Speech of the Governor of Eesti Pank at the Riigikogu

Speech of the Governor of Eesti Pank at the Riigikogu at the presentation of Eesti Pank's Annual Report 2010

Tallinn, 16 June 2011

Honourable President of the Riigikogu, Distinguished Members of the Riigikogu

Thank you for the opportunity to introduce to you the Annual Report 2010 of Eesti Pank. I shall begin with the monetary policy and price stability of the euro area and Estonia, and afterwards I will discuss Eesti Pank's activities associated with the adoption of the euro.

Monetary policy and price stability in the euro area

First I will briefly discuss the current economic situation and price stability in the euro area. The good news is that the global and the euro area's economy is recovering from the decline faster than expected. Although growth is slower than before the crisis, it is much faster than last year's prognosis. The confidence of the private sector is strong and supports household consumption and investment growth. The implementation of production capacity is in no way indicative of a crisis situation. Unemployment is high, but on the wane. The activity indicators of the industrial and services sector exceed the historical averages. Furthermore, the euro area's export growth is fostered by the swift growth in global economy.

The fact that the recovery of global economy along with several other factors has increased commodity prices is slightly less encouraging. Estonia has also been affected by this. Inflation in the euro area has even risen to 2.7%. The majority of the price rise stems from global factors, i.e. the appreciation of energy and food on the global market. The prices of other goods and services have been posting more modest growth rates. Nevertheless, the threat of price rise pressures in Europe and elsewhere has increased even more.

To contain the price rise risks we elevated the interest rates in April. Yet our current interest rate level continues to be low and supportive of the economy's recovery. I have been a full member of the Governing Council of the European Central Bank nearly for half a year and I can confirm that the Council is very vigilant about inflationary developments. If necessary, we will react immediately to the phenomena that may threaten price stability.

Euro area debt crisis

Economic growth has not recovered evenly in all euro area countries. In some euro area countries, recovery is threatened by a debt crisis. Discrepancies in the economic policies of the Member States have become the main source of insecurity for the general public. In this respect the greatest financial and economic crisis of recent years has taught the euro area and European politicians several important lessons.

First, one must admit that the economic policy coordination mechanisms in Europe have not been efficient enough. The Member States have not adhered to long-term strategic plans and goals or the rules of public finances, be they national or implemented across the euro area and the European Union. Too often, in complex fiscal policy situations the short-term interests of politicians have prevailed, although the fulfilment of the agreed guidelines would also have been beneficial for the countries that ignored them.

The second lesson concerns the tight economic integration of the euro area countries. The public debt and financial sector issues of a single member may affect the entire euro area. Thus, closer economic policy cooperation is justified in the areas of public finances, competitiveness and the financial sector in order to guarantee the efficient functioning of the euro area's economic and monetary system. A set of strict rules is in everyone's interest. Our interest is not only to observe our own actions but also the development plans and goals set by other euro area countries - not only those of Greece or Portugal.

Thirdly, we must prepare ourselves better for potential crises. This entails more thorough prevention and oversight and effective crisis solution measures.

These issues are all being addressed. The new European framework in preparation will set out greater sanctions and pressure mechanisms upon the emergence of problems in public finances and other macroeconomic imbalances. Unfortunately, the new framework is not as strong as I and my euro area colleagues would like, because politicians will still have excessive powers to decide whether to implement the sanctions or not. Learning from prior experience, the automaticity of the implementation of new rules should be increased considerably.

A part of the new framework is the new European Stability Mechanism that will enter into force in the middle of 2013 and take over all the current temporary measures. It is the last bulwark that is needed when preventive coordination fails along with the failure to pressure the country in question. This is not a fund for paying off bad decisions, but a liquidity aid for the Member States in whose solvency we do not doubt. Our task is to guarantee that this bulwark would never have to be used. For this, we need all the Member States to fulfil their promises and obligations. This is the only way we can cope in complex situations.

In short, every euro area country must keep their financial matters in order. This is crucial. We are firmly opposed to those who hope that the postponement or restructuring of governments' debts will yield good results. Coercing or pressuring the private sector is not a solution either. Countries suffering from these problems must make a tremendous effort to restore and preserve their reliability. Similarly, our effort at the European Central Bank is to maintain the price stability and the reliability of the euro area's monetary policy framework.

Eesti Pank's activities regarding the adoption of the euro

The fact that I started today's presentation from the euro area's price stability was not a coincidence. On 1 January 2011, a development stage in the Estonian monetary and economic policy ended. Estonia became a member of the Eurosystem and the euro became legal tender. This has been a long process. The adoption of the euro became a strategic goal for Estonia and Eesti Pank already in autumn 2003, when the Estonian people voted in favour of joining the European Union at a public referendum. The decision made by the Estonian people also meant support for joining the euro area.

