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Estonia

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1) REFERENCES

Commission Opinion [COM(97) 2006 final-Not published in the Official Journal]
Commission Report [COM(98) 705 final-Not published in the Official Journal]
Commission Report [COM(1999) 504 final-Not published in the Official Journal]
Commission Report [COM(2000) 704 final-Not published in the Official Journal]
Commission Report [COM(2001) 700 final - SEC(2000) 1747: Not published in the Official Journal]
Commission Report [COM(2002) 700 final - SEC(2002) 1403: Not published in the Official Journal]
Commission Report [COM(2003) 657 final - SEC(2003) 1201: Not published in the Office Journal]
Treaty of Accession to the European Union [Official Journal L 236 of 23.09.2003]

2) SUMMARY

In its July 1997 Opinion, the Commission considered it was too early to decide on Estonia's participation in the euro area immediately upon its accession. If it were to participate in the third stage of economic and monetary union (EMU) while not being a member of the euro area, this should not pose serious problems. The Commission stressed that the legislation on the Estonian central bank was already fully compatible with Community requirements. As for the free movement of capital, it should be possible for the remaining restrictions, particularly those on the purchase of real estate by non-residents, to be removed without difficulty.

The November 1998 Report noted that Estonia had made some progress in its preparations for joining EMU.

However, the October 1999 Report found that Estonia's rate of progress had slowed down.

The November 2001 Report found that significant progress had been made and that alignment on the acquis was almost complete.

The October 2002 Report found that alignment on the EMU acquis was almost complete.

The November 2003 Report finds that Estonia meets the commitments and requirements resulting from the accession negotiations. A final amendment of the legislation on the central bank remains necessary.
The Treaty of Accession was signed on 16 April 2003 and accession took place on 1 May 2004.

COMMUNITY ACQUIS

The third stage of EMU began on 1 January 1999. This date will entail far-reaching changes for all Member States, even those not taking part in the euro area from the outset.

In the economic sphere, the keystone is the coordination of national policies (national convergence programmes, general economic guidelines, multilateral surveillance and excessive-deficit procedure). All countries are required to comply with the Stability and Growth Pact, to refrain from direct financing of the government deficit by the central bank, to prohibit privileged access by public authorities to financial institutions and to have liberalised capital movements.

Member States not taking part in the euro area conduct an independent monetary policy and participate in the European System of Central Banks (ESCB) under certain conditions. Central banks must be independent and must have price stability as their primary objective. Lastly, exchange-rate policy is regarded as a matter of common interest by all Member States, who must be in a position to participate in the new exchange-rate mechanism.

Even though accession entails acceptance of the objective of EMU, compliance with the convergence criteria is not a precondition. However, since those criteria are indicative of a macroeconomic policy geared to achieving stability, all Member States must, in due course, comply with them on a permanent basis.

EVALUATION

During the period of the negotiations, commercial integration into the Community made considerable headway. Macroeconomic stability was maintained even during the 1998 Russian crisis. Estonia offers a favourable environment to economic operators. Therefore the private sector well exceeded 80% of gross domestic product (GDP). All these factors lead to the conclusion that the Estonian economic is a viable market economy. The continuation of the current reform programme should enable Estonia to cope with competitive pressures and market forces within the Union.

In 1997, economic activity picked up strongly and real GDP growth reached 11.4%. However, economic activity fell very sharply in mid-1998 as GDP in real terms increased by only 4% and plunged into a recession in 1999. Following this shock, Estonia saw a sharp increase in internal demand, which pulled growth up to 6.9% in 2000. Despite the slowing down of economic activity in the UE and the United States, the Estonian economy recorded uninterrupted growth in 2000 and 2001. The 2003 Report notes that the increase of 6% in the GDP in 2002 was favoured by very dynamic private consumption.

