Estonia's capital Tallinn
Romain Gueugneau

TALLINN - It’s 4 p.m., and night is already falling on Tallinn. The wind is freezing. Covered in snow, the old Soviet military barracks located on the outskirts of Estonia’s capital city look like the set of a Cold War movie.

Uniformed soldiers occasionally cross the courtyard. You almost expect James Bond to suddenly come around the corner of one of the three buildings on the site that in 2008 became the headquarters of the NATO Cooperative Cyber Defense Centre of Excellence.

The flags of the 11 members flutter in the central court. Behind the thick walls of the barracks, experts simulate cyber-attack scenarios and ways of fighting back. The existence of the center and its location in Estonia bears witness to the new status of the little Baltic state on the outer rim of Europe. Since it was the victim of major data pirating in 2007, ostensibly orchestrated by its big neighbor Russia, the country has built state-of-the-art expertise in computer security.

In addition to cyber defense, Estonia, which is the birthplace of Skype, is one of most connected countries in the world. You only need to stroll through the streets of Tallinn to take stock of this – Wi-Fi has been available everywhere – free – for a decade. Third generation (3G) Wi-Fi is available throughout the country, in the cities as well as in the rural areas. A third of the country is already covered by 4G. In Tallinn, it’s not unusual to see people pay for their parking space with their smart phone.

By 2015, the former USSR satellite state will be in a position to provide 100mb/second connections to the entire population. The EU objective is to attain this by 2020 when it is expected that no more than about half the total population of the member countries will be using it. Yet in Estonia, “Internet access is considered as a basic right, like access to water and electricity,” says Indrek Vinberg, the young director of the new technologies demonstration center in Tallinn.

The richness of its technological infrastructure has made Estonia a pioneer in terms of e-government. Introduced in 2000, electronic tax filing has become the norm. “Ninety-four percent of Estonians file online,” says Minister of the Economy and Telecommunications Juhan Parts, adding that this has made paying taxes “almost fun.”

The country has been using electronic ID cards since 2002, and this is the real keystone of the system. The card makes it possible to access various public services on the web (social security, police, education, etc.) with the guarantee that the different government portals and their data are safe and protected. Tallinn’s residents can also use the card as a transportation card. It is also a voter registration card for those opting to vote via Internet, which 24% of citizens did during the 2011 legislative elections.

Teaching coding from primary school

It is not surprising in this context that the new EU Agency for Large-Scale Information Systems, charged with managing the second generation Schengen Information System and supporting management of European immigration policies, has officially been headquartered in Tallinn since Dec. 2012, while maintaining a base of operations in Strasbourg. This is a real source of pride for Estonia, which has been a EU member since 2004 and converted to the euro last year.

“The importance given to e-government was a decisive factor in the decision to set up here,” acknowledges Krum Garkov, the Bulgarian executive director of the agency.

The resolutely high-tech profile of the little Baltic state is part of its heritage as a former Soviet bloc country. After the USSR imploded, Estonia – who had hardly ever been independent – had to rebuild itself from scratch. And this was a real opportunity say the country’s leaders.

“Being such a small country, after the Soviets left there were too few people to administer it effectively,” recalls Estonian President Toomas-Hendrik Ilves, who has a master’s degree in psychology from the University of Pennsylvania. “So we opted to make up for the lack of human resources through automatization.”

As the country’s leaders in the early 1990s tended to be young and high-tech aware, they decided to invest massively in new technologies, a public sector initiative that was rapidly imitated by the private sector. Banks and telecom operators also invested in building new technology infrastructure. “Being a ward of the Soviet Union for several decades made it possible for us to train a competent generation of engineers and mathematicians, which turned out to be very useful after independence,” says Minister of the Economy and Telecommunications Juhan Parts.

The government introduced computer and new technologies training in schools, starting in primary school, to better prepare Estonians for the new economy. In 1996, the Ministry of Education launched the Tiger Leap foundation to equip every school in the country with computers and get them connected to the Internet – a mission that was accomplished just a few years later. Today, the foundation promotes computer-programming training. At the Gustav Adolf School in Tallinn, for instance, children from six through high school age learn programming basics, which are taught as games.

