That situation has now been reversed. The shops are full and Estonians can buy whatever they want. Salaries however are still a long way behind Western European ones. For daily products, this is not a big problem. For luxury items it is. Estonian car prices for example easily meet Western European ones, while the average salary in Estonia is still well below 1,000 Euros per month.

Since the moment the Estonian Crown was reintroduced, inflation was reduced and interest rates as well, loans started to gain popularity. Bank started to introduce credit plans which were offered almost regardless of the demander`s financial situation. Having a job was enough to get a loan. Amount and payback period were only details. Banks were eager to distribute money and many people took advantage of that. Marju (22, photo) tells me that some people started taking loans for almost everything they bought, including cars and everyday consumer products.

Slow down
At this moment, the economic growth is starting to slow down. House prices are no longer increasing like they did. The low salary standard is causing many problems for people to pay back their loans. Decreasing house prices cause real estate to start becoming unsuitable to serve as a pay-back guarantee for the loans. Also, it means that people will be less likely to buy a house. The investment simply becomes too risky investment if they might have to sell the house at a lower price afterwards.

Marju gives an example of how this affects people in their daily lives as she tells about a family of five who was forced to temporarily emigrate to be able to pay off their loans. They moved to Finland where salaries are much higher and then collected enough money to pay off their loans. If the Estonian economy does not keep growing at the current pace, which is quite likely, many more families may be forced to find similar emergency solutions.

Marju herself has only one loan. It serves to pay for her second studies and the conditions for such a loan are quite favourable. The state covers half of the interest and the pay back period is two years. Further advantages include the possibility to become a state official and not have to pay anything back, or to get a 50% reduction in case you get a baby.

Consumption
Many loans however serve for people to buy cars or daily consumption goods. Estonia is not the only country where the economic promises makes people feel untouchable and more rich than they actually are. The Estonian government is only now starting to promote smarter financial behaviour, but it may be too late. The whole economy relies on, or has even become dependent of, positive expectations. But nothing in life is sure - Estonia may have to pay heavy tolls in the near future for the luxury it experiences now.

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