Andres Sutt. Macroeconomic co-ordination and fiscal policy in the expanding Eurozone (Statement at the conference "thinking EUconomy - Wirtschaftspolitik europäisch denken"

Macroeconomic Co-ordination and
Fiscal Policy in the Expanding Eurozone

Statement by Mr Andres Sutt,
Deputy Governor of Eesti Pank (Bank of Estonia)

The enlargement of the European Union with the clear message that all countries without an opt-out clause will, in the future, also be members of the EMU, is a most welcome and forward-looking approach in view of the ongoing globalisation and integration processes in the world. Eventually, the adoption of the single currency by all Member States will provide clear benefits for the Union as a whole. From the macroeconomic point of view it will support further economic integration and higher growth rates by fostering trade and investments. Therefore, euro area enlargement will provide tangible benefits for all European citizens over time.

The main policy challenge for both the current and prospective euro area members is to ensure that the best use is made of the monetary stability provided by the framework of the European System of Central Banks (ESCB). From the perspective of the new Member States, the issue at stake is how to maintain an economic structure supportive of sustained growth and real rapid convergence. A strong fiscal stance is instrumental in this regard. The Convergence Programs of the new Member States should include ambitious Medium Term Objectives to ensure that not only the Maastricht criteria are met, but most importantly, the emergence of excessive deficit situations is avoided and the risks of seeking recourse in exchange rate adjustments after joining the ERM2 (and, eventually, the euro area) are minimized. A well-functioning single market for all goods and services, including infrastructure networks, as well as pursuing National Reform Programmes in the context of the reinforced Lisbon agenda, is the other pillar of success of the euro area and of the new Member States in particular.

Estonia has been a de facto member of the euro area since the inception of its independent currency in 1992. Fixing the local currency to the Deutsche-Mark, and later to the euro, meant that monetary policy decisions were not made in Estonia. Estonia's currency board regime implies a prudent fiscal stance that has been largely adhered to since 1992, resulting in our central government having accumulated a relatively large net asset position of around 10 percent of GDP. A solid budgetary position and early deregulation of product and capital markets implies that Estonia has been well placed to absorb both positive and negative shocks during the past 15 years. Deregulation and reform in preparation of EU membership has allowed us to fully integrate our economic and financial systems with the Single Market. However, that kind of approach requires, in today's conjuncture, forward-looking structural reforms in almost all EU member states, e.g. in the product, services and labour markets, healthcare and social insurance systems, etc.

For Estonia, the adoption of the euro is the only logical step and an overarching policy priority. In this context, we would like to emphasize that it is in the interest of the entire European Union that Euro Area enlargement takes place in accordance with a clear set of well-known rules in which the criteria are applied in line with the Treaty's provisions and in an equal and economically meaningful manner. The countries joining should have a proven track record to fare well under the common monetary policy. This being the case, Euro Area membership will hasten the catch-up process in these countries and strengthen the countries' ownership in the EU-wide macroeconomic co-operation at large.

Macroeconomic stability and economic flexibility are prerequisites for the new Member States to ensure that investment in physical and human capital is sustained and outlays for research and development are further increased. Higher growth and stronger policy coordination on the EU level will also strengthen the social dimension of the enlargement.

Andres Sutt. Macroeconomic co-ordination and fiscal policy in the expanding Eurozone (Statement at the conference "thinking EUconomy - Wirtschaftspolitik europäisch denken"