“The training is crucial for this generation, who often know how to use a computer before they learn to read,” says Valdur Parasin, a French teacher at this school that counts the inventors of Skype among its former students.

“The training helps children with their math and logic as well,” adds Kristi Rahn, a computer science teacher. The private sector also plays a role in the education of young Estonians. After creating partnerships with companies like IBM and Microsoft, the Tiger Leap foundation is turning to the increasing numbers of Estonian high tech companies. The objective is for these companies to come to the schools to explain what they do to, awaken interest in a career in new technologies, and attract future talent.

You don’t need to go very far to find a good model. The success of Skype, sold to eBay in 2004 and then to Microsoft in 2012, has inspired a whole generation of students and young web entrepreneurs. Grabcad, which specializes in 3D printing, is one of the latest Estonian success stories. “The start-up ecosystem is booming in Tallinn,” says Enn Saar, who works for telecom firm Elion. “It’s great for the country. In the early 2000s, companies were afraid of a brain drain, of young high tech talent leaving for abroad. Today we’re seeing the opposite: Estonians wanting to develop their business here.” The country is drawing foreigners as well. The Swedish bank Swedbank recently set up a division charged with managing IT in the whole Baltic region.

Recruitment isn't easy

Several IT hubs have been created these past few years in the Estonian capital. Here too the Soviet past turned out to be a source of new opportunities. Many start-ups have elected to set up in the Ulemiste district, where during the Cold War the Dvigatel factory employed around 10,000 workers to make parts and munitions for the Red Army. The buildings, looking just as sinister as they did back then, are still standing – only now all you hear is the click-click of hundreds of blue-jean clad developers and webmasters typing on their keyboards.

The government is aware of the formidable potential of this new economy. In 2010, it created a cluster to help export Estonian know-how in new technologies and to expand the sector, which accounts for about 15% of GDP. In 12 years, research and development investment has gone from 0.9% to 2.3% – something that will help get the country’s economy back on track – it is expected to show growth of a little over 3% in 2013 after having plunged by 15% in 2009 during the crisis.

The main challenge for this country – with its population of almost 1.3 million – is to keep growing. Yet despite all the efforts in education and training, companies have a hard time finding the personnel they need to develop. Skype, which employs more than 500 people in Tallinn, finds it difficult to grow its local teams.

“It’s one of the limitations of our model,” notes Enn Saar. ”You couldn’t, say, hire 3,000 software developers in a year here.”

And this, says one computer industry representative, may be the limits of the place. “Estonia is a fantastic place to nurture ideas. Unfortunately, it remains difficult to grow a company and move to the next level.”

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Economy

Merkel's Legacy: The Rise And Stall Of The German Economy

How have 16 years of Chancellor Angela Merkel changed Germany? The Chancellor accompanied the country's rise to near economic superpower status — and then progress stalled. On technology and beyond, Germany needs real reforms under Merkel's successor.

Chancellor Angela Merkel looks at the presentation of the current 2 Euro commemorative coin ''Brandenburg''

Daniel Eckert

BERLIN — Germans are doing better than ever. By many standards, the economy broke records during the reign of outgoing Chancellor Angela Merkel: private households' financial assets have climbed to a peak; the number of jobs recorded a historic high before the pandemic hit at the beginning of 2020; the GDP — the sum of all goods and services produced in a period — also reached an all-time high.

And still, while the economic balance sheet of Merkel's 16 years is outstanding if taken at face value, on closer inspection one thing catches the eye: against the backdrop of globalization, Europe's largest economy no longer has the clout it had at the beginning of the century. Germany has fallen behind in key sectors that will shape the future of the world, and even the competitiveness of its manufacturing industries shows unmistakable signs of fatigue.

In 2004, a year before Merkel was first elected Chancellor, the British magazine The Economist branded Germany the "sick man of Europe." Ironically, the previous government, a coalition of center-left and green parties, had already laid the foundations for recovery with some reforms. Facing the threat of high unemployment, unions had held back on wage demands.

