TANEL ROSS June 1310

Estonia – the case for policy consolidation Tanel Ross, GIC Conference Series Prague, 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 system  Pension and, albeit to a lesser extent, health care systems reformed at an early stage  Open 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

40

Conclusions and outlook – GDP growth recovering %, y.o.y.

30 20 10 0 -10 -20 -30 -40 2003 III 2004 III 2005 III 2006 III 2007 III 2008 III 2009 III 2010 Apr Real GDP Retail sale volume index Volume index of industrial production Export of goods

Conclusions and outlook – expectations for 2010 have improved 12

%

8 4 0 -4 -8 -12 -16 1996

1998

2000

2002

2004

Spring 2010 Convergence Programme Jan 2010

2006

2008

2010*

2012*

Spring 2010 positive scenario CP Jan 2010 negative scenario

2014*

Labour market stabilizing %, y.o.y.

30 25 20 15 10 5 0 -5 -10 -15 -20 2004

2005

2006

Number of payments (TCB) Employment (SO)

2007

2008

2009

Average payment (TCB) Average wage (SO)

2010

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 140 120 100 80 60 40 20

2007

2008

2009

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

2010*

Võlapiirang

IT

GR

BE

€

HU

FR

PT

EU

DE

MT

UK

AT

IE

NL

CY

ES

PL

FI

SE

DK

LV

SI

SK

CZ

LT

RO

BG

LU

EE

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Thank you! www.fin.ee Tanel Ross, GIC Conference Series Prague, June 14, 2010