Kallas looks for an international way out as domestic sharks circle

Kallas looks for an international way out as domestic sharks circle
Estonian Prime Minister Kaja Kallas with Ukrainian President Volodomyr Zelinskiy. / bne IntelliNews
By Linas Jegelevicius in Vilnius November 16, 2023

Estonian Prime Minister Kaja Kallas this week revived her bid to be the next Nato secretary-general  – as her domestic opponents rally against her, she may really need a new job soon.

After winning re-election in March, Kallas’ popularity has swiftly tumbled after she belatedly announced she was planning tax rises to bring down the country’s budget deficit, even though the economy is still struggling to emerge from recession. Kallas has also appeared hypocritical in her hawkish stance on sanctions against Moscow after it was revealed that her husband’s logistics company had continued to operate in Russia after the invasion.

Since the election the far-right opposition EKRE party has been obstructing parliament by filibustering debates, and now Kallas’ former allies, the rightwing Ismaa party, have joined calls for her to resign and are preparing another no-confidence motion.

The opposition scents blood and even some coalition politicians are now speculating about a change of leadership.

“She is in trouble. Dissatisfaction with her is tangible even among her own ranks. Some just do not dare to speak out against her because of being afraid not to be politically correct – she has helped Ukraine much, perhaps too much if the support and the GDP ratio is taken into consideration and, well, her being woman is her ally too,” an Estonian analyst, who asked to be quoted anonymously, told bne IntelliNews.

Crumbling reputation

Kallas has won a high profile for herself and for Estonia by her tough stance towards Russia and her strong support for Ukraine. Estonia has given the most aid to Ukraine in relation to GDP, has consistently called for tougher sanctions on Russia and more help for Ukraine, and is planning to raise its defence spending above 3% of gross domestic product (GDP) next year.

This has got Kallas talked about as a potential Nato secretary-general, which, if it happened, would make her the first woman and the first from a former Warsaw Pact state to fill the post.

In the past Baltic candidates for secretary-general were routinely written off as “too hawkish”. The sea-change in perceptions since Putin's invasion makes it conceivable that a Baltic leader could now succeed Secretary-General Jens Stoltenberg when his extended term expires in October 2024, though Kallas herself has previously said she would be “unlikely” to be chosen.

Despite this strong international reputation, Kallas’ domestic standing and that of her centre-right Reform Party have crumbled this year.  Now, it is EKRE that sits on top of the country’s most popular political party rankings, favoured by 23.2% of voters, while 20.2% support Isamaa and only 20% support the Reform Party.

Kallas and her party are accused by the rightwing opposition of winning the election in the spring by concealing their plans for tax rises, which they only announced afterwards.

“The government as a whole has failed, especially in tax matters which have been the most problematic for Reform after being their bread and butter historically,” says political analyst Ott Lumi, a former Isamaa politician. “ I believe the problem started in the spring when hopes and expectations were quite different. Tax hikes were not communicated in good time,” he said.

The usually fiscally upright Estonia has experienced high budget deficits over the past few years, with social spending from government measures to alleviate the energy crisis, together with boosted defence spending, forecast to push the deficit up to a forecast 4.3% of GDP this year.

Since the spring, the Reform party and its coalition partners – the centre-right Eesti 200 party and the Social Democrats – have been hotly debating the measures to bring the deficit within the Maastricht criteria of 3% of GDP next year: Reform – which has always prided itself on its budgetary rigour – favours spending cuts, as well as tax cuts for high earners, while the Social Democrats prefer tax rises.

Bad mood

The issue is particularly contested because Estonia has been in recession since mid 2022, accompanied by at times one of the highest inflation rates in the European Union, and a bout of budget austerity could prolong the recession and the prevalent bad mood in society.

The economy declined 2.5% during the third quarter and is forecast by the central bank to shrink 2.2 per cent overall this year, and grow just 1.4% next year. Estonia’s October inflation was at 4.9% year-on-year and the central bank forecasts an overall inflation level this year of 9.4% before falling to 3.4% in 2024. Moreover, the bank also predicts that unemployment will rise to 8% next year.

“The general feeling in Estonian society about the government and the prime minister is outrage,” says entrepreneur Otto Schwarz. “The country's economic performance has declined for the sixth quarter in a row, with some public figures maintaining that the government does not have a clear and well-thought-out economic policy and an anti-crisis plan,” he told bne IntelliNews.

Andrei Korobeinik, MP from the opposition Centre Party, told bne IntellInews that the Reform party’s original mistake was its hands off, free market response to the energy crisis following the Russian invasion, which allowed domestic prices to soar and Estonian companies to become less competitive.

“The primary and specific cause of Estonia's economic downturn can be attributed to the government's decision to refrain from intervening during the energy crisis. This hands-off approach might be viable in an isolated economy, but Estonia's situation is different. Our economy is deeply intertwined with other European markets, where most governments have actively supported their businesses,” he says.

He argues the planned VAT rise will disproportionately hit lower income families and instead the government should take advantage of the country’s low public debt to invest in infrastructure, which would provide employment and give support for the construction sector.  

Pain now

However, some observers believe the bad mood will blow over as the scandal over Kallas’ husband fades away and the economy recovers, and argue the government is right to get the pain over now in its first year of office. The government still has a solid majority of 60 seats in the 101-member parliament.

Kallas also still has staunch supporters, like MP Raimond Kaljulaid from the Social Democratic Party. “Regarding state finances, we have seen worrying level of budget deficits for at least five years now and until now we have not had a government that would actually do something about it. As we know from the sad experience of some other countries, these problems snowball. We are trying to change that trend, cut down on the deficit and borrowing before it is out of control. And this of course is politically very unpopular and turbulent, but I strongly believe it must be done. So overall, we are on the right track.”