Estonia has succeeded in reducing its macroeconomic imbalances and vulnerabilities, but faces the challenge of preserving its hard-earned fiscal and financial stability and enhancing long-term growth prospects. In this regard, adopting a fully fledged medium-term fiscal framework can help assess policy trade-offs and avoid procyclical policies. Financial sector stability can be safeguarded by strengthening macroprudential policies. Deeper Nordic-Baltic cross-border prudential arrangements and the EU banking union can enhance financial stability. Estonia needs to safeguard its external competitiveness, address skill mismatches, and accelerate human capital accumulation.
The staff report for the 2011 Article IV Consultation concluded that a vibrant recovery marked Estonia’s first year in the euro area, albeit amid nascent tensions. The economy’s strong rebound has been grounded in a proven track record of prudent macroeconomic policies. Executive Directors endorsed that Estonia faces an increasingly challenging environment as it looks to continue implementing policies preserving macroeconomic policy credibility and safeguarding sustainable growth. They also stated that, for the financial sector, the challenge entails safeguarding stability in the context of heightened global financial tension.