Thursday 3 June 2010

EU: Convergence programme Estonia

Despite a deep recession, Estonia is preparing for the euro changeover in 2011. The European Union offers a snapshot of the Estonian economy.

For some background remarks on economic policy coordination, you can read the blog post EU: Useful stability and convergence programmes? (3 June 2010).

Convergence programme Estonia

The Council has published its opinion on the convergence programme of Estonia in the Official Journal of the European Union (OJEU):

COUNCIL OPINION on the updated convergence programme of Estonia, 2009-2013;
OJEU 29.5.2010 C 140/1

Economic background

The Council begins its 26 April 2010 examination of the updated convergence programme of Estonia, which covers the period 2009 to 2013, with the following remarks:

The Estonian economy is currently emerging from a severe recession. Whilst the recession has led to marked pressures on public finances, the reversal of unsustainable domestic demand and bursting of a real estate boom has resulted in a rapid unwinding of previously high internal and external imbalances. Taking into account the substantial macroeconomic imbalances prior to the downturn, the wide- ranging and decisive action by the government to contain the negative impact of the economic downturn on public finances was a prudent response in line with the European Economic Recovery Plan. It helped to contain economic, budgetary and financial system risks and contributed to restoring competitiveness through price and wage adjustment in the economy. Maintaining robust monetary buffers to support exchange rate stability and prudent financial sector policies, including enhanced cross-border co-operation, helped to avoid adverse developments. High debt levels accumulated by the private sector are now being gradually reduced but will nevertheless weigh on the recovery, holding back consumption and investment. Key policy challenges ahead include raising the productivity of the economy to further improve competitiveness and progress towards long-lasting convergence and containing the risk of skill losses through long-term unemployment. More broadly, the economic challenge is to restore positive and sustainable growth while avoiding any relapse into significant internal and external imbalances. A major adjustment of public finances to the expected lower growth in the coming years has already been made, but further progress remains to be achieved in the medium term.

Council recommendation

After a detailed discussion, the Council invited Estonia to:

(i) ensure that the general government deficit remains below 3 % of GDP and take the necessary measures to underpin the targeted return to the MTO [medium-term objective] in the medium term;

(ii) strengthen the medium-term budgetary framework, particularly by improving expenditure planning, and further strengthen the system of monitoring the strategic targets and reporting on them.

If you are interested in the Estonian economy, you can read the blog post Euro introduction: Estonia 2011 (31 May 2010). The blog post contains links to the convergence reports published by the European Central Bank and the European Commission, useful for context and comparison.

Ralf Grahn

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