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It is absolutely clear that Estonia will not be able to gain a place among the most expensive or richest countries in Europe or the European Union in terms of prices or living standards in the foreseeable future, economic analyst Heido Vitsur says.
Although the probability that Estonia could emerge as one of the five richest or five most expensive countries in Europe is very close to zero, it's still useful to know more about who are currently our peers and how we got here. This is to better understand our chances and the factors that shape them.
Today, according to the World Bank, Estonia ranks 19th in the European Union in terms of GDP calculated at purchasing power parity per capita, with 49,000 dollars. In Western Europe, it ranks 22nd. We are lagging behind Austria, which is in fifth place in the European Union, by 24,700 dollars per capita, and by 21,200 dollars behind Sweden, which is in seventh place.
However, if we were to claim fifth place in Europe, we would have to overtake Iceland, whose GDP per capital is higher by 28,600 dollars than ours.
Looking back, we see that our position in this competition, despite ambitious promises, has not improved over time. In 2008, the gap between us and Austria was only 18,500 dollars, compared with 24,700 dollars now. True, over these years, our relative standard of living compared to Austria has risen from 55 percent to 66 percent.
However, growth charts are deceptive, and an improvement in the relative standard of living compared to someone else does not necessarily mean getting closer to them. For example, Bangladesh's GDP per capita in PPP (purchasing power parity) terms has grown 3.1 times during the same period, compared to our 2.3-fold growth. While in 2010 a resident of Estonia had 18,700 dollars more in purchasing power than a Bangladeshi, now we have 40,000 dollars more, which is more than twice as much as in 2010.
What makes our advancement on the scoreboards of wealth particularly questionable, however, is the fact that, in the European Union and throughout Western Europe, it is not easy to find countries that have fared worse than us in the last 15 years.
However, once we get back to real money, our task becomes even more difficult. In terms of real money, in 2023, we lagged behind Austria by as much as 26,700 dollars and behind Iceland by 49,000 dollars.
Fifteen years, that's from 2008 to 2023, is a long time and a lot can happen during that time. So, from 2010 to 2019, less than 21,000 dollars separated us from Austria in PPP terms. Although we recovered from Covid faster than the European average, we went on to do worse than average, and the gap increased from 20,800 to 24,700 dollars with Austria and from 17,400 to 21,200 dollars with Sweden.
What makes our advancement on the scoreboards of wealth particularly questionable, however, is the fact that, in the European Union and throughout Western Europe, it is not easier to find those countries that have fared worse than us in the last 15 years than those that have caught up with us or even gone past us.
So, for example, in 2010, Lithuania lagged behind us in terms of purchasing power by 1,300 dollars, but now beats us by 3,000 dollars. In 2019, the gap between us was only 800 dollars. We've also been overtaken by Poland, who lagged behind us in 2010 by 2,400 dollars but has now built a lead of 500 dollars.
Romania, which was 6,200 dollars behind us in 2010, has improved its position over the past three years to the point where we are now only 2,100 dollars apart in terms of PPP, which is unlikely to take long for Romania to bridge given its current momentum and our rising prices. It is also worth noting that Portugal, which used to be a couple of thousand dollars behind us in the meantime, is now only a couple of hundred dollars behind.
Since we have kept consoling ourselves with the assertion that we are doing better than Latvia and Greece, it should also be borne in mind that, while our gap with Latvia has increased by a thousand dollars over the last four years, the 9,000-dollar gap with Greece has stabilized.
Likewise, a comparison with the European average gives us nothing to be cheerful about. In 2010, we lagged behind the European average GDP per capita, calculated in PPP terms, by 9,000 dollars. Although we managed to narrow this gap to 8,400 dollars over the next nine years, by 2023 the gap had widened to 11,300 dollars.
The inflation of the past three years did not significantly support our GDP growth relative to others even in nominal terms. By 2019, we had managed to reduce the nominal gap with the European Union average from 18,300 to 11,500 dollars. However, the roughly 40 percent price increase over the past three years, which damaged our economy, only brought us 500 dollars closer to the European average.
