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Estonia’s Return to Europe

14. January 1998 - 8:44

Lecture by Toomas Hendrik Ilves, Minister of Foreign Affairs of Estonia in Cyprus, January 14, 1998

Your Excellencies,
Honoured guests,
Ladies and gentlemen,

Good evening and thank you for inviting me to speak to you. I am very happy to be here tonight, and very happy to be visiting Cyprus. Although one needs no excuse to visit your most lovely country, my visit here -- being the highest level visit of a representative of my country to Cyprus so far -- carries a deeper significance. I believe that this visit is an auspicious sign of a new European era. Here in Cyprus, I see that we share a common understanding of the basis for economic success that points the way for all of Europe, and especially for small countries.

My country resembles yours in many ways. An obvious example is our geographical location on east-west sea trade routes. Estonia is located on the southeastern coast of the Baltic Sea and shares land borders with Latvia and Russia. Our ties with the Nordic states of Finland, Sweden, Denmark, and Norway have been strong from our prehistory onward, and our identity is both geographically and spiritually a European one. As Cyprus, Estonia is a seafaring country and it has been said that no seafaring country can ever be considered truly small.

Estonia declared independence in 1918 and functioned as a democratic state and a member of the League of Nations until the Second World War. We emerged in the collapse of 19th century empires - the Ottoman, Austro-Hungarian and Russian - that saw the emergence of so many what were considered then "new" countries: Poland, Czechoslovakia, Hungary, Austria, Yugoslavia, and of course what were then known as the four Baltic States of Lithuania, Latvia, Estonia and Finland. I say four, because that is how it was; today the example of Finland's successful self-redefinition of itself as a Nordic, not a Baltic country is an example of how perceptions can change. In the wake of the Second World War, Estonia, Latvia and Lithuania were alas the only European countries to simply disappear off the map when these three countries were forcibly occupied and annexed by the Soviet Union.

I shall not dwell on the intervening horrors, except to say that in 1939, Estonia and Finland enjoyed the same level of development. Today, the differences between EU member Finland and Estonia are dramatic, to say the least showing what a difference democracy and a free-market economy can make. Fortunately, these differences are rapidly disappearing, a testimony to the changes that form the basis of my talk tonight.

At the end of the 1980’s the Soviet Union -- then a superpower -- began to collapse under the weight of its own unworkability, and Estonia seized the opportunity to break free from its grasp. It is significant that this struggle was peaceful; instead of conflict and violence we used public demonstrations, the written word and song. On August 21, 1991, through what later came to be known as the Singing Revolution, a half-century of oppression ended and Estonia regained its independence.

Since then, Estonia has made rapid progress in becoming a normal, albeit poor democratic, free-market European country and toward joining European and Euro-Atlantic structures created while we were occupied. In my address this evening I shall outline the progress Estonia has made in reforming its political system and economy. Then I shall discuss the Estonia's current efforts to join the European Union, and NATO, and conclude with a brief synopsis of our regional co-operation efforts.

In Estonia, the political and economic choices we faced following the re-establishment of independence were clear. Speed was important. Economically, the Central and Eastern European Countries of the Former Warsaw Pact began their free market reforms already in 1989, while Estonia had to wait two more years to initiate the move from a centrally planned to a market economy.

Estonia opted for a crash course in reforms and, as a result, enormous progress has been made since 1991: national and municipal elections have been completely free and open, the Estonian press is free and independent and there are thriving non-governmental organisations in every sphere of public life. Estonian political reforms and new legal system are based on a modern constitution adopted in 1992. The constitution asserts the legal continuity of the Estonian Republic since 1918, yet at the same time it is a modern constitution that takes into account the development of democracy and the principle of human rights that evolved in the West after the Second World War. Estonia was among the first countries to enact minority rights legislation already in the 1920s, and has ensured that these rights continue to be respected today.

While the foregoing merely underlined our commitment to democratic norms, it was in the area of economic reforms were Estonia quickly moved to the forefront of radical change. Among the steps we undertook in 1992-93:
A balanced budget required by the constitution, with the nasty incentive to Parliament that a failure to balance the budget immediately leads to the dissolution of parliament and new elections.

The elimination of all tariffs, giving Estonia one of the most liberal trade regimes in the world.

A tough privatisation scheme according to the German Treuhand model, in which we privatised state property to the highest bidder for cash, not vouchers, with no restrictions on foreign ownership, with the result that 85 % of enterprises are now in private hands.

A currency issued by a currency-board based Central Bank, pegged to the German Deutsche Mark and which prohibits us from issuing more currency than we have backing for.

A flat-rate income tax of 26 %.

We allow foreign ownership of land.

We allow 100 % repatriation of profits.

The elimination of subsidies to industry and agriculture.
At first, our economy plunged depression as a result of these radical steps. Soon, however, we began to see dramatic effects.

