The flexible labour market is Estonia's economic defense to economic shocks. Unlike commonly used interest- or exchange rate manipulation, it is a market-oriented defense.

When an economy is hit by a slowdown, GDP-growth generally just falls a few percentage points, but still the effects are very tangible. The reason is that a small change on the margin makes a big difference to a number of economic subjects. The threat of a major downturn then initiates a number of corrective mechanisms.

From a production viewpoint, the impact of an economic slowdown is generally higher on discretionary products, and lower on non-discretionary products. From a company perspective, the impact is higher on heavily leveraged companies, and lower on companies with strong balance sheets.

Sovereign nations have various defense tactics when an economic slowdown emerges. Typically interest rates are lowered in order to alleviate the pressure on companies' and individuals' debt levels. Thereby monetary supply is ultimately enhanced and the country inflates its way out of its problems. Another popular option is allowing the exchange rate to fall, whereby the competitiveness of the entire corporate sector increases relative to that of other nations, also creating inflation.

As Estonia is gradually feeling the impact of an economic slowdown, there will obviously neither be an opportunity to independently lower interest rates nor to change the exchange rate of the kroon. Instead, the Estonian economy will have to adjust by way of wages and prices. Particularily the flexibility of wages is absolutely crucial for the Estonian economy, to be able to respond to changes in the environment. The flexible labour market is Estonia's defense against economic shocks.

When also the European slowdown gains steam, e.g Swedish and Finnish companies will again be reminded how costly it is for them to scale down and adjust to market realities at home. They will again be forced to consider in what country their production should be located.

It may sound as a tough situation for Estonia only to rely on its labour market to take the hit following any economic shocks, but let us bare in mind that a country like Finland is even more severly tied up. As the labour market there is more rigid, Finland cannot adjust efficiently through wages, and neither by changing interest rates nor by changing the exchange rate.

To be clear, there is one more economic defense line, fiscal policies i.e the state budget. But that is a temporary solution which sooner or later expires, or starts to affect monetary policy or even the currency. Within the Eurozone, we see that some countries have used fiscal policies to its limits, however thereby jeopardising the fundamentals of the entire Eurozone's functioning.

Estonian economic subjects have generally not borrowed in kroons but in euros, and the Estonian state is committed to a fixed exchange rate. Therefore, as loans will have to be serviced in euros, stimulating the Estonian economy must always include stimulating the inflow of euros. This underlines the importance of economic integration for the Estonian economy. Estonia must essentially see itself as a group of economic subjects within the Eurozone, not as a separate macroeconomic unit. But safeguarding the flexibility of the labour market, makes this possible.