Commission Opinion on Estonia's application for Membership of the European Union
Date: 1997-07-15
Institutions: European Commission
Subjects: EU relations, Estonia, accession to the European Union, economic situation, political situation

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels,  15.07.1997 
COM(97) 2006 final 

Commission Opinion 

on Estonia's Application 

for Membership of the European Union 

Contents 

A. INTRODUCTION 

Page 

a)  Preface 

The Application for Membership 
The Context of the Opinion 
The Context of the Opinion 

b)  Relations Between the European Union and Estonia 

Historical and Geopolitical  Context 
Estonia's Position Concerning the European Union 
Contractual  Relations 
The Pre-Accession  Strategy 
Trade Relations 
General  Evaluation 

m 

B. CRITERIA FOR MEMBERSHIP 

1.  Political Criteria 

1.1  Democracy  and the Rule of Law 

Parliament and Legislative Powers: Structure 
Functioning of Parliament 
The Executive:  Structure 
Functioning  of the Executive 
The Judiciary:  Structure 
Functioning  of the Judiciary 

1.2  Human Rights and Protection of Minorities 

Civil and Political  Rights 
Economic, Social and Cultural Rights 
Minority  Rights and the  Protection of Minorities 

1.3  General  Evaluation 

2.  Economic Criteria 

2.1  The Economic  Situation 

Background 
Liberalisation 
Stabilisation  of the Economy 
Structural  Change 
Financial  Sector 
Economic and Social  Development 

2.2  The Economy in the Perspective of Membership 

Introduction 
The Existence of a Functioning Market Economy 
The Capacity  to Cope with Competitive Pressure and Market Forces 
Prospects and Priorities 

2.3  General  Evaluation 

3.  Ability to Assume the Obligations of Membership 

3.1  Internal Market Without  Frontiers 

The Four  Freedoms 

- General  Framework 
- Free Movement of Goods 
- Free Movement of Capital 
- Free Movement of  Services 
- Free Movement of Persons 
- General  Evaluation 

Competition 
3.2  Innovation 

Information  Society 

Education, Training and Youth 
Research and Technological  Development 
Telecommunications 
Audio-visual 

3.3  Economic and Fiscal  Affairs 

Economic and Monetary Union 
Taxation 
Statistics 

3.4  Sectoral Policies 

Industry 
Agriculture 
Fisheries 
Energy 
Transport 
Small and Medium  Enterprises 

3.5  Economic and Social Cohesion 
Employment and Social  Affairs 
Regional Policy and Cohesion 
3.6  Quality of Life and  Environment 

Environment 
Consumer  Protection 
3.7  Justice and Home  Affairs 
3.8  External  Policies 

Trade and International Economic Relations 
Development 
Customs 
Common Foreign and Security Policy 

3.9  Financial  Questions 
Financial  Control 
Budgetary  Implications 

4.  Administrative  Capacity  to  Apply  the  Acquis 

4.1  Administrative  Structures 
4.2  Administrative  and Judicial  Capacity 
4.3  General  Evaluation 

C. SUMMARY AND CONCLUSION 

Annexes 

Composition  of Parliament 
Single Market:  White Paper Measures 
Statistical  Data 

A.  I N T R O D U C T I ON 

a)  Preface 

The Application for Membership 

Estonia  presented  its  application  for  membership  of  the  European  Union  on  24 
November  1995,  and  the  Council  of  Ministers  decided  on  4  December  1995  to 
implement  the  procedure  laid  down  in  Article  0  of  the  Treaty,  which  provides  for 
consultation of the Commission. 

That  is  the  framework  in  which  the  Commission  submits  the  present  Opinion, 
responding  to  the  request  of  the  European  Council  in  Madrid  in  December  1995  to 
present the Opinion as soon as possible after  the conclusion of the  Intergovernmental 
Conference, which commenced in March  1996 and concluded in June 1997. 

The Context of the Opinion 

The  Estonian  application  for  membership  is  being  examined  at  the  same  time  as 
applications  from  nine other associated  countries. Estonia's  accession  is to be  seen  as 
part  of  an  historic  process,  in  which  the  countries  of  Central  and  Eastern  Europe 
overcome  the  division  of the continent which has  lasted  for  more than  40  years,  and 
join the area of peace, stability and prosperity created by the Union. 

