Estonia’s prime minister warned that the Baltic nation will confront a harrowing winter as the highest inflation rate in the euro area collides with an energy crunch forced on it by Russia’s invasion of Ukraine.
“We’re facing tough times ahead due to energy,” Kaja Kallas, the nation’s 44-year-old head of government, told Bloomberg News in an interview in Tallinn on Thursday. “We will probably see even higher prices than we saw last winter — and that’s very concerning.”
Kallas, who’s seen her popularity soar in the nation of 1.3 million because of her tough stance on Russian President Vladimir Putin, fought to stay in power this month after her coalition collapsed amid political infighting. She’s in talks to form a new government as Estonia confronts the region’s biggest security crisis in the decades and inflation reaches 20%.
The extended war in Ukraine and the winter months in a country that sees temperatures drop below 20 degrees Celsius (-4 Fahrenheit) will lay bare an array of complex issues. Estonias most vulnerable residents are in need of financial relief at a time that the central bank is warning about excessive state spending.
Unlike European Union member states that have been more hesitant, Estonia has committed to halting purchases of Russian gas, opting to shift to liquefied natural gas shipments, a prospect that will eat into incomes already fraying under higher energy and food costs. Estonia’s household electricity prices jumped more than 50% in the second half of 2021, the sharpest year-on-year spike in the EU, according to Eurostat.
“In our case, high inflation and slow economic growth have converged, making the situation extremely difficult,” Kallas said.
The dynamics may weigh on coalition talks. Her Reform party, which leads the polls ahead of elections next year, has pursued a strict austerity agenda, particularly after the global financial crisis. She herself has kept to that course, ruling out debt-fueled spending.
That’s been backed by Bank of Estonia Governor Madis Muller, who recently said he was concerned with state borrowing on track to rise from 20% to 30% of gross domestic product in the next four years.
But Kallas will come under pressure from her new coalition partners, the Social Democrats and the conservative Pro Patria party, both of which favor investing more, including children’s benefits and expanding tax exemptions. The prime minister signaled that that may have to change once the parties are in a coalition.
“In the opposition you can come out with all kinds of ambitious ideas, but in government you are responsible for the good standing of the country,” Kallas said.