A Long Transition: The Estonian Currency Board Arrangement 1992-2010

This book is different from most similar ones as it tells a story that has finished. It is very rare in monetary and economic policy to find stories with a clear beginning and end, but the story of the Estonian currency board is one such, as it started with a monetary reform on 20 June 1992 and ended on 1 January 2011 when Estonia joined the euro area.

Such a framework provides a unique opportunity to describe a clearly defined stage in the modern history of the economy. Although this book tells the story of Estonia, it also gives a picture of the age as a whole, because although Estonia is small and exceptional in some ways, most of the major events of the last decade of the 20th century and the early years of the 21st appear here in one way or another.

This is particularly true of the main processes of the period in Central and Eastern Europe as the economy changed from a command economy to a market economy. There was, and still is to some extent, a mix of very different economic policy choices. Looking back more than twenty years later we can say that there was no single and only route through these processes and towards the living standards of the ‘old’ member states of the European Union. There were better and worse choices in the short term but no one country from Central and Eastern Europe stood out as much more successful than the others.

This period is made more interesting by its coincidence with changes in the global economy. Globalisation became a torrent, the role of emerging markets increased, financial markets were liberated, and information and communications technology advanced. With the great changes came great crises, in the form of the Great Recession and the subsequent European debt crisis. The changes they caused have not yet ended and they will be considered in greater depth in the future.

This book concentrates on the changes of 1990–2010 looking through the prism of monetary policy, which in Estonia’s case meant the monetary policy based on the fixed exchange rate. As a broader perspective is needed, the book covers the modern history of Estonia’s economy in a wider sense, at least where it concerns the general logic of development, the essential features of economic policy and the main macroeconomic indicators such as GDP growth, inflation and employment or unemployment.

The small size of the country sets its own limits. A country the size of Estonia is not able to have a fully free choice among all the possible doctrines of monetary policy and so this is a study of a small and open economy in transition, where the distinctive feature of Estonia, the currency board arrangement, takes centre stage and the story unfolds in several acts with two crises in the Asian and Russian crisis and the later Great Recession.

Another distinctive feature is that the policy-makers and the people of Estonia travelled a path in twenty years that normally takes many times longer, starting from essentially zero with hyperinflation and an economy collapsing out of the break-up of the Soviet Union, and finally arriving at accession to the European Union and the euro area. This required a new financial system to be built and to evolve, and needed new markets to be created such as the securities market and the credit market. Furthermore, the global crisis required a section of the road to be travelled twice for the pre-crisis level of wealth to be regained, and so it is clear that this was an exciting and challenging time.

I hope that you will enjoy reading this book.
Ardo Hansson
Governor of Eesti Pank