The European Council in Copenhagen in June  1993 concluded that: 

"The  associated  countries  in  Central  and  Eastern  Europe  that  so  desire  shall  become 
members  of  the  Union.  Accession  will  take  place  as  soon  as  a  country  is  able  to 
assume  the  obligations  of  membership  by  satisfying  the  economic  and  political 
conditions. Membership requires: 

-  that  the  candidate  country  has  achieved  stability  of  institutions  guaranteeing 
democracy,  the  rule  of  law,  human  rights  and  respect  for  and  protection  of 
minorities; 

- the existence of a functioning  market economy, as well as the capacity to cope 
with competitive pressure and market forces within the Union; 

-  the  ability  to  take  on  the  obligations  of  membership,  including  adherence  to 
the aims of political, economic and monetary union. 

The  Union's  capacity  to  absorb  new  members,  while  maintaining  the  momentum  of 
European integration,  is also an important consideration  in the general interest of both 
the Union and the candidate countries". 

This  declaration  spelled  out  the  political  and  economic  criteria  for  examining  the 
accession requests of the associated countries of Central and Eastern Europe. 

The  European  Council  in  Madrid  in  December  1995  referred  to  the  need,  in  the 
context  of  the  pre-accession  strategy,  "to  create  the  conditions  for  the  gradual, 
harmonious integration of the applicant countries, particularly through: 

- 

the development of the market economy, 

- 

the adjustment  of their administrative structure, 

- 

the creation of a stable economic and monetary  environment". 

In  its  Opinion,  the  Commission  analyses  the  Estonian  application  on  its merits,  but 
according  to  the  same  criteria  as  the  other  applications,  on  which  it  is  delivering 
Opinions at the same time. This way of proceeding respects the wish, expressed by the 
European  Council  in Madrid,  to  ensure  that the  applicant  countries  are treated  on  an 
equal basis. 

In addition to the individual  Opinions the Commission  is presenting  separately to the 
Council, in the framework  of its communication "Agenda 2000", a general  assessment 
of  the  accession  requests,  and  its  recommendations  concerning  the  strategy  for 
successful  enlargement  of the Union. At the same time, it is presenting  an  evaluation 
of the impact of enlargement on the Union's policies. 

The Contents  of the  Opinion 

The structure of the Opinion takes account of the conclusions of the European  Council 
in Copenhagen. It: 

-  describes  the relations  up to now between  Estonia  and the Union,  particularly 
in the framework  of the association  agreement; 

-  analyses  the  situation  in  respect  of  the  political  conditions  mentioned  by  the 
European  Council  (democracy,  rule  of  law,  human  rights,  protection  of 
minorities); 

-  assesses  Estonia's  situation  and  prospects  in  respect  of  the  economic 
conditions  mentioned  by  the  European  Council  (market  economy,  capacity  to 
cope with competitive pressure); 

-  addresses  the  question  of  Estonia's  capacity  to  adopt  the  obligations  of 
membership,  that  is  the  acquis  of  the  Union  as  expressed  in  the  Treaty,  the 
secondary  legislation, and the policies of the Union; 

-  makes  finally  a  general  evaluation  of  Estonia's  situation  and  prospects  in 
respect  of  the  conditions  for  membership  of  the  Union,  and  a  recommendation 
concerning accession negotiations. 

In assessing  Estonia  in respect of the economic criteria and its capacity to assume the 
acquis,  the  Commission  has  included  a  prospective  assessment;  it  has  attempted  to 
evaluate the progress  which  can reasonably  be expected  on the part  of Estonia  in the 
coming  years, before  accession,  taking  account  of  the  fact  that  the  acquis  itself  will 
continue  to  develop.  For  this  purpose,  and  without  prejudging  the  actual  date  of 
accession, the Opinion is based on a medium-term time horizon of approximately  five 
years. 

During  the  preparation  of  the  Opinion,  the  Commission  has  obtained  a  wealth  of 
information  on  Estonia's  situation  from  the  Estonian  authorities,  and  has  utilised 
many  other  sources  of  information,  including  the  member  states  and  numerous 
international organisations. 

b)  Relations Between the European Union and Estonia 

Historical and Geopolitical  Context 

Estonia  shares  its  eastern  border  with  Russia  and  its  southern  border  with  Latvia.  It 
has  an area of  45,000  km  and  a population  of  1.5  million.  Across  the  Finnish  Gulf 
and the Baltic Sea Estonia has had historically close links to Finland and  Sweden. 

From  the  early  13th  century  Estonia  experienced  seven  centuries  of  foreign  rule,  by 
Denmark, the German Teutonic Knights, Poland, Sweden and from  1710 Russia.  The 
19th century  brought  an era of national  awakening  and development  of  civic  society. 
Estonia  declared  its independence  on 24 February  1918, and  successfully  defended  it 
against  Soviet  forces.  On  2  February  1920  the  Estonian-Russian  Peace  Treaty  was 
signed in Tartu. 

