On 8 May, Governor of Eesti Pank Andres Lipstok made a presentation at a conference on law in Tartu, Estonia. Lipstok gave an overview of the underlying reasons of the current economic crisis, the global economic situation and Estonia's opportunities to overcome the crisis.
Andres Lipstok said the current global downturn to be, like any economic crisis, driven by overproduction and insufficient demand. "The ongoing crisis has been mainly boosted by the excessive optimism in global financial markets, which encouraged people to consume more and save less. Another underlying reason was the economic policies adopted by several Asian countries and based on cheap exports and low exchange rate. At this point, the situation has changed considerably," said Lipstok.
"The current global growth model is coming to an end, as trade is shrinking drastically all over the world. At the same time, we should bear in mind that in a free market economy a temporary decline in production is usually followed by a rise. Nearly all major crises have stemmed from national policies that shape people's expectations and decisions. By trying to make up for earlier mistakes in a crisis situation, national policies often hinder corrections in a free market economy and thus also the recovery of growth," said Lipstok, referring to the behaviour of various countries at the time of the Great Depression in the 1930s.
He added that the present global crisis is not a crisis of market economy by a crisis of national policies that have increased the discrepancies and imbalances. "Policy-makers all over the world should take into account that the crisis can be overcome only with the help of policies that support market economy," said Lipstok.
He pointed out that the growth outlook of the European Union is uncertain given the current global economic situation, but the EU economic policy measures should help survive the crisis. "The short-term objective of these measures is to halt the decline and stabilise the economy. The long-term goal is to restore the confidence of households, enterprises and financial markets in Europe's growth potential. Third, the structural reforms envisaged in the Lisbon strategy need to be implemented in the EU Member States in order to increase competitiveness or, in other words, the flexibility of the economy and the labour market," Lipstok told.
"Estonia is a part of the European Union and the single market, and the EU framework is suitable also for our economic policy," stated Lipstok, stressing that Estonia's integration with Europe and the single market should be even closer, since the opportunities and stability provided by the EU are vital for recovery from the crisis. "The speed of exit from the crisis thus depends on the flexibility of Estonian enterprises and their ability to restructure production and business operation in line with the changing external environment and EU market. The state's role is to establish the preconditions necessary for restructuring and new investment," stressed Andres Lipstok.
"The stabilisation of the Estonian economy is supported by the fixed exchange rate, the perspective of joining the euro area, and the stable banking sector. Sustainable fiscal policy is the key here. At this point, the fiscal policy calls for decisive steps, whereas it is also clear that easy solutions are not sufficient to restore growth. The state expenditure has grown considerably in the past years, whereas the so far stable tax burden has been one of the strengths of the Estonian economy, leaving plenty of room for private initiatives," said the Governor.
Andres Lipstok mentioned that the latest news from all over the world have been slightly more optimistic than in previous months, which indicates that the extensive support packages are starting to pay off. "Therefore, it is ever more important that countries take steps to ensure the long-term growth potential. After all, it is not the first time to overcome a global crisis by creating the grounds for a new one," the Governor concluded.
