Fiscal policy is better off in Estonia than in most of the other EU countries

According to Ülo Kaasik, Deputy Governor of Eesti Pank, Estonia’s economic policy can concentrate on long-term growth, whereas many other countries are forced to deal with short-term problems.

“Estonia’s peculiarity — in its positive meaning — is that the economic policy focus does not rest on putting out fires but on ensuring as rapid growth as possible in the longer term,” said Ülo Kaasik on Wednesday at a conference for accountants.
However, the Deputy Governor noted that in order to maintain the peculiarity, continued efforts are needed to restore budget balance and reserves. “Although fiscal policy is better off in Estonia than in most of the other EU countries, the government has to continue with their plans of improving the budget balance and accumulating reserves.”

In addition to prudent economic policy, Estonia as a small country also requires a favourable external environment, added Kaasik. “In the midst of the debt crisis we must not forget that the European Economic and Monetary Union has not lost any of the good reasons it has been based on. I have not heard of any better alternatives. The lesson of the crisis is to make the union serve its citizens even better.”

“Solving the debt crisis has included several steps improving the management of the EU and aiming to ensure long-term balanced growth. One of the solutions has been the European Stability Mechanism (ESM), which allows a rapid response to risks to the stability of the entire euro area. This means its objective is larger than helping out single countries,” said Kaasik.

He also highlighted that euro area central banks have alleviated the crisis by providing unlimited liquidity to commercial banks. According to the Deputy Governor, the goal has been to avoid a situation, where households and companies suffer due to a sharp decline in the ability and willingness of banks to lend.

“After two long-term liquidity provision operations there are now first signs of the impact of the central banks on economic activity. It has, however, come at a price — risks in the balance sheet of central banks have heightened,” Kaasik noted.

“The volume of the ESM is more than two times smaller than the extraordinary loans issued by central banks to commercial banks. The related risks are also Eesti Pank’s risks, since both revenue and expenditure are allocated according to participation in the ECB. When we compare the size of euro area central banks with their participation in the ECB, it can be seen that Eesti Pank’s reserves are about three times smaller than the average. As a result, we must, in cooperation with the Supervisory Board of Eesti Pank, find ways to increase our reserves,” he added.

Source: Bank of Estonia

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