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AGENDA FOR EUROPE:
WHICH OF ESTONIA’S SUCCESS FACTORS CAN BE USEFUL FOR
OTHER EUROPEAN COUNTRIES AND THE EUROPEAN UNION
Ar...
What are the features that have led to
success in Estonia’s economic development?
a) Strong economic growth over the last ...
(A) During the last 20 years Estonia has
experienced strong economic growth
Average annual economic growth 1996-13 (%) GDP...
Determinants of Estonia’s economic growth
Source: World Economic Forum Global Competitiveness Report 2013-14
Rank Rank
out...
However, Estonia experienced an
unsustainable boom prior to the global
financial crisis, followed by a severe recession
Th...
(B) During the severe recession the
Estonian economy showed a high
degree of resilience
Cumulative decline (peak to trough...
Factors of resilience (I):
Lower levels of private and public sector
indebtedness
0
20
40
60
80
100
120
140
2007 2013
Euro...
Factors of resilience (II):
well-capitalised banks;
limited size of the financial sector
Ratio of capital and reserves to ...
(C) Speedy adjustment and recovery:
GDP and unemployment
75
80
85
90
95
100
105
t0 t2 t4 t6 t8 t10 t12 t14 t16 t18 t20
Est...
Speedy adjustment and recovery:
External and fiscal adjustment
Current account balance (% of GDP) Fiscal balance (% of GDP...
Speedy adjustment and recovery:
Deleveraging
Net international investment position (% of GDP) Loan to deposit ratio (%)
So...
Speedy adjustment and recovery:
the role of wage flexibility and
productivity growth
90
95
100
105
110
115
120
2008 2009 2...
Fiscal consolidation in Estonia in
2008-2010
Fiscal consolidation in Estonia was front-loaded (consolidation measures amou...
14
The advantages and disadvantages of a
sharp adjustment rather than a gradual one
Disadvantages of a sharp adjustment:
-...
What can be learned from the unsustainable
boom in Estonia before the global financial
crisis?
1. A strong external anchor...
Which of Estonia’s success factors can
be useful for other EU countries
Estonia has been successful thus far in ensuring r...
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Agenda for Europe: which of Estonia’s success factors can be useful for other european countries and the European Union

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Ardo Hansson, Eesti Pank 5 April 2014
A financial forum organised by The European House – Ambrosetti in Italy http://www.ambrosetti.eu/en/news/2014/financial-markets-workshop

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Agenda for Europe: which of Estonia’s success factors can be useful for other european countries and the European Union

