Estonia’s adoption of the euro may bolster a German-influenced faction on the European Central Bank’s Governing Council that’s pushing for more government austerity in member states, analysts said.
Andres Lipstok, Estonia’s central bank governor and a former fencing champion, became a voting member of the ECB council when the Baltic nation joined Europe’s currency bloc on Jan. 1. Since winning independence from the Soviet Union in 1991, Estonia’s tight control on spending has given it the lowest level of government debt in the 27-member European Union and the second-smallest budget deficit in the euro zone.
“Estonians prefer a stability-oriented approach, as their fiscal policy shows,” said Carsten Brzeski, senior economist at ING Groep NV in Brussels and a former European Commission official. “So Lipstok most likely will strengthen the Germanic bloc, and Bundesbank President Axel Weber will enjoy a new friend.”
Weber, who has been critical of the ECB’s decision to buy government bonds in response to Europe’s debt crisis, leads a group of policy makers demanding politicians take greater responsibility for their own profligacy. Ireland in November became the second euro nation after Greece to receive an EU-led bailout, sparking concern that contagion will spread through the euro area and undermine the common currency.
“Most likely we will witness the creation of an Austere Coalition, actually a modified Hanseatic League, of Germany, Austria, Finland, Estonia, and a few of the smaller countries,” said Simon Johnson, a professor at the Massachusetts Institute of Technology’s Sloan School of Management, in his blog on Dec. 2. “Ending moral hazard -- the prospect of soft bail-out money forever -- is an admirable goal.”
Lipstok, who declined to be interviewed for this article, made headlines in October 2007 by stating in an online chat with readers of Eesti Paeevaleht newspaper that he could “surely” make ends meet on a gross wage of 5,000 krooni ($473) per month. His gross salary at the time was about 115,000 krooni a month.
Lipstok said on Sept. 20 last year that Estonia had kept a tight rein on its finances to comply with EU fiscal rules and qualify for euro membership.
Even as the economy shrank 13.9 percent in 2009, Estonia raised sales, alcohol and fuel taxes, froze payments into workers’ pension funds and cut salaries. The measures helped reduce the budget deficit to 1.7 percent of gross domestic product, well below the EU’s 3 percent limit. By contrast, Ireland and Greece had deficits of more than 14 percent of GDP.
The Nasdaq OMX Tallinn stock index rose 6.1 percent since Estonia joined the euro, the largest gain among 84 benchmark indexes tracked by Bloomberg. The index advanced 73 percent last year, ranking it third behind the Mongolian Stock Exchange Top 20 and Sri Lanka Stock Market Colombo All-Share Index.
High School Swordsman
Lipstok, who turns 54 next month, was Estonia’s best high school swordsman in his youth and could have represented the Soviet Union at the junior world fencing championships in 1975, according to the 2004 book “Kapital” by Tiina Jogeda, for which Lipstok was interviewed. He chose instead to end his sporting career and study finance at Tartu University, where he obtained the equivalent of a master’s degree.
“He stood out already in the auditorium and was always eager to reply and discuss,” said Mart Sorg, professor emeritus at Tartu University, who was chairman of the central bank’s board when Lipstok became governor in June 2005. “We chose him for his compromise-building skills,” Sorg said.
Earlier in his career, when Estonia was still part of the Soviet Union, Lipstok held finance positions at regional and central-government level. He rose to prominence as the head of Laeaene regional government in western Estonia from 1989, when the pro-independence movement started gathering strength.
According to Kapital, Lipstok helped ensure a bloodless transition to autonomy for Estonia during the failed 1991 coup attempt by Communist hardliners on Soviet President Mikhail Gorbachev, which precipitated the collapse of the Soviet Union.
Lipstok’s good relationship with the head of the Soviet garrison in western Estonia allowed him to negotiate a deal to keep the troops inside the barracks as the coup destabilized Russian control across the Baltics. On Aug. 20, 1991, Estonia proclaimed independence.
A member of the business-friendly Reform Party until 2005, Lipstok served as finance minister and economy minister in successive governments in 1994 to 1996.
“There were all sorts of people in the government back then, the share of the crazy ones was pretty high, and Lipstok was remarkably well-mannered and constructive against that background,” said Andres Tarand, a Social Democratic prime minister during Lipstok’s term as finance minister.
Short ECB Tenure
Lipstok’s tenure on the ECB’s council won’t be a long one. His seven-year term as Estonian central bank chief expires in June 2012 and he can’t be re-elected.
In joining the ECB, Lipstok will be plunged into top-level policy making in Europe during a time of crisis. While Estonia is the euro region’s second-smallest economy after Malta, Lipstok’s vote on the ECB council carries as much weight as any of its other 22 members.
Given Estonia’s track record of fiscal rectitude, Lipstok will find himself in good company with the likes of Weber and Juergen Stark, the ECB’s chief economist, said Hardo Pajula, a Tallinn-based economist with SEB AB. Stark said last month that every euro-area country must be responsible for its own debt.
“The rhetoric of the Bank of Estonia over the last 20 years has been influenced primarily by the postulates of Washington consensus and German ‘Ordnungspolitik’,” Pajula said. “Hence, I am rather certain that Lipstok and his team will probably make natural allies of Messrs Weber and Stark.”