Estonia – the case for policy consolidation

Tanel Ross, GIC Conference SeriesPrague, June 14, 2010

Introductory remarks

• The euro adoption• Long term policy priorities – basis

for the euro and the anti-crisis measures

• The years of 2008 and 2009• Conclusions and outlook

The euro adoption Fiscal deficit 1.7 per cent of GDP as of 2009, well

below the Maastricht reference value of 3 per cent. Public debt at 7 per cent of GDP as of 2009, the EU

average around 80 per cent. 12-month average inflation rate -0,7% (April 2010)

and to remain at moderate levels in the years ahead

Fixed rate of exchange for 18 years

On June 8, ECOFIN ministers recommended to accept Estonia to the euro area

European Council discussion in June 17; formal decision by ECOFIN in July 13

Long term policy priorities – basis for the euro and the anti-crisis measures

Policies for the euro adoption are fully in line with long term economic strategy

A robust and simple macroeconomic framework

Simple and transparent tax systemPension and, albeit to a lesser extent, health

care systems reformed at an early stageOpen and generally business-friendly trade,

investment and labor policies

The years 2008 and 2009 Pre-crisis fiscal management allowed for automatic

stabilizers to play their cushioning role FY deficit 2.8% of GDP in 2008 (2.6% surplus in 2007) No need to borrow, as financial assets at 10% of GDP

Maintaining the credibility of state finances and to keep fiscal position within the Maastricht limits FY deficit 1,7% of GDP in 2009, cumulative

consolidation nearly 14% in 2008 and 2009 as compared to the baseline

Lower spending, tax increases and temporary measures

The years 2008 and 2009 Flexible labor markets and transparent business

environment facilitated rapid adjustment on company level Nominal average wage decline 7% by end-2009, 15%

in the public administration Increased flexibility of labor legislation, active labor

market policies

Strong banking system Capital and liquidity management in regional groups High domestic buffers – Tier 1 capital 15%, required

reserve ratio 15% Not a single cent of taxpayer money spent to prop up

banks

Conclusions and outlook – GDP growth recovering

-40

-30

-20

-10

0

10

20

30

40

2003 III 2004 III 2005 III 2006 III 2007 III 2008 III 2009 III 2010 Apr

%, y.o.y.

Real GDP Retail sale volume indexVolume index of industrial production Export of goods

Conclusions and outlook – expectations for 2010 have improved

-16

-12

-8

-4

0

4

8

12

1996 1998 2000 2002 2004 2006 2008 2010* 2012* 2014*

%

Spring 2010 Spring 2010 positive scenarioConvergence Programme Jan 2010 CP Jan 2010 negative scenario

Labour market stabilizing

-20-15-10-505

1015202530

2004 2005 2006 2007 2008 2009 2010

%, y.o.y.

Number of payments (TCB) Average payment (TCB)Employment (SO) Average wage (SO)

Conclusions and outlook

Policy consolidation could pay off even in a relatively short term, at least in a small open economy

Fundamentals need to be in place to that end strong public and private balance sheets general culture of flexible markets and readiness to adjust

European Union policy coordination frameworks are growth enhancing, if rigorously implemented Stability and Growth Pact financial market integration structural reforms (Lisbon agenda, EU2020)

Conclusions and outlook – fiscal starting position for the next cycle

0

20

40

60

80

100

120

140EE

LU

BG

RO

LT

CZ

SK

SI

LV

DK SE

FI

PL

ES

CY

NL IE

AT

UK

MT DE EU PT

FR

HU

€

BE

GR

IT

2007 2008 2009 2010* Võlapiirang

Source: Eurostat, European Commission, Ministry of Finance of Estonia.* 2010: European Commission Spring Forecast. May 5, 2010.

Thank you!

www.fin.ee

Tanel Ross, GIC Conference SeriesPrague, June 14, 2010