Brexit – What is the Impact on Estonian Economy?

There has been a lot of debate regarding what Brexit means to the EU – Does it have any impact? What will the impact be? Who will be worse off? What will happen with business between the UK and EU? 

Whilst much of the debate is still ongoing and many experts are trying to ascertain the potential outcome and mitigate business impact on both sides, the impact of Brexit on EU member countries individually is much less discussed. Politically, this is understandable, since the approach seems to be that everything within the EU is done in unity and none of the member states go to resolve their own issues individually, in parallel with the combined EU approach – Brexit needs to be tackled as one front by Brussels, is the message that has been received by the member states it seems. Albeit that the local national business leaders would probably prefer, at least in some matters, to tackle issues separately with the UK to ensure best mutual deals regarding aspects that specifically concern them most. 

With regards to Estonia, the import-export combined value with the UK amounts to an annual average of 621 million Euros across the past 10 years. This averages to about 60% of the balance being imports to Estonia from the UK and 40% being exports from Estonia into the UK. Compared to the 1930s when circa 30% of Estonian exports went to the UK, the current proportion is only marginal at around 2%. 

The main import-export articles in 2016 are shown in the following table. The percentages represent the proportion out of the total imports or exports with the UK respectively. 

The following provides the imports-exports comparison between the UK and Estonia: 

* It is important to note also that in 2016 the UK was the 4^th largest importer in the world.

** values based on 2016 average EURUSD rate of 0.904179

Taking a simplistic view based on the above figures then the direct impact to Estonia from Brexit would be marginal. Although some particular areas may be impacted which depend on specialist equipment that is manufactured or sold from the UK, such as certain medical equipment, for example. Such impact will probably only have a short-term setback to specialist businesses. 

The indirect impact to the Estonian economy, however, is very likely to be more significant than any direct trade impact. Considering that the biggest import-export partners of Estonia are other EU countries combined, then any impact of Brexit upon other EU major economies will have a domino effect on the smaller member states, such as Estonia. Considering that the UK is also a net contributor to the EU budget (meaning it contributed to the EU budget with more funds than it receives in return) with an annual net balance contributed of circa 15bn EUR, then the challenges appear to be more on the Brussels side from the budgetary perspective. 

News from Brussels, of course, attempt to show the UK as the side that is likely to lose out on the Brexit deal and gladly promote stories of a bad choice by the UK to leave the EU. This is very understandable, when looking at the figures, which show a very different story, and this is also why such pressure is being put upon the UK government. 

There is a high probability of a deal between the EU and the UK, since the mutual economic and financial reliance does not really allow for a ‘no-deal’ situation. Much of the UK economy (energy, financial services, manufacturing, retail, transport etc.) is very closely linked to the German economy and London is a vital financial centre – London Stock Exchange has a total market capitalisation value of shares in the region of 6.2 trillion USD (only two stock exchanges are larger – New York Stock Exchange and NASDAQ). By the way, London Stock Exchange operates also in Italy. For the UK, on the other hand, it is important to benefit from the trade agreements and political links that the EU owns and manages. 

Taking into account the close linkage between the EU and UK, then a Brexit deal, however reasonable for the parties, is very likely. The reliance of the Estonian economy on other EU member states suggests that the Brexit impact upon Estonian economy in a nutshell will not be significant in case of such a deal. Should it happen that a no compromise is reached, then, unless sanctions against Russia are alleviated which could serve as a mitigation measure for a total value of the Estonian economy, the outcome is likely to negatively impact Estonian economy. The logic in this comes from the fact that all the three Baltic states were the biggest ‘economic victims’ once the sanctions were imposed on Russia. 

As to the impact on public sector and state owned businesses, it is similarly likely that a government procurement agreement (GPA) is reached between the UK and the EU. This is also what the UK Prime Minister, Theresa May, has promised to strive for. This potentially means that for the procurement organisations in the UK there will be less red tape due to less regulation, although procurement activities in the EU will then be similarly governed as today. There will probably continue to be a similar amount of procurement activity between the EU and UK, but the potential changes to the regulation are yet unknown.