As I said in this post about Latvia's August trade statistics:
"The key question to now follow will be the evolution of producer prices in the export sector, since the only way to get out of this mess in the longer term will be to export your way out of it - since all those capital inflows one day or another have to be paid back - and the only way to be able to export is to be competitive."
So why don't we do just that, take a look at producer prices in the Estonian export sector. Here is a comparison of the recent inflation in the export and import sectors.
Now we can see straight away here that there is no significant productivity differential being achieved in the tradeables sector, and rising costs are being pushed straight on through to exports. This now can only end badly, and the only question left is when. My guess is when the Eesti Pank finally bite the bullet and break the euro peg. The situation is impossible, and like this it simply cannot correct. In addition the euro has been trading earlier this morning at over $1.43 per euro, and the Kroon is of course being dragged up with the euro. We are all hoisted on our own petard.
Last months producer price growth compares with an increase of 8.5 percent in August, and 6.4% back in January.
Estonia's export industry has struggled this year to adjust to rising wages, which were up 21 percent year on year in the second quarter, stoked by labor shortages which have been produced by rapid economic growth following a large drop in ferility some 20 odd years ago. The problem - which would exist in any event - is only being added to by Estonian workers leaving to earn the higher wages which are on offer elsewhere in Europe, although it must be said that this end of the problem is much less severe in Estonia than it is in other parts of the Baltics, Bulgaria, Romania and Poland.
Clearly the Baltic countries are being hit by the fact that no-one saw this coming and thus structural reforms of the kind which might make the countries more attractive to immigrants (like multi culturalism) have not been extensively introduced.
Meantime the foreign companies are steadily begining to draw the inevitable conclusions and pack their bags. The latest example, as reported by Eesti Paeevaleht last week is Boras Wafveri AB, a Swedish textile producer, which is now busily seeking a partner for its unprofitable Estonian unit, Kreenholmi Valduse AS. Rumours have it it they are even contemplating selling the whole plant as losses mount due to competition from lower-cost producers in Asia and elsewhere.