The  Republic  of  Estonia  became  a  member  of  the  League  of  Nations  in  1921.  The 
Estonian  Constitution  established  Estonia  as  a  democratic  parliamentary  republic, 
where  supreme  legislative  power  was exercised  through the  100-member  Parliament, 
the Riigikogu.  During the  1930s an authoritarian regime was established  which led to 
the adoption of a new Constitution  in  1937.  Estonian  society and economy  as well as 
the  national  culture  developed  rapidly. 
The  economy  was  comprehensively 
reorganised  and  reoriented  towards  the  United  Kingdom,  Germany  and  the  Nordic 
countries.  Estonia was annexed  by the  Soviet Union  in June  1940, then  occupied  by 
Germany in  1941-44. 

After  the war  Soviet  rule was re-established,  though not recognised  by  most  Western 
States. 
It  was  accompanied  by  mass  deportations  and  settlement  of  Russians.  In 
March  1991  a  referendum  gave  clear  support  to  restoration  of  Estonia  as  an 
independent  republic.  Independence  was declared  in August  1991.  The  last  Russian 
military forces withdrew from  Estonia in August  1994. 

After  the  re-establishment  of  independence  a  further  referendum  in  June  1992  gave 
support  to  a  new  constitution,  and  the  first  parliamentary  elections  were  held  in 

September  1992.  Since then, despite frequent  changes of government  coalition,  there 
has been consensus on development of a liberal market economy. 

Estonia's Position Concerning the European  Union 

Since restoring  independence  in  1991, Estonia has actively pursued  a policy  aimed  at 
strengthening  political,  economic  and  social  ties  with  the  European  Union  and 
anchoring  its  security  and  stability  in  trans-Atlantic  security  structures.  Estonia 
applied for EU membership on 28 November  1995. 

The strong determination  of Estonia to achieve European integration  and accession to 
the  EU  was  underlined  by  President  Men  ,  in  his  speech  at  the  French  Institute  of 
Foreign Relations on  13 February  1997: 

"Once the European Union has set the applicants for membership a definite  threshold, 
it is in the interest of Estonia like any other European country to meet those criteria in 
all  respects.  We  do  not  need  concessions,  which  would  dilute  the  essence  of  the 
Union  and  make  it  similar  to  many  impotent  world  organisations.  Estonia,  even 
though  she  has  a  taste  of  blood  in  her  mouth,  already  meets  a  lot  of  legislative  and 
economic  requirements  set  by  the  European  Union.  According  to  an  EBRD 
assessment  Estonia  is  one  of  the  fastest  and  most  successful  reformers  among  the 
post-communist  states  And  it  is not  only  economic  criteria  I am  talking  about.  In 
the year  1997 we  can again  enjoy  a sweet privilege  in Estonia that we were  deprived 
of  for  such  a  long  time:  we  live  in  an  open  society  where  there  is  constitutionally 
guaranteed  freedom,  where the military  are strictly under civilian  control  and where a 
viable non-governmental  sector prospers.  Democracy functions  in Estonia." 

Contractual  Relations 

Diplomatic  relations  between 
the  European  Communities  and  Estonia  were 
established  on 27 August  1991.  A Trade and Co-operation  Agreement was signed  on 
11 May  1992 and  entered  into  force  in  1993.  At present, the basis of the  contractual 
relationship  between  the  EU  and  Estonia  is  the  Free  Trade  Agreement  which  was 
signed  on  18 July  1994  and  entered  into  force  on  1 January  1995.  This  preferential 
agreement  abolishes  duties  and  quantitative  restrictions  between  Estonia  and  the 
European  Community,  with  the  exception  of  Estonian  exports  into  the  EU  of  some 
specified  products  (agricultural  products  and  fisheries)  for  which  preferential 
treatment  is  granted.  The  Free  Trade  Agreement  further  comprises  provisions 
concerning  payments,  competition  and  other  economic  provisions, 
including 
approximation  of legislation. 

A Europe Agreement  between the European  Communities  and Estonia was  signed  on 
12 June  1995.  Estonia  ratified  the  Agreement  on  1 August  1995.  It  will  enter  into 
force on completion of ratification  by all EU Member States. 

