Andres Sutt: Macroeconomic co-ordination and fiscal policy in the expanding
Eurozone
Statement by Mr Andres Sutt, Deputy Governor of Eesti Pank (Bank of Estonia), at the conference
"thinking EUconomy - Wirtschaftspolitik europäisch denken", Berlin, 3 May 2006.
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The enlargement of the European Union with the clear message that all countries without an opt-out
clause will, in the future, be also members of the EMU, is a most welcome and forward-looking
approach in view of an ongoing globalisation and integration processes in the world. Eventually, the
adoption of the single currency by all Member States provides clear benefits for the Union as a whole.
From the macroeconomic point of view it would 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 the economic structure supportive for sustained growth and rapid real convergence. Strong
fiscal stance is instrumental in this regard. 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 taking
recourse to exchange rate adjustments after joining the ERM2 (and, eventually, the euro area) are
minimized. The well functioning single market for all goods and services, including infrastructure
networks, as well as pursuing the National Reform Programmes in the context of the reinforced Lisbon
agenda is the other pillar for the success of the euro area and for 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 D-mark, and later to the euro meant that the monetary policy
decisions were not made in Estonia. Estonia's currency board regime implies prudent fiscal stance
that has been largely adhered to since 1992, resulting in our general 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 last 15 years. Deregulation and reform in preparation of the
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 the overarching policy priority. In this
context, we would like to emphasize that it is in the interest of the whole European Union that the Euro
Area enlargement takes place in accordance with the clear set of well known rules while the criteria
are applied, in line with the Treaty provisions, on 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, the Euro Area membership would fasten 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 further increased. Higher growth and stronger policy coordination on the EU level will
also strengthen the social dimension of enlargement.