The success of Estonian reforms is not solely based on the policies of a particular parliament or government, but on the mutual understanding of both the electorate and the elected of the need for immediate reform. Looking at the experience of some other Eastern European countries we know that initial reforms -- which inevitably resulted in temporary economic decline -- could bring to power political forces that could slow the continued pace of reform. In Estonia, this did not happen. The speed at which necessary reforms were enacted is the reason why so many economists speak of Estonia as a ‘success story’ of reform and development.

Now let us look at the results of these harsh measures:

Inflation, which had reached a four figure high while we were in the rouble zone in 1991, is now down to 12,6 percent for 1997.

In privatisation the share of net sales and revenues for state-owned enterprises has fallen to 13 percent, whereas the private sector accounts for approximately 64 percent of the GDP.

In terms of FDI or foreign direct investment, our investor-friendly policies have made Estonia a leader. The United Nations Trade and Development Organisation determined that in 1996 the per capita investment in Estonia placed it only behind Hungary in Central and Eastern Europe. The makeup of the Estonian economy has also changed radically where agriculture now accounts for less than 7 percent of total economic activity and services two-thirds.

Since liberalising our trade regime we find that trade flows have increased dramatically. In fact, Estonia and Cyprus exported a comparable percentage of total national product to EU member states, while Estonia imported a somewhat larger percentage from the EU (59% of Estonia’s imports according to recent figures). Indeed, from a trade perspective the Estonian, like the Cypriot economy, is more integrated with the European Union than many of the EU members.

The two largest rating services in the world, Moody’s and Standard & Poor’s, have both recently endorsed Estonia’s ability to adequately fulfil all obligations to investors. Our economy continues to grow quickly with the latest figures showing GDP growth of 4.5 percent in 1996 and reaching 12.4 percent higher through the second quarter in 1997 over the same period the year before.

I am proud, as most Estonians, of our economic success. It is not surprising that in Estonia there exists an inevitable emotional link with Cyprus - a country with a history of strong economic development. The adoption of a market-oriented economic system, the pursuance of sound macroeconomic policies by the government as well as the existence of a dynamic and flexible entrepreneurial community and labour force all contributed to Cyprus’ graduation from the World Bank list of developing countries in mid-1991. We learn from the Cypriot experience and aspire to achieve the same goal.

Free trade has highlighted the value of larger and freer markets for Estonia and through our formal application to the European Union we want to take the next step and liberalise the movement of capital and labour as well, thus fully joining in the Common Market. I am sure that those here today and the majority of Cypriots understand these efforts well.

As two of the least populous countries in Europe, and indeed as the two smallest involved in the enlargement process, we realise the limits of our domestic markets and seek the opportunity to compete in the European Union - a market that with enlargement will potentially encompass a half-billion customers. As an Estonian I am a strong believer in a phrase made popular by economist E. F. Schumacher, "Small is Beautiful". We have the advantage of flexibility and dynamism. The trade dependent nature of our economies, however, both deeply integrated into the European market, tie our economic and social development intimately with the EU’s own.

Joining the European Union has been, is and will continue to be Estonia’s central foreign policy objective, and I am pleased that on December 13th, at the Luxembourg Summit, the European Council decided to begin EU accession negotiations in Spring with Cyprus, the Czech Republic, Hungary, Poland, Slovenia and Estonia. For us, the Council’s decision is a confirmation that the choices we have made in our reform were right and supports the continuing consolidation of democracy and market reforms in our country.

At the same time, Estonia is pleased, and attaches particular importance, to the inclusion and preparation of our southern neighbours Latvia and Lithuania within the overall enlargement process.

It is self-evident that Estonia prefers to have its southern border an internal border of the Union, and not as an external border. Estonia therefore stresses the importance of further strengthening and developing relations with its Baltic partners Latvia and Lithuania, and hopes that they will be able to join us at the negotiating table in the future.

As the Cypriots well understand, the invitation to begin negotiations from the Council is a signpost along the path of European integration, and the most difficult work still lies ahead. The negotiation process is certain to demand years of hard work and our first task will be to determine what we want to achieve in negotiations.

Our second critical task for the next few years will be to continue, and indeed devote even more effort, to our task of preparing to take over the aquis communautaire. The Agenda 2000 noted, "[Cyprus] should not encounter any major problems in adopting the aquis". Estonia acknowledges that it still has work to do, and in this task we are using the avis to map out our future activities in the integration process. Our Government is also preparing a National Programme for the Adoption of the Aquis. This Programme will serve as Estonia’s programme of action for alignment with the aquis as foreseen by the Accession Partnership.