Once  it  enters  into  force,  the  Europe  Agreement  will  be  the  legal  basis  for  relations 
Its  aim  is  to  provide  a  framework  for  political 
between  Estonia  and  the  Union. 

dialogue, promote  the expansion  of trade and economic  relations between the parties, 
provide  a basis  for  Community  technical  and  financial  assistance, and  an  appropriate 
framework  to  support  Estonia's  gradual  integration  into the Union.  The  institutional 
framework  of  the  Europe  Agreement  provides  a  mechanism  for  implementation, 
management  and  monitoring  of  all  areas  of  relations.  Sub-committees  examine 
questions  at  a  technical  level.  The  Association  Committee,  at  senior  official  level, 
provides  for  in-depth  discussion  of  matters  and  often  solutions  to  problems  arising 
under the Europe Agreement.  The Association Council, at Ministerial level, examines 
the  overall  status  of  and  perspectives  for  relations  and  provides  the  opportunity  to 
review Estonia's progress on preparation for accession. 

The Pre-Accession  Strategy 

Implementation  of the Free  Trade Agreement and the White Paper 

The Free  Trade  Agreement  is fully  functioning,  according  to the agreed  timetable.  A 
new  Protocol  entered  into  force  on  1  April  1997  allowing  for  Pan-European 
cumulation  of rules of origin.  Implementing  rules on undertakings  and state aid have 
been prepared  and  agreed.  In  order  to make the necessary  adaptations  following  the 
enlargement  of  the  Union  in  1995  as  well  as  the  conclusion  of  the  Uruguay  Round, 
autonomous  measures  were  adopted  by  the  Community  for  agricultural  products, 
processed agricultural products and fishery  products.  An additional Protocol has been 
prepared to incorporate these measures in the Agreement.  Other main issues discussed 
in the context  of the Free Trade Agreement are: approximation  of legislation  and pre-
accession  strategy,  macro-economic  issues,  customs  cooperation,  certification  and 
standardisation  issues  and  trade  issues.  No  serious  issues  of  conflicting  views  have 
occurred. 

The Commission's  White Paper of  1995 on the Internal  Market  set out the  legislation 
which  the  candidate  countries  would  need  to  transpose  and  implement  in  order  to 
apply the acquis,  and identified  elements essential to the implementation  of the single 
market (known as Stage I measures) which would need priority attention.  In response 
to the White Paper the Government drew up in June  1996 an Activity Plan for  Joining 
the  European  Union.  This  document  includes  a  detailed  list  of  all  legislative 
initiatives necessary  for the implementation  of the acquis.  For each legal act, the Plan 
states  the  main  responsible  ministry,  the  state  of  the  existing  legislation  as  well  as 
tentative  deadlines  for  the  approximation  work.  The  Government  Activity  Plan 
currently  includes  all  Stage I measures, and the incorporation  of  Stage II measures  is 
being established. 

Comprehensive  measures  in  anticipation  of  membership  have  been  taken,  and 
administrative  structures  have  been  established  to  ensure  coordination  of  integration 
policy.  A  Ministerial  Commission,  chaired  by  the  Prime  Minister,  formulates  the 
general policy and submits proposals for the government.  It is supported by a Council 
of Senior  Civil  Servants and an Office  of European Integration, which reports directly 
to  the  Prime  Minister.  A  European  Affairs  Committee  has  been  established  in  the 
Parliament. 

The  EC/Estonia  Free  Trade  Agreement  functions  well.  No  disagreements  over 
implementation  have  arisen.  Its  functioning  already  takes Estonia  some  of the  way 
towards  the  enhanced  level  of cooperation  with the EU which will  be required  when 
the Europe Agreement comes into force. 

Structured  Dialogue 

Estonia  has  participated  in" the  Structured  Dialogue  since  the  Cannes  European 
Council in June  1995. 

Phare 

Technical  and financial assistance from the EU to Estonia commenced under the  1991 
Tacis  programme  and  has  since  1992  been  extended  through  the  Phare  programme. 
During  the  period  1992-1997,  Phare  provided  over  152  MECU  to  Estonia.  The 
allocation in  1997 is 32 MECU (excluding Cross Border). 

The  main  targets  have  been  establishment  of  the  legal  and  institutional  framework, 
strategy  formulation  in  key  areas  of  the  reform  programme  and  support  for  export 
promotion,  infrastructure  development  as well  as  restructuring  and  privatisation  and 
third pillar issues. 

Phare  has  had  a  particular  impact  on  privatisation  of  enterprises  and  land,  as  well 
reform  of the tax administration and customs. 

Participation  in Community Programmes 

Estonia will  become  eligible to participate in Community programmes from  the entry 
into force  of the Europe Agreement.  It has already applied to participate in:  Socrates, 
Leonardo,  SAVE  II,  LIFE,  Raphael,  Kaleidoscope,  MEDIA  II  and  Ariane.  It  has 
earmarked budgetary funds  to cover its financial obligations. 