  1. 1. AGENDA FOR EUROPE: WHICH OF ESTONIA’S SUCCESS FACTORS CAN BE USEFUL FOR OTHER EUROPEAN COUNTRIES AND THE EUROPEAN UNION Ardo Hansson Eesti Pank 5 April 2014
  2. 2. What are the features that have led to success in Estonia’s economic development? a) Strong economic growth over the last 20 years b) Resilience to adverse shocks, especially during the global economic and financial crisis in 2008-09 c) Speedy adjustment and recovery in the aftermath of the financial crisis At the same time, important insights for other countries may be gleaned from the less successful moments in Estonia’s economic development, especially from the unsustainable boom prior to the global crisis
  3. 3. (A) During the last 20 years Estonia has experienced strong economic growth Average annual economic growth 1996-13 (%) GDP per capita in PPS 1996-2013 (EU-28=100) Source: Eurostat 0 1 2 3 4 5 6 European Union (28 countries) Euro area (18 countries) Central/Eastern European (11 countries) Estonia 0 20 40 60 80 100 120 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 European Union (28 countries) Euro area (18 countries) Estonia
  4. 4. Determinants of Estonia’s economic growth Source: World Economic Forum Global Competitiveness Report 2013-14 Rank Rank out of all 148 countries out of EU-28 Global Competitiveness Index (total) 32 12 Basic requirements (21.7%) 26 11 Institutions 27 11 Infrastructure 40 19 Macroeconomic environment 22 3 Health and primary education 29 15 Efficiency enhancers (50.9%) 30 13 Higher education and training 23 10 Goods market efficiency 30 12 Labour market efficiency 12 2 Financial market development 35 9 Technological readiness 29 15 Market size 99 26 Innovation and sophistication (28.3%) 35 14 Business sophistication 51 18 Innovation 31 13
  5. 5. However, Estonia experienced an unsustainable boom prior to the global financial crisis, followed by a severe recession The boom in 2004-2007 was accompanied by: 1) large current account deficits/capital inflows; 2) strong credit growth; 3) rapid increases in asset prices; 4) deterioration in cost/price competitiveness. Economic growth, current account balance and unit labour costs Loan growth and change in real estate prices (%) Source: Eurostat, ECB -20% -15% -10% -5% 0% 5% 10% 15% 20% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Economic growth (%) Current account balance (% of GDP) ULC-REER (%) -40% -30% -20% -10% 0% 10% 20% 30% 40% 50% 60% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Loan growth Change in real estate prices
  6. 6. (B) During the severe recession the Estonian economy showed a high degree of resilience Cumulative decline (peak to trough) in GDP in selected euro area countries in 2007-2013 (%) Despite a very severe recession in 2008-09 Estonia did not experience a systemic financial crisis and did not need to apply for international financial assistance -30% -25% -20% -15% -10% -5% 0% Estonia Latvia Greece Ireland Portugal Cyprus Spain Source: Eurostat
  7. 7. Factors of resilience (I): Lower levels of private and public sector indebtedness 0 20 40 60 80 100 120 140 2007 2013 Euro area Estonia 0 10 20 30 40 50 60 70 80 90 100 2007 2012 Euro area Estonia Bank credit to households and firms (% of GDP) Public sector debt (% of GDP) Source: Eurostat, ECB
  8. 8. Factors of resilience (II): well-capitalised banks; limited size of the financial sector Ratio of capital and reserves to total assets (%) Ratio of MFI total assets to GDP (%) Source: Eurostat, ECB - 50 100 150 200 250 300 350 2007 2013 Euro area Estonia 0 2 4 6 8 10 12 14 16 18 2007 2013 Euro area Estonia
  9. 9. (C) Speedy adjustment and recovery: GDP and unemployment 75 80 85 90 95 100 105 t0 t2 t4 t6 t8 t10 t12 t14 t16 t18 t20 Estonia EA-4 0 5 10 15 20 25 t0 t2 t4 t6 t8 t10 t12 t14 t16 t18 t20 Estonia EA-4 GDP after the cyclical peak in 2007-08 (GDP at cyclical peak=100; quarterly data) Unemployment (%, t0 = cyclical peak in GDP during 2007-08; quarterly data) Note: EA4 consists of Ireland, Greece, Spain and Portugal Source: Eurostat
  10. 10. Speedy adjustment and recovery: External and fiscal adjustment Current account balance (% of GDP) Fiscal balance (% of GDP) Source: IMF, World Economic Outlook Database, October 2013 -20 -15 -10 -5 0 5 2007 2008 2009 2010 2011 2012 2013 Estonia EA-4 -16 -12 -8 -4 0 4 2007 2008 2009 2010 2011 2012 2013 Estonia EA-4
  11. 11. Speedy adjustment and recovery: Deleveraging Net international investment position (% of GDP) Loan to deposit ratio (%) Source: Eurostat, ECB, Eesti Pank 0 50 100 150 200 250 2007 2012 Estonia EA-4 -120 -100 -80 -60 -40 -20 0 2008 2013 Estonia EA-4
  12. 12. Speedy adjustment and recovery: the role of wage flexibility and productivity growth 90 95 100 105 110 115 120 2008 2009 2010 2011 2012 2013 Real unit labour costs Nominal output per person empoyed Nominal wage costs per employee Real unit labour costs, whole economy (2008=100) Source: Statistics Estonia Cost competitiveness was mostly restored via strong productivity growth and to a lesser extent via downward (nominal) wage adjustment.
  13. 13. Fiscal consolidation in Estonia in 2008-2010 Fiscal consolidation in Estonia was front-loaded (consolidation measures amounted to about 10% of GDP: 2/3 on the expenditure side and 1/3 on the revenue side). The fiscal consolidation strategy had the following components: 1) Protection of the most vulnerable groups; 2) Broad-based reductions in current expenditures; 3) Reduction of wages in the public sector; 4) The phasing in of structural reforms. 0% 5% 10% 15% 20% 25% 30% 35% 40% 2008 2009 2010 Social protection (% of total government expenditure) Social protection (% of total government expenditure) Headline and structural budget balance (% of GDP) Source: Eurostat, Eesti Pank -8% -6% -4% -2% 0% 2% 4% 2007 2008 2009 2010 2011 2012 nominal budget balance structural budget balance
  14. 14. 14 The advantages and disadvantages of a sharp adjustment rather than a gradual one Disadvantages of a sharp adjustment: - an overreaction might force ‘viable’ firms out of business, leading to losses in physical and human capital; - it is politically difficult if the electorate is not informed or is reluctant; - the high speed of adjustment might lead to mistakes in economic policy. Advantages of a sharp adjustment: - a shorter period of high uncertainty weighing on economic activity, especially on investment decisions; - faster closure of ‘non-viable’ firms and elimination of unsustainable businesses and activities - avoidance of reform fatigue; - avoidance of excessive accumulation of public and private debt.
  15. 15. What can be learned from the unsustainable boom in Estonia before the global financial crisis? 1. A strong external anchor in the form of a credible fixed exchange rate arrangement might lead to policy complacency 2. The build up of imbalances and vulnerabilities created by the amplification channels of the economy needs to be addressed early and decisively (e.g. through more active use of fiscal and macro-prudential measures). Under a fixed exchange rate regime/monetary union some of these channels might be especially strong (e.g. the real interest rate channel associated with the asset price/credit channel) 3. Overall, the experience of the euro area has demonstrated that in a monetary union there is indeed a stronger need for policy discipline in other economic policy areas
  16. 16. Which of Estonia’s success factors can be useful for other EU countries Estonia has been successful thus far in ensuring relatively high growth and strong resilience in the economy. Both of these achievements have been strengthened by: - Strong fiscal policy discipline; - Flexible labour markets; - Relatively low levels of indebtedness (especially public sector indebtedness); - Well capitalised banks and the limited size of the financial sector; - Extensive sustained structural reforms; - Strong and prompt policy responses to adverse shocks.

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