Ross lists lessons for policymakers

Former Deputy Governor of the Bank of Estonia Marten Ross, who temporarily held the position of the prime minister’s economic and financial advisor, compiled a list of lessons that Estonia should learn from the 2008-2009 crisis, reports Postimees.

Ross’ paper, which took three weeks to draft, stated that the three principal lessons the country needs to learn are that a counter-cycle economic policy would soften the crises, an overly optimistic view on harmonizing incomes with the rest of Europe would send wrong signals to the economy and thirdly, that the fixed exchange rate of the currency – first regarding the kroon and now the euro – has demonstrated itself as a reasonable strategy for Estonia.

However, Ross also finds that Estonia needs to cut back on regulatory limitations that delay the economy’s reactions to external factors – for example, to increase flexibility in pay provisions and lower the so-called ‘guaranteed budgetary spending.’ At the same time, Ross notes that there are relatively few obstacles in Estonia for changing wages, as well as prices.
In another part of the document, Ross noted that the state needs to accumulate reserves and be prepared so that in cases of the ‘stress scenarios,’ the government sector could, for example, operate for 18 months without borrowing more money from various sources.

The former deputy governor also stated that as banks operating in Estonia are essentially the same as in other countries, the stability of these banking groups ought to become priorities in economic policy in cooperation between states. “It is likely that without adding direct political pressure, the practical testing of this issue on the political level will continue ‘waiting for the next crisis.’”

Minister of Finance Jurgen Ligi commented on the lessons presented in Ross’ analysis in the following manner: “It would be difficult to be surprised about anything here, apart from the relatively mild tone in which it is presented. We have learned these lessons and have repeated them many times, observing the international developments.”
The minister noted that Estonia was the first to cut costs without a dictate from its creditors. “Now we find confirmation from the examples of others that the markets’ punishments for accumulated debts are much more clearly perceivable facts than the governments’ successes in boosting their economies by taking more loans,” said Ligi.
Ligi went on to note Estonia’s existing plans to downgrade the growth forecast for next year due to the eurozone’s sovereign-debt crisis, reports Bloomberg.

The Finance Ministry is due to publish its updated forecast in the middle of September, Katrin Reimann, a ministry spokeswoman, said in a phone interview on Aug. 26. “Our economy will quite clearly suffer because of Europe’s debt crisis, even though it will reach us with a delay,” Ligi added.

“We are extremely interested in an end to this crisis so that the financial markets would calm down and that countries could finance their deficits and service debts under normal conditions,” he urged.
Estonia’s preliminary GDP growth totaled 8.4 percent, year-on-year, in the second quarter this year. Quarter-on-quarter, seasonally and working-day adjusted GDP grew 1.8 percent.