The public finances are in a healthy situation thanks to vigorous growth and tight control of public expenditure. The surplus balance amounted to 2.1% of GDP in 1997, which was a remarkable turnaround in relation to the 1.5% deficit registered in 1996. During the first half of 1998, the budgetary surplus continued to increase, rising to 2.6% of GDP. As a result of the economic crisis, the public administration deficit reached 4.1% of GDP in 1999. Estonian public finances were rapidly put in order after the recession and the public administration deficit brought down to 0.7% in 2000. Prudent budgetary policies were applied, in particular by the central administration, and the substantial revenue generated by privatisation helped reduce the public debt, which had risen to 7% of the GDP in 1997 but fell below 5% in 2001. The 2003 Report notes that the budget surplus amounted to 1.3% of GNP, an increase which is accounted for principally by vigorous growth, despite additional expenditure approved by Parliament in two amending budgets

The inflation rate fell from an annual average of 23.1% in 1996 to 11.2% in 1997. This is a considerable slowdown. In September 1998, consumer prices continued to rise at an annual rate of 6.6%. Inflation increased from 3.1% in 1999 to 3.9% in 2000 mainly as a result of higher petroleum prices. Since then, the rate of price increases has picked up again slightly, running at 5.6% in 2001. The 2003 Report notes that the rise in prices, which reached almost 7% in the middle of 2001, eased to 2.7% at the end of 2002. Regarding core inflation, this has remained relatively stable, at around 4% for the year.

Despite a definite slowing down, the real exchange rate continued to increase in 1997. The currency board system, which makes provision for the pegging of the kroon to the Deustchmark and then the euro, worked well despite strong disruption on the financial markets. In 1999, the exchange rate never came under serious pressure. Thus Estonia maintained its currency board system without interference from the exchange markets.

With regard to the current account balance, the marked economic growth in 1997 lead to a further deterioration in the external accounts. The current account deficit rose to 12% of GDP and the trade deficit to 24% of GDP. In 1999, the current account deficit dropped back to 5.7% of GDP, a significant decline compared with the very high levels reached in 1997 and 1998. In 2000, the current external deficit rose to 6.7% of GDP. It was around 6% of GDP in 2001. The 2003 Report notes that a strong demand for imports and a relatively moderate growth in exports has produced a deterioration in the current-account deficit, which amounted to 12.3% of GDP in 2002.

Estonia has made progress in structural reforms since mid 1997. Privatisation of industrial undertakings has continued. Since mid-1998, Estonia has encountered further difficulties in planning and implementing certain key reforms. In 1999, reforms in the financial sector went ahead. Privatisation is almost complete. All small and medium-sized enterprises are held by the private sector and it remains to privatise a very small number of large companies and a bank. In 2000, accelerated reforms removed several structural weaknesses in the economy. The reform of pension schemes and health care is progressing steadily. The 2001 Report noted that a law grouping supervisory activities in all financial sectors under the responsibility of one body was finally adopted. The Estonian authorities must still meet two challenges: the liberalisation of the energy sector and the restructuring of the hospital care system. With regard to the liberalisation of capital movements, Estonia has made significant progress only a few minor restrictions remain. In 2003 the authorities have made significant progress in their reform programme, in particular as regards pension schemes and financial surveillance.

With regard to the independence of the central bank, the Bank of Estonia enjoys a high degree of independence and direct financing of the public sector is prohibited. Nevertheless, some measures are still necessary to align Estonian legislation completely with the acquis. In particular, amendments must be made to legislation relating to the central bank in connection with the composition of the supervisory board, the independence of whose members is not guaranteed. In 2001, amendments to the law on the Bank of Estonia should ensure complete independence of all its decision-making bodies in the exercise of its functions well as complete personal independence of the various members of its supervisory board. The 2003 Report calls for one final amendment concerning possible conflicts between the managing bodies of the Bank and possible interference by the parliament.

With regard to negotiations on its future participation in EMU, Estonia has reiterated that it will accept the EMU acquis as defined in the EC Treaty and that it will comply fully with it. It has also declared that the administrative structures to implement the acquis would be put in place. Negotiations on this chapter were closed in December 2002. No transitional provisions were requested.

This summary is for information only and is not designed to interpret or replace the reference document.

Last updated: 11.03.2004
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