"Up until the Covid-19 crisis, Germany had achieved strong economic growth with both high and low unemployment," says Michael Holstein, chief economist at DZ Bank. However, it never made important decisions for its future.

Another economist, Jens Südekum of Heinrich Heine University in Düsseldorf, offers a different perspective: "Angela Merkel profited greatly from the preparatory work of her predecessor. This is particularly true regarding the extreme wage restraint practiced in Germany in the early 2000s."

Above all, Germany was helped in the first half of the Merkel era by global economic upheaval. Between the turn of the millennium and the 2011-2012 debt crisis, emerging countries, led by China, experienced unprecedented growth. With many German companies specializing in manufacturing industrial machines and systems, the rise of rapidly industrializing countries was a boon for the country's economy.

Germany dismissed Google as an over-hyped tech company.

Digital competitiveness, on the other hand, was not a big problem in 2005 when Merkel became chancellor. Google went public the year before, but was dismissed as an over-hyped tech company in Germany. Apple's iPhone was not due to hit the market until 2007, then quickly achieved cult status and ushered in a new phase of the global economy.

Germany struggled with the digital economy, partly because of the slow expansion of internet infrastructure in the country. Regulation, lengthy start-up processes and in some cases high taxation contributed to how the former economic wonderland became marginalized in some of the most innovative sectors of the 21st century.

Volkswagen's press plant in Zwickau, Germany — Photo: Jan Woitas/dpa/ZUMA

"When it comes to digitization today, Germany has a lot of catching up to do with the relevant infrastructure, such as the expansion of fiber optics, but also with digital administration," says Stefan Kooths, Director of the Economic and Growth Research Center at the Kiel Institute for the World Economy (IfW Kiel).

For a long time now, the country has made no adjustments to its pension system to ward off the imminent demographic problems caused by an increasingly aging population. "The social security system is not future-proof," says Kooths. The most recent changes have come at the expense of future generations and taxpayers, the economist says.

Low euro exchange rates favored German exports

Nevertheless, things seemed to go well for the German economy at the start of the Merkel era. In part, this can be explained by the economic downturn caused by the euro debt crisis of 2011-2012. Unlike in the previous decade, the low euro exchange rate favored German exports and made money flow into German coffers. And since then-European Central Bank president Mario Draghi's decision to save the euro "whatever it takes" in 2012, this money has become cheaper and cheaper.

In the long run, these factors inflated the prices of real estate and other sectors but failed to contribute to the future viability of the country. "With the financial crisis and the national debt crisis that followed, economic policy got into crisis mode, and it never emerged from it again," says DZ chief economist Holstein. Policy, he explains, was geared towards countering crises and maintaining the status quo. "The goal of remaining competitive fell to the background, as did issues concerning the future."

In the traditional field of manufacturing, the situation deteriorated significantly. The Institut der Deutschen Wirtschaft (IW), which regularly measures and compares the competitiveness of industries in different countries, recently concluded that German companies have lost many of the advantages they had gained. The high level of productivity, which used to be one of the country's strengths, faltered in the years before the pandemic.

Kooths, of IfW Kiel, points out that private investment in the German economy has declined in recent years, while the "government quota" in the economy, which describes the amount of government expenditure against the GDP, grew significantly during Merkel's tenure, from 43.5% in 2005 to 46.5% in 2019. Kooths concludes that: "Overall, the state's influence on economic activity has increased significantly."

Another very crucial aspect of competitiveness, at least from the point of view of skilled workers and companies, has been neglected by German politics for years: taxes and social contributions. The country has among the highest taxes on income in Europe, and corporate taxes are also hardly as high as in Germany anywhere in the industrialized world. "In the long run, high tax rates always come at the expense of economic dynamism and can even prevent new companies from being set up," warns Kooths.

Startups can renew an economy and lay the foundation for future prosperity. Between the year 2000 and the Covid-19 crisis, fewer and fewer new companies were created every year. Economists from left to right are unanimous: Angela Merkel is leaving behind a country with considerable need for reform.

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