Trade  Relations 

Since  1991 the trade pattern of Estonia has swiftly  changed  from  an almost  exclusive 
orientation  towards  the  CIS  to  a  strong  integration  with  the  EU.  Following  the 
accession  of  Finland,  Sweden  and  Austria  as well  as the  entry  into  force  of  the  Free 
Trade  Agreement  between  the  Community  and  Estonia,  54%  of  Estonia's  exports 
were directed to the EU in  1995, while 66% of Estonia's imports originated in the EU. 

Estonia's  most  important  trading  partners  within  the  EU  are  Finland  (29.2%  of 
imports and  18.4% of exports), Germany and Sweden . Estonia's imports from  the EU 
consist  mainly  of  machinery  and  electrical  equipment,  agricultural  products  and 
textiles  . Estonia's main exports into the EU are wood products and textiles. 

Estonia  has  a  growing  trade  with  other  candidate  countries,  mainly  Latvia.  A  Free 
Trade  Agreement  with Latvia and  Lithuania covers trade  in all  goods  including,  from 

1 January  1997, also agricultural products. Estonia aims at membership of the Central 
European Free Trade Association (CEFTA). 

General Evaluation 

Relations with the EU have developed well since Estonia regained its independence. 
There have been no disagreements over implementation of the Free Trade Agreement 
and free trade has virtually been achieved. Cooperation will be further enhanced when 
the Europe Agreement with Estonia enters into force. 

B.  C R I T E R IA  F OR  M E M B E R S H IP 

1.  Political  Criteria 

The European  Council  in Copenhagen  decided  on a number  of "political" criteria  for 
accession  to be  met  by the candidate  countries  in  Central  and  Eastern  Europe.  These 
countries  must  have  achieved  "stability  of  institutions  guaranteeing  democracy,  the 
rule of law, human rights and respect for and protection of minorities". 

In carrying out the assessment required  in this connection, the European  Commission 
has  drawn  on  a  number  of  sources  of  information:  answers  given  by  the  Estonian 
authorities  to  the  questionnaire  sent  to  them  by  Commission  staff  in  April  1996, 
bilateral  follow-up  meetings,  reports  from  Member  States'  embassies  and  the 
Commission's  delegation,  assessments  by  international  organisations  (including  the 
Council  of  Europe  and  the  OSCE  (Organisation  for  Security  and  Cooperation  in 
Europe), reports produced by non-governmental  organisations, etc. 

The  following  assessment  involves  a  systematic  examination  of  the  main  ways  in 
which  the  public  authorities  in  each  of  the  candidate  countries  are  organised  and 
It  does  not 
operate,  and  the  steps  they  have  taken  to  protect  fundamental  rights. 
confine  itself  to  a  formal  description  but  seeks  to  assess  the  extent  to  which 
democracy and the rule of law actually operate. 

This assessment relates to the situation in June  1997. It does not examine in detail any 
changes  which  have  taken  place  in the  past  or  which  may  come  about  in  the  future, 
though  it generally  takes  account  of any  stated  intention to reform  a particular  sector. 
The  situation  of  the  government  is  mentioned  here  only  in  passing:  it  will  be 
examined in greater depth in chapter 4. 

1.1 

Democracy  and  the  Rule  of  Law 

Under  the  new  Constitution  adopted  by  referendum  in  June  1992,  Estonia  is  a 
parliamentary  democracy.  The  institutions  function  correctly,  the  various  powers 
being  mindful  of  the  limits  of  their  competence  and  willing  to  cooperate  with  each 
other. 

Parliament  and  Legislative Powers:  Structure 

The  Parliament  -  the  Riigikogu  -  is  unicameral  and  comprises  101  members  elected 
for  four  years according  to a proportional  representation  system  (a minimum  score of 
5% is needed to  qualify  for  seats). No provisions exist  for  any  specific  representation 
of the minorities, though  six members of the party  representing  the  Russian-speaking 
minority have held seats in Parliament since 1995. 

The President  of the Republic can dissolve Parliament  in three circumstances, namely 
if  a  government  bill  is  thrown  out  by  the  Riigikogu,  if  the  latter  defeats  the  Prime 

Minister  or the  Government,  and  if it fails  to  adopt the budget within  two  months  of 
the start of the budget year. 

Members  of  Parliament  enjoy  the  conventional  immunities.  The  opposition's  role  in 
the  institutions  and  its  participation  in  its  workings  are  recognised  in  Estonia,  in 
particular  when  parliamentary  committees  of  enquiry  are  set  up.  Four  such 
committees  are currently  active, two of them dealing  with corruption  and  monitoring 
the  secret  services.  These committees  comprise  an equal  number  of  government  and 
opposition members. Three of the committees are chaired by opposition MPs. 