Reform, however, cannot be a goal in and of itself. What are needed are intelligent reforms that go beyond short-term needs and possess a long-term vision. Cyprus has been in preparation for negotiations for a number of years already, and Cyprus’ experience in European integration reaches back to the signing of an Association Agreement with the EU (then the EEC) in 1972. Estonia’s Association Agreement with the EU will come into force on the 1st of February of the year; therefore, we are interested in learning from your experience, as it would help us avoid possible pitfalls.

It is also necessary that we begin to view our reforms in a wider perspective. As we are all aware, the EU has reached one of its most radical phases of development. While both Estonia and Cyprus are engaged in negotiations, the European Union plans to carry out a number of significant reforms. Creation of the European Monetary Union, reform of the Common Agricultural Policy, and empowering the common foreign and security policy among other initiatives are being contemplated at the moment. This deepening integration will alter the face of the Union and as well as the kinds of reforms that will be contemplating in the years to come.

It was only at the end of this past summer that our two countries truly engaged at a high level when your Foreign Minister, Mr. Kassoulides, came to Tallinn. Today we signed an agreement concerning the elimination of entrance visas but this is only the first step in our new relations. European integration is serving to bridge the distance between us. If before we did not meet one another strictly as Estonians and Cypriots, then now we come together as Europeans - to begin a dialogue on shared European interests - as countries entering the negotiation process at the same time, as countries that lie on the outer frontier of the Union, as countries that will be among the smallest in the Union.

As border countries of the enlarged European Union we also share a strong interest in expanding Europe’s links with neighbouring regions. Just as Cyprus serves as an intermediary for the growing trade between Europe and the Middle East, Estonia seeks to facilitate transit trade between Europe and Russia, Ukraine and Central Asia. The liberalisation of the flows of goods and people within Europe, and nearby regions, is however presents new challenges. Refugee flows, trade in narcotic drugs, organised crime, in addition to other trans-national problems relating to pollution, economic instability and nuclear weapons proliferation have become serious domestic problems for small, open nations. As the interdependence of European states grows, intensified co-operation becomes increasingly important.

The European Conference, which will convene for the first time in March, will be an element of this deepening dialogue. This multilateral forum for political consultation is intended to address questions of general nature to member states and applicants alike. Already, through co-operation in Justice and Home Affairs, Estonia has enhanced her ability to combat modern security threats. Our efforts in this field are co-ordinated with Baltic Sea countries, including Finland, Sweden, Denmark, Latvia and Russia. Estonian frontiers are now controlled in an effective and professional manner, using electronic surveillance as the standard. In the fight against drug trafficking, Estonian border guards and police co-operate with Swedish and Finnish authorities and this has led to a significant increase in the number of arrests and seizures. It is our interest to see this type of co-operation broadened and intensified throughout Europe and I hope this will form an area of intensified co-operation between the Union and the applicant countries.

The second priority of our European integration is NATO membership. Indeed, we believe that a transformed NATO will be central player in Europe’s efforts to manage these new risks. We are satisfied with both the language and the spirit used in the final declaration of the NATO summit in Madrid last summer. The aspirations of the Baltic states to eventually become partners in NATO was clearly recognised beside those of Slovenia and Romania. For us, the next step toward NATO is determine what is necessary to prepare Estonia, both on military and political fronts, for full accession to the Alliance. This will require us to develop special policies for Estonia and the Baltic states together with our partners. Estonia has already begun to develop detailed plans for co-operation in all branches of defence.

At the same time, our involvement in the Partnership for Peace programme, the EAPC, and our bilateral military co-operation will be intensified. It is through this kind of activity that Estonia is developing the necessary links for the new co-operative security structure and creating a military with an inter-operable capability. In some areas, for instance Bosnia, Estonia is already a positive contributor to European and regional security. We have just sent our sixth contingent of troops to Bosnia, and we anticipate in the future that our activity in missions such as these will only grow.

Last but certainly not least, one of our foreign policy priorities is our relations with our two southern neighbours. Recognising our small size and our common historical experience, Estonia continues to promote co-operation with Latvia and Lithuania. Taking as our example the Nordic countries who work together in areas of mutual interest while mindful of differences in origins, economies and political structure, Estonia has pushed for Baltic co-operation on a vast range of issues. For example, free trade on a wide array of goods was established at the beginning of last year and now we are seeking to expand free trade to services. In the military sphere BaltBat has become fully operational. The three Baltic states have made strides in establishing a joint minesweeping fleet, airspace control system, and a common officer training centre. Finally, in the political sphere, the Baltic Assembly convenes twice a year to allow elected parliamentary representatives from all three states to discuss issues of joint concern.

In conclusion ladies and gentlemen,

The upcoming decade in Europe will set the course for Europe. Now that the EU and NATO have put into place the frameworks for their ongoing enlargement processes, we can say with some assurance that the uncertainty which has typified the post-Cold War transition is coming to and end, and that a new era is beginning.

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