AP Interview: Estonia pledges support for Portugal

AP News
Posted: Apr 09, 2011 1:13 PM
AP Interview: Estonia pledges support for Portugal

Estonia _ the eurozone's newest and poorest member _ will not shirk from bailing out much richer Portugal and Ireland, the country's finance minister said Saturday.

"Even if a rich country is in trouble, it is still in trouble and you need to support it," Jurgen Ligi told The Associated Press.

Ligi was speaking a day after the 17 euro countries decided to give Portugal about euro80 billion ($115 billion) in rescue loans as long as it signs up to a strict economic adjustment program.

Estonia, and its unassuming finance minister, might have some words of advice to Portugal's feuding political parties as they are forced to agree on painful reforms and budget cuts _ although Ligi is careful not to impose.

"We are so small that we are careful on advice," said Ligi, whose government was just elected for another term. "We are sharing it, if it is asked."

A success story for some, a cautionary tale for others _ Estonia's part in the eurozone's financial saga has some ironic twists.

The small Baltic country suffered more than most European states in the wake of Lehman Brothers' collapse in 2008. That year its economy shrank by 5.1 percent, followed by a 13.9 percent plunge in 2009.

With its tax revenues declining, Estonia did what few other countries dared. Rather than spend its way out of the recession, it slashed spending, cutting some public sector salaries by a third and likely exacerbating its immediate economic problems.

"It was a rational decision not to spend more than you earn," said Ligi. "I would have done it even more."

Today, Estonia has the lowest debt load in the eurozone _ less than 6 percent of gross domestic product _ and it even managed to produce a small surplus in 2010, Ligi said. Ireland's deficit topped 30 percent last year, while Portugal just revised its up to more than 8 percent.

But those numbers don't tell the full story.

Estonia's per capita gross domestic product was just $19,000 in 2009, the latest numbers available, compared with $23,000 in Portugal and $37,600 in Ireland. Unemployment is still more than 14 percent, the fifth highest in the eurozone.

Although its economy started growing again last year, even the European Commission, the EU's executive and a firm advocate of the cut-and-grow strategy, says Estonia's medium-term growth rate will reach barely one-third of its pre-crisis level.

"We have a lot of problems. We're not a rich country," said Ligi.

But he is not trying to use that as an excuse to avoid paying for the problems of less disciplined governments, like Slovakia did when it refused to participate in a euro110 billion emergency loan to Greece last year.

Once Estonia has officially joined the eurozone's main bailout fund, the European Financial Stability Facility, Ligi expects to guarantee loans to both Ireland and Portugal.

"I will fight for it in Parliament, if necessary," Ligi said.

The minister said he has little hope of changing the key to calculate Estonia's contribution to the facility, which is in the middle of an overhaul to expand its lending capacity to euro440 billion from about euro250 billion currently.

Once that is done, Estonia will likely be responsible for loan guarantees that make up some 12.6 percent of economic output, Ligi said _ much more than richer countries like Germany or the Netherlands, whose guarantees probably won't top 10 percent of GDP.

The reason for that odd distribution lies in the formula used to calculate contributions, which gives equal weight to economic output and population size.

Estonia and the other newer and poorer euro states secured a more favorable key for the recently agreed post-2013 bailout fund, where Estonia's responsibility will only weigh some 9 percent of GDP. However, Ligi said a similar deal was unlikely for the European Financial Stability Facility, which was set up in May 2010.

"You can't open history," Ligi said.

But the minister does not expect huge protests at home for pledging his support for Ireland and Greece.

"We Estonians understand that those things do not help," he said. "Estonians can cope with difficulties quite well and they are very rational."