“A strong economic stimulus was needed during the pandemic from both the central bank and the government for the rapid recovery from the crisis, but it is now wiser to change the approach, because Russia’s invasion of Ukraine and very high inflation have altered the economic circumstances substantially”, said Governor of Eesti Pank Madis Müller today at a joint seminar for the European Investment Bank (EIB) and the Baltic states.

The major difference between the pandemic and the current crisis is that inflationary pressures have risen significantly. In consequence the European Central Bank, which moved actively to support the economy during the pandemic, is currently withdrawing its monetary policy support measures. It is doing this even though the majority of the factors causing the current high inflation are beyond the control of the central bank, as prices rise for energy and fuels, raw materials, and food. “The circumstances are completely different from what they were during the pandemic, and the central bank needs to take firm steps to bring down inflation in the euro area”, said Mr Müller.

This means that a larger role in managing the crisis now falls on the shoulders of fiscal policy. The issue in the pandemic, at least at the start, was a drop in demand, and so the state kept the economy afloat by supporting companies and households. The pandemic was also considered to be a temporary problem. The current situation is different, as the war will cause permanent changes in supply chains and in economic relations. “The shock is now primarily on the supply side and has pushed inflation in Estonia up from its already high level. There is greater desire to buy goods and services than there is capacity to produce and supply them. Inflation is in consequence high and has been rising”, noted Mr Müller.

Russia’s war on Ukraine has equally highlighted the importance of becoming more independent of energy supplies from Russia and of increasing spending on defence. “Despite the inflationary pressures, Estonia has to make those investments. The government needs to be very careful though that its spending does not excessively increase aggregate demand”, said Mr Müller, noting that this was a difficult balance to strike. “Support should be temporary and targeted at those who need it the most”, he emphasised. “Broadly based subsidies run the risk of inflation in Estonia being very high for even longer”.

The seminar this year was organised as a regional event for the first time, covering all three Baltic states. Madis Müller was joined in the discussion group by the governors of the Latvian central bank, Mārtiņš Kazāks, and the Lithuanian central bank, Gediminas Šimkus. They discussed the factors behind the successful and rapid recovery from the pandemic crisis, and the problems of the new crisis. They all agreed that it was important to see difficult circumstances as an opportunity to invest and adapt. Structural changes play a very large part in this. The joint seminar of the EIB and the central banks of the Baltic states also heard the EIB’s annual review of investment trends based on corporate surveys.

Additional information:
Hanna Jürgenson
Eesti Pank
Communications Specialist
Tel: 56920 930
Press enquiries: [email protected]