A  genuine  multi-party  system  exists  in  Estonia  (seven  electoral  coalitions  and  nine 
political  parties  fielded  candidates  at  the  last  elections  in  1995).  While  establishing 
parties  may  be  easy, it  should  be  noted  that non-citizens  cannot  become  members  of 
them.  Political  parties  receive  funds  from  the  State  budget  on  the  basis  of  their 
representation  in  Parliament.  Each  parliamentary  group  is  allocated  offices  and  staff 
free  of charge. 

Parliament  exercises  the  legislative  power  and  shares  the  right  of  initiative  with  the 
President  of  the  Republic  (only  as  regards  amendments  to  the  Constitution)  and  the 
Government.  The  President  of  the  Republic  can  ask  the  Riigikogu  for  a  second 
reading. If Parliament votes the same way as before, the President can refer the matter 
to the National  Court. The President has done so six times and been vindicated on five 
of  these  occasions.  Some  matters  are  the  exclusive  domain  of  the  regulatory  power 
and Parliament  has no right to delegate  its legislative power to the Government,  even 
on a temporary basis. 

Parliament can decide to organise référendums on any subject it deems fit. 

Functioning of Parliament 

The elections  in  September  1992 and March  1995 were free  and fair,  resulting, in the 
latter case, in a change of government  (see annex for the results of the last elections in 
March  1995). 

Parliament  functions  satisfactorily,  its prerogatives  are  respected,  and  the  opposition 
plays a full  part in its work. 

The Executive:  Structure 

The  President  of the  Republic  is elected  by a two-thirds  majority  of Parliament  for  a 
four-year  term. If he/she cannot command that majority  in the first two ballots, a third 
ballot  takes  place,  with  the  representatives  of  the  local  authorities  (273  persons) 
voting along with the members of the Riigikogu. The President has the standard  duties 
of head of State. 

The  Prime  Minister  is  appointed  by  the  President  but  must  receive  Parliament's 
endorsement  before  he/she  can  form  a  government,  which  must  not  comprise  more 
than  14  ministers.  At  the  Prime  Minister's  request,  the  President  has  the  power  to 

dismiss  ministers  (under  Articles 78  and  90  of  the  Constitution),  who  are  also 
individually accountable to Parliament. 

Administratively,  the  country  is  divided  into  15  districts  ("maakond")  headed  by 
Governors appointed  for five-year terms by the government.  Governors have the task 
of  coordinating  the  work  of the  various  government  departments  in  the  districts  and 
overseeing  that  of the  local  authorities. The  Governors'  work  is  financed  directly  by 
the State budget. 

Estonia has only one level of local authority, the municipality (of which there are 254, 
comprising  45  cities/towns  and  209 
for 
administering  the  main  public  services  locally.  Their  governing  bodies  are  elected 
directly  by  universal  suffrage  every  three  years.  Local  authorities  have  budget 
autonomy  and  tax-raising  powers. Their  work  is overseen  by both the  governors  and 
the "Chancellor of the Law". 

rural  municipalities), 

responsible 

Estonia  introduced  a  civil  service  code  which  guarantees  government  officials' 
employment 
the 
administration's  decisions is guaranteed by Article 44 of the Constitution, which gives 
citizens access to the administration's documents, except those of the secret services. 

in  January  1996.  The  public's 

information  on 

right 

to 

The  army,  secret  services* and police  are under  the  control  of the  civil  authorities,  as 
demonstrated  by  the  President's  dismissal  of  the  Commander-in-Chief  of  the  armed 
forces  in late  1995. 

Functioning  of the  Executive 

The central institutions of the State function  correctly. 

Local authorities in Estonia enjoy  a large measure of autonomy. 

Estonia's public service has a shortage of qualified  personnel, in particular in the legal 
field, and suffers  from  competition from the better-paid private sector. 

The  police's  effectiveness  has  sometimes  been  called  into  question  given  the  rise  in 
organised  crime  and  in the  fight  against  corruption.  Major  efforts  are currently  being 
made to reorganise and modernise the force. 

The secret services fall under the control of a parliamentary committee of enquiry. 

The Judiciary:  Structure 

The  independence  of  Estonia's judiciary  system  is  guaranteed.  Judges  are  appointed 
for  life  by  the  President  of  the  Republic  on  a proposal  from  the  National  Court  and 
can  only  be  dismissed  if they  are  found  guilty  of  a crime.  Subject  to the  approval  of 
the  President  of  the  Republic,  the  National  Court  is  competent  to  hear  complaints 
against  magistrates  of  lower  courts  while  Parliament  hears  complaints  against judges 
of the National  Court on referral  by the "Chancellor of the Law". 