It is completely incomprehensible how anyone can talk about Estonia moving into the family of rich countries in the current situation. To get a sense of the real situation, it is not necessary to pore over the decline by a few percent in the World Bank's large database. All one needs is a moderate degree of empathy and keeping our eyes open in Estonia.
We have not made much progress in 15 years in the race for higher places, but have lost or wasted the cards that we had in this economic race (relatively cheap/affordable, stable and low-tax country with solid public finances, etc.).
According to the latest survey of family incomes based on data for 2020, we spent an average of 500 euros per family member per month. This year, we are probably spending a third more speaking of money, but somewhat less in purchasing power. However, the problem is not with the average purchasing power, but with the fact that 20 percent of our families, that is, about 300,000 people, can spend two or three times less than the modest average, that in southeastern and eastern Estonia the incomes of families are a quarter lower than in Tallinn, and that a single-parent family can spend 2.6 times less per person than the family of a childless working person.
Moreover, it is precisely those families that had to spend a portion half bigger of their meagre income on food than the wealthy before the price rises that will be hardest hit by the rise in food prices and VAT increases. Wealthy and successful countries do not have to do such things.
Since we have not made much progress in 15 years in the race for higher places, but have lost or wasted the cards that we had in this economic race (relatively cheap/affordable, stable and low-tax country with solid public finances, etc.), we must, whether we want it or not, admit to ourselves that there is no guarantee that we will remain 18th in the EU and 22nd in Western Europe also in the years to come.
The reality is that we need to make an immense effort and act intelligently to reach the European average in terms of wealth, as we have got there in terms of price levels.
This task will, unfortunately, be all the more difficult the faster we move towards the countries with the highest price levels in Europe. Last year, we were separated by just one percentage point from Italy, which ranks 11th in terms of price levels, and by 11.6 percentage points from Germany, which is in tenth place. No more than 15 to 18 percentage points separate us from the Netherlands and Belgium, which are in fifth and sixth place in terms of price levels in the European Union. However, the gap with Luxembourg, which is fifth in Europe, is more substantive at 36 percentage points.
However, here it is necessary to remember that being in 12th place does not mean that we are there for all groups of goods. This is because in most European countries, unlike in our country, lower VAT rates apply to food and many basic necessities, subsidies are paid to producers to keep food prices low, etc., which is why we are already higher than in 12th place in terms of food prices, as well as some other prices.
It might seem that since our prices have risen 15 to 25 percentage points faster than in countries with higher price levels over the past three years, it could be quite likely that our prices will continue to grow, for example, seven to 12 percentage points faster than those in wealthier European countries also in the coming years. This could potentially bring us quite close to the level of countries like the Netherlands and Belgium, especially if price increases are boosted by tax increases or inefficiencies.
However, the reality is that, regardless of what we do, our prices cannot rise much faster than elsewhere anymore. If we cannot get price increases under control ourselves, it will be the market that, from a certain point that is not far off anymore, will prevent a number of producers from continuing to produce at their current productivity levels under the conditions of high prices and the accompanying rise in wages.
Unfortunately, despite the slowdown in price increases, the data for the first quarter of this year are not encouraging. Where Estonia's unit labor costs (ULC) grew by 14 percent over the year, the average for the euro area was only 6 percent, while in Italy and Germany, which are close to us in terms of price levels, ULC grew by 4 percent and 7 percent respectively.
However, the reality is that, regardless of what we do, our prices cannot rise much faster than elsewhere anymore.
If this situation continues, it won't be long before we see many businesses fail to keep pace with our price increases.
It is absolutely clear that Estonia will not be able to gain a place among the most expensive or richest countries in Europe or the European Union in terms of prices or living standards in the foreseeable future.
Therefore, the claim that Estonia will become one of the five most expensive countries can be seen as a poorly coined warning in a complicated economic situation (paraphrasing the infamous promise to reach the top five richest countries in 15 years). However, continued talk of reaching or staying on the path to becoming one of the five richest countries can, at best, be qualified as an empty and fact-ignoring attempt to embellish the actual state of affairs.
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