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Baltic economies: more pain inthe past, more gain in the future?                  Raul Eamets                University of...
Source: Morten Hansen & Raul Eamets
Our GDP is back in 2005      200=100190                                             EU27180                               ...
Estonia: two restrictive            supplementary budgets in 2009• 10,6% cut in operational expenditure of the central gov...
Fiscal Policy in Estonia                     Budget Budget deficit/surplus                            surplus/deficit % of...
What would have happened without action…                              "If nothing had been done" scenario                 ...
Labour market flexibility…How quickly labour market adjusts to macroeconomic changesIn Baltics:Wage reductionWorking hours...
Employment changes: construction was          most affected
Wages are flexible• Union density and collective bargaining coverage is  very low• Latvia - 20% salary cuts in public inst...
Table 11. Annual wage changes in the Baltic States by economic sector Industry                          Estonia           ...
Policy responces              Baltics versus EU 15Baltic countries            EU15Government expenditures ↓   Government e...
Baltic countries: back in growth trackSource: The Economist, 14.07.2011
To get budget back to balance -        is it mission impossible?Lessons from Estonia1. Very strong political commitment – ...
To sum upLimited policy instruments to stabilise economyLabour market should be "buffer" for macroeconomic  adjustmentEmpl...
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Baltic economies: more pain in the past, more gain in the future?

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Presentation by Dr. Raul Eamets, Professor of Macroeconomics, Head of the Institute of Economics, University of Tartu (Estonia) at the Bank of Latvia conference "Economic Adjustment under Sovereign Debt Crisis: Can Experience of the Baltics Be Applied to Others?"
Riga, November 2, 2012.

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Transcript of "Baltic economies: more pain in the past, more gain in the future?"

  1. 1. Baltic economies: more pain inthe past, more gain in the future? Raul Eamets University of Tartu "Economic Adjustment under Sovereign Debt Crisis: Can Experience of the Baltics Be Applied to Others?" Bank of Latvia 02.11.2012.
  2. 2. Source: Morten Hansen & Raul Eamets
  3. 3. Our GDP is back in 2005 200=100190 EU27180 EA DK170 DE160 EE IE150 LV LT140 NL130 PT SK120 FI110 SE UK100 US JP90 2000 2002 2004 2006 2008
  4. 4. Estonia: two restrictive supplementary budgets in 2009• 10,6% cut in operational expenditure of the central government – including the wage bill by 9,6% and administrative costs by 12%.• Stricter limits on new borrowing by municipalities.• Suspending contributions to the second pillar pension system for until the end of 2010;• increase in value added tax (from 18% to 20%)• twice higher taxes on natural gas• considerable increases in different environmental duties
  5. 5. Fiscal Policy in Estonia Budget Budget deficit/surplus surplus/deficit % of GDP% of GDP4,03,02,01,00,0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011-1,0-2,0-3,0-4,0
  6. 6. What would have happened without action… "If nothing had been done" scenario public balance % of GDP 4,0 2,0 0,0 2002 2003 2004 2005 2006 2007 2008 2009* 2010* -2,0 Maastricht criterion -4,0 -6,0 -8,0 -10,0 -12,0 -14,0
  7. 7. Labour market flexibility…How quickly labour market adjusts to macroeconomic changesIn Baltics:Wage reductionWorking hours declinedEmployment declined
  8. 8. Employment changes: construction was most affected
  9. 9. Wages are flexible• Union density and collective bargaining coverage is very low• Latvia - 20% salary cuts in public institutions• Estonia – 9,6% salary cuts in public institutions• Estonia - The total salary income of Estonian population decreased around 10 billion EEK which was around 4% of GDP
  10. 10. Table 11. Annual wage changes in the Baltic States by economic sector Industry Estonia Latvia Lithuania 2008 2009 2008 2009 2008 2009 Total economy 13.8% -4.6% 20.6% -4.0% 19% -4% Primary 17.7% -7.4% 17.2% -4.6% 23% -8% Industry 11.5% -3.5% 13.4% -4.0% 18% -4% Manufacturing 10.8% -3.9% 19.8% -2.1% 18% -4% Energy 17.0% 6.8% 5.6% -5.0% 16% 0% Construction 8.3% -13.4% 19.0% -1.1% 10% -21% Business services 12.3% -4.2% 21.0% -1.8% 19% -5% Public services 17.4% -4.5% 20.2% -9.7% 22% -11% Public administration 15.7% -7.6% 16.1% -18.0% 23% -10% Education 20.4% -2.5% 23.4% -9.9% 26% 8%Source: national statistical offices of Estonia, Latvia, Lithuania
  11. 11. Policy responces Baltics versus EU 15Baltic countries EU15Government expenditures ↓ Government expenditures ↑(NL, SE, DE)Government investnments ↓ Government investments ↑ (AT, DE, DK, NL, PT, SE)Direct taxes ↑ Direct taxes ↓ (AT, DE, DK, ES. IE, SE, UK)Excise duties↑ Excise duties↑ (FI, GR, NL, IE, UK)Public pensions ↓ LAT Social welfare support ↑ (BE, IE, GR)Business aid ↑ EST Business aid ↑ (ES, DE, FR. GR, NL, UK, PT)
  12. 12. Baltic countries: back in growth trackSource: The Economist, 14.07.2011
  13. 13. To get budget back to balance - is it mission impossible?Lessons from Estonia1. Very strong political commitment – in Estonian case it was EURO2. Small economy ?3. Strong Government4. Weak trade unions  no public unrest5. Flexible labour market
  14. 14. To sum upLimited policy instruments to stabilise economyLabour market should be "buffer" for macroeconomic adjustmentEmployment  working hours wages Socially costly  unemployment  Increasing competitiveness and "forced" restructuring, low loan burden for future generations
  15. 15. Thank you!
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