10 

The  department  of  public  prosecutions  continues  to  fall  under  the  authority  of  the 
Minister of Justice under the  1993 Law. 

Administrative acts are scrutinised  by the "Chancellor of the Law", who is elected  by 
Parliament  for  seven  years  on  a  proposal  from  the  President  of  the  Republic.  The 
"Chancellor  of  the  Law"  checks  the  constitutional  conformity  of  government 
measures  and  local  authority  acts  and  can  intervene  where  he  deems  they  are 
unconstitutional.  Where  the  authority  refuses  to  amend  them, he can  refer  the  matter 
to the National  Court. 

Estonia  has  no  ombudsman.  A  government  bill  introducing  one  is  currently  being 
considered. 

Vetting  for  constitutionality  is  the  task  of  the  National  Court,  Estonia's  supreme 
judicial  authority,  which  hears appeals  against the judgments  of the  lower  courts  and 
acts as Constitutional  Court. Its President is elected by Parliament on a proposal  from 
the  President  of  the  Republic.  Its  members  are  appointed  by  the  President  of  the 
National  Court  himself.  Matters  can  be  brought  before  it  by  the  President  of  the 
Republic,  the  "Chancellor  of  the  Law"  or  private  citizens.  The  National  Court 
scrutinises laws for conformity  with the Constitution and treaties. 

Functioning of the Judiciary 

The major  difficulties  facing  the justice system relate to uncertainty  regarding the  law 
applying  in many  areas of legislation  and the inexperience  of the magistracy  (90% to 
95% of judges have been replaced since independence). 
In  Estonia's  institutions  the  National  Court  plays  an  important  role  in  upholding 
democracy  and  the  rule  of  law.  Petitions  addressed  to  it  are  rising  in  number,  even 
though most of them are groundless. 

1.2  H u m an  Rights  and  the  Protection  of  Minorities 

Estonia has set in place a number of regulations to ensure observance of human  rights 
and  the  rights  of  minorities.  Various  international  conventions  are  also  applicable, 
above  all  the  European  Convention  on  Human  Rights  and  its  main  additional 
protocols. In accordance with Article F of the TEU, this collection  of texts  forms  part 
of the acquis: any country wishing to join the Union must have ratified  them. 

Estonia, which  has been  a member  of the Council of Europe  since May  1993,  ratified 
the European Convention on Human Rights and most of its additional  protocols  (with 
the exception  of  Protocol  6  on  the  death  penalty)  in  April  1996.  It  has  also  granted 
private  individuals the right  to appeal  to the European  Court of Human  Rights  if they 
consider that their rights under that Convention have been violated. 

Among  other  international  conventions  protecting  human  rights  and  minorities, 
Estonia  has  ratified  the  Convention  against  the  use  of  torture  and  the  framework 
convention on minorities. It has not signed the European  Social Charter. It has  ratified 

11 

the  main  conventions  on  human  rights  concluded  under  the  aegis  of  the  United 
Nations. 
Under  Article  123 of the  Constitution,  properly  ratified  treaties  take  precedence  over 
national law. 

Civil and Political Rights 

Access to the judicial  system  is to a large extent guaranteed  in Estonia. Although  the 
Criminal Code provides for legal aid, it is not always available in practice. 

Capital  punishment  has  not  been  abolished  in  Estonia,  where the  last  execution  was 
carried  out  in  September  1991.  The  President  of  the  Republic  has  declared  a 
moratorium  on  the  application  of  the  death  penalty  and  the  Minister  of  Justice  has 
undertaken  to  abolish  it  before  1  February  1998.  In  November  1996,  the  Estonian 
Government  also  adopted  a  new  draft  penal  code,  since  presented  to  the  Riigikogu, 
that makes no provision for the death penalty. 

Protection against  arbitrary  arrest appears to be guaranteed  in so far  as police  custody 
is limited to 48 hours, after  which any further  detention must be decided by a court. 

All citizens over  18 years old can vote in national  elections. However,  local  elections 
are  open  to  all  persons  legally  resident  in  Estonia  though  only  Estonian  citizens  can 
stand as candidates. 

Freedom  of  association  is  guaranteed,  as  demonstrated  by  the  large  number  of 
associations  (4 000  associations  and  200  foundations  existing  currently).  While  non-
citizens may not join political parties, they are free to belong to associations. 

Freedom of assembly is also guaranteed. 

Freedom  of  expression  is  shown  by a free and  vigorous  press  (cf.  the  role  played  by 
the  press  in  denouncing  illegal  telephone-tapping,  which  led  to  the  fall  of  the 
Government  in  October  1995). Pluralism  in  the audio-visual  media  is  ensured  by  the 
existence,  alongside  the public  radio  station  and  the public  television  channel,  of  29 
private  radio  stations  and  five  private  TV  channels  (two  national  and  three  local).  A 
Radio  and  TV  Broadcasting  Council  runs  the  public  channels  and  appoints  their 
managers. 

