Baltic debates collection Episode I: The Highest Inflation in the EU and the Impact for SMEs in Estonia
On Tuesday December 20th, SME Europe of the EPP in cooperation with European Foundation of Mittelstand organized a webinar “The Highest Inflation in the EU and the Impact for SMEs in Estonia”.
The panel was moderated by Dr. Florian HARTLEB; Political Scientist, Consultant and Expert; Co-founder of the European Foundation of Mittelstand; and saw the participation of Kristjan JÄRVAN, Minister of Entrepreneurship and Information Technology of the Republic of Estonia; Kristo AAB, Economist; Macro Analyst at LHV Bank – Member of Estonian Chamber of Commerce and Industry; Prof. Dr. Susanne DURST, Tallinn University of Technology, Head of Unit, Entrepreneurship and International Business Unit: Department of Business Administration; Eero ELENURM, CEO at Interest Marketing LTD; Chairman of the Board at Youth in Science and Business Foundation.
Dr. Florian Hartleb; opened the webinar by stating that Estonia has been a trendsetter in IT but now we see that Estonia is under pressure – there is the highest inflation in the EU, and a troubling neighbor as well as the general economic situation. It is important to talk about how SMEs are affected by the crisis and how they can be helped in Estonia and in Europe.
Kristjan Järvan followed up with the importance of looking at the Baltic states together, since the trendlines are very similar in Estonia, Latvia and Lithuania. The crisis is not only about energy, but also about cheap material that is used for manufacturing here. In a situation where this ceases to exist, Estonian economy must restructure. One option is to get higher priced goods from the west, but this is not always possible, as one can already see the economy is restructuring. He continued that Estonian citizens and companies have fixed prices. Which gives an idea that the real inflation is lower than what statistics says. A bigger question regarding inflation and changing of the energy economy is subsidies, this puts local companies in a tight spot. If you are a smaller country, you cannot win a subsidies race. Your company will not be more efficient, but it’s true if other countries are subsidizing, they are losing their competitive advantage. It would be better not to subsidize – but how fast can they react and change their business models for the country to not subsidize. “When other countries are subsidizing their companies and we are not, then we are much more competitive, the wealth generated from that is much greater. “
Prof. Dr. Susanne Durst continued the debate referencing to a study from crisis management in small and medium sized enterprises that has started with the pandemic – so far crisis and risk management has been studied in the big organizations, but before the pandemic, there wasn’t anything more specific. If we try to increase the amount of knowledge about crisis management in SMEs, we learn that this approach is more people oriented. We see that in SMEs there is a strong focus on being close to employees, customers, stakeholders. SMEs are typically associated with involving the employees, which is a good sign when handling a crisis. Prof. Dr. Durst found out in her research that small entrepreneurial firms react to crises quickly with proactive approaches.
During the pandemic, new business models were needed, crisis time has given an opportunity to rethink and reconsider the business model and what kind of new skills and competences entrepreneurs and their employees should develop to come out stronger out of crisis. Entrepreneurs are very much aware that the pandemic needed a lot from them and their employees; but also that their own wellbeing was under strong focus.
As for the solutions for European SMEs – there is a need to consider the context, which is not the same as in i.e., Liechtenstein. The subsidies have an impact on SMEs and specifically on long term development. Simply focusing on survival is not enough – it is too expensive; Concrete measures helping SMEs must be taken. From other countries we have seen what features were required aka being flexible, adaptable, forward-looking.
Kristo Aab has mentioned the general awareness in Estonia of the fact that there are many companies that are struggling with the crisis – high energy prices, weaker demand, etc. But if we look at macro data, on a nation basis, we haven’t really seen the situation go really bad yet.Estonian consumers are very flexible and have been willing to pay the price. Estonian consumers are accepting inflation. We can see from companies’ profit levels as well, profits have been going up at least as much as their prices have increased or even more. Companies who are concentrating on the internal market are doing better right now, because Estonian customers are strong at the moment – they have savings from the pandemic, they may have a link to pension reform etc.
The inflation that the companies are facing – the energy prices as the most pressing one – is compensated with wages that increased and is remaining solid. He continued on the topic of real estate, where the prices have blown up, there have been several reasons for that – rise in income, the success of the IT sector: “We have several deals made in the IT sector and some of that money has made its way to real estate.”
Eero Elenurm added from SME owner viewpoint, what has been happening in the last year and what will be in the next years, will change the business landscape a lot. In an inflation environment, it is much more important to think about work-life balance and issues related to health etc. This may not always be good for SME owners, however, because many SME owners may think that maybe they have been doing wrongly two years ago when they were putting a lot of effort into issues to make money, in contrast to actually spending the money.
From a business point of view, uncertainty has increased, projects have fixed prices for several years ahead – this is a big risk to take, whether to make a big quotation or not to make a quotation at all. Energy intensive companies will find other possibilities, and some will be closed, which will have an impact on employment. He would suggest a solution, to have less people working for the government, because that would create a more skilled workforce to move from the government sector to the private sector.