tanel ross june 1310
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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
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