Looking back at last year I am glad to admit that the technical adoption of the euro in Estonia was smooth. Indeed, in 2010 Eesti Pank's main agenda was introducing the euro. Besides ordinary work, the adoption of the euro entailed major preparations.

For Eesti Pank, these also involved preparations for Eesti Pank's work in the Eurosystem - to fulfil the tasks of a national central bank in the euro area. This also affected the financial side of our operations. The low yield of reliable bonds and the decreasing reserve requirement reduced our interest revenues by half compared to 2009, to 414 million kroons. At the same time, we incurred more expenses owing to the euro adoption process. The greatest euro-related expenses were the production of euro banknotes and coins - this increased our operating expenses by more than 50 per cent compared to 2009, up to 390 million kroons. As temporary employees were recruited to make preparations, personnel costs also rose somewhat. The employment contracts of most temporary employees have already expired or are about to expire and the central bank intends to keep its personnel at a steady 230-240 employees. In total, last year Eesti Pank suffered a loss of 30 million kroons - however, the loss is almost ten times smaller than we anticipated.

At any rate, Eesti Pank's goal is not to earn profit. Most importantly, Eesti Pank's work in managing the country's monetary system and fulfilling the central bank's duties has been flawless and smooth.

Summarising the expenses briefly, Eesti Pank's ordinary planned budget for 2010 was 9% smaller than in 2009, amounting to 260.2 million kroons. Approximately 93% of this budget was exhausted. In addition, the euro budget amounted to 197.8 million kroons and only 75% of it was used, mainly for covering the costs of adopting the euro cash.

Eesti Pank's tasks in the Eurosystem

Joining the euro area did not change the key tasks of Eesti Pank. Our primary goal is still safeguarding price stability. However, the last year changed the role of the central bank considerably. Eesti Pank is now responsible for the whole euro area's price stability together with other euro area countries. This means that since the beginning of 2011, as the Governor of Eesti Pank I participate in making decisions that concern not only Estonians but 331 million people in the euro area. Therefore, the operation range of the central bank has expanded remarkably. While during the kroon, our monetary policy could be regarded as a God-given gift, now we can participate in developing the euro area's monetary policy.

We continue to safeguard Estonia's financial stability, guarantee the operation of payment and settlement systems, organise cash circulation, manage Estonia's foreign reserves, compile statistics and advise the Government. These daily tasks did not disappear with our accession to the euro area.

Estonia's economic outlook

According to Eesti Pank, in the years 2011-2013 Estonia will largely recover from the recent economic decline. The economy has improved mainly due to the growth in export revenues. The role of domestic demand is smaller, although it is also bouncing back. The smooth changeover to the euro created suitable grounds for paying attention to what really matters - how to help guarantee price stability in the future. In addition, joining the euro area has also decreased long-term inflation risks in our economy, because we no longer have to worry about the devaluation of the Estonian kroon or other similar matters. At the same time, we must remain alert to the growth. This year and in the forthcoming years it is crucial that the high inflation in Estonia, which currently exceeds 5%, would not entail a wage growth that would give the price rise an additional boost. This price rise spiral must be avoided. In the interest of balanced growth it is important that wage growth would not exceed growth in productivity. Otherwise, the competitiveness of Estonia may suffer.

In fiscal policy, the Government is targeting a surplus for the consolidated budget of 2013. According to Eesti Pank, this goal is reasonable and feasible. However, the crisis experience showed that merely setting a fiscal balance or surplus goal may not suffice. In a rapidly changing environment it is difficult to differentiate between one-off extra revenues from sustainable tax incomes. Therefore, the fiscal policy should include provisions to contain the growth in expenses.

As for financial stability, I am confident that Estonia has coped with the decline very well. Domestic risk sources have abated swiftly along with the improvement of economic growth and the main risks primarily stem from the external environment. The development of the loan market has, nevertheless, remained modest. It is important that banks be able to take risks and fund sustainable projects that are necessary for economic growth. They have all the prerequisites for this. The capitalisation of banks in Estonia is strong and their liquidity for granting loans is sufficient because of the deposit growth results. We must also bear in mind that the loan stock should grow in line with economic growth.


The finances of Estonia have acquired a much stronger standing since Estonia joined the euro area. At the same time, this will not give us the opportunity to freeload on others. All parties have to contribute in order to make the Eurosystem strong, including us.

Thank you for your attention!

Speech of the Governor of Eesti Pank at the Riigikogu