The right to property  is enshrined  in the Constitution  (Article  32) and  former  owners 
have  received  compensation  for  property  expropriated  under  the  Communist  regime, 
although  some  complaints  have been filed on the level  of compensation  granted.  The 
courts  also  closely  respect 
the  right  to  property,  as  is  shown  for  example  by  the 
decision  of the National  Court  in  1995 to  condemn the Government's  nationalisation 
of property  formerly  held  by the  Soviet  authorities, which they  considered  should  be 
returned to the original owners. 

Respect  for  privacy  is  guaranteed  by  the requirement  for  a warrant  to  be  issued  by a 
public prosecutor or a judge before  any search can be made. 

12 

In February  1997 Estonia ratified the Geneva Convention on refugees  and Parliament 
adopted a law  implementing  the Convention in the country.  This major step forward 
puts an end to the previous  situation in which asylum seekers were treated as illegal 
immigrants and frequently detained under harsh conditions. 

Some cases  of  ill-treatment,, suffered  in particular by prisoners remanded in custody, 
have  been  recorded.  Estonia  has  undertaken  a  modernisation  programme,  which  is 
coming up against the relatively meagre financial resources available. 

Economic. Social and Cultural Rights 

Article  28  of  the  Constitution  recognises  the  right  to a minimum  income  and  social 
security. 

Trade  union  freedoms  are  guaranteed  without  restriction  in  Estonia,  where  two 
national  federations  unite most union members. Almost  30% of workers are members 
of a trade union. 

The right to strike is recognised  by Article 29 of the Constitution,  but is prohibited in 
the civil  service (State and local authorities), the armed forces, the justice  system, the 
emergency  services  and  in  the  private  sector  when  negotiations' are  under  way  on  a 
collective agreement or its validity. 

Freedom of education and religion are guaranteed in Estonia. 

Minority Rights and the Protection of Minorities 

When it comes to assessing the situation of minorities in Estonia, a distinction  should 
accordingly  be  made  between  rights  and  protection  attendant  on  membership  of  an 
ethnic  and  cultural  community  irrespective  of the nationality  held,  and  differences  in 
personal  status  deriving  from  the  fact  of  not  holding  Estonian  citizenship.  In  this 
respect, the definition  of the concept of minority adopted by Estonia in its  declaration 
when  depositing  the  act  of  ratification  of  the  Council  of  Europe's  framework 
convention on minorities is not relevant and the situation of non-citizens also needs to 
be taken into consideration in this assessment. 

Around  35%  of  the  population  of  Estonia  consists  of  minorities,  including  non-
citizens,  made  up  of  28%  Russians,  2.7%  Ukrainians  and  1.5%  Belorussians.  The 
minorities  live  mainly  in Tallinn  and the north-eastern  quarter  of the country  (Narva-
Sillamae  region),  where  they  may  account  for  up  to  95%  of  the  total  population 
(Narva). Of that  35%, a group of 23% (numbering around 335 000, mainly  of Russian 
origin)  are  not  Estonian  citizens,  8%  having  chosen  Russian  nationality  and  13% 
former  Soviet  citizens  now  without  any  nationality.  The  Soviet  Union's  post-1945 
policy  of  encouraging  the  settlement  of  Russian  speakers  in  Estonia  is  largely 
responsible  for  the present  situation  (88.2% Estonians and  8.2% Russians  in the  1934 
census,  compared  with  74.6%  Estonians  and  20.1% Russians  in  1959,  and  64.7% 
Estonians and 27.9% Russians in  1979). 

13 

Under  the  Law  of  April  1995,  applicants  for  Estonian  nationality  must  sit  an 
examination  to  test  their  command  of the Estonian  language  and  their  knowledge  of 
the country's history and institutions. 

Since  1992,  approximately  90.000  applicants  have  acquired  Estonian  nationality. 
Under  the  new  naturalisation  procedure  introduced  by  the  Law  of  April  1995,  the 
number  of naturalisations  per  year has fallen  (around  7 000  should  be  naturalised  in 
1997 according to the Estonian authorities'  forecasts).  The number  of candidates  also 
seems  relatively  low.  At  this  rate,  a  large  percentage  of  Estonia's  population  will 
continue to remain foreign or stateless for a long time. 

This  situation  can be explained  by  several factors.  The examination  system  has  often 
been held responsible,  its difficulty  being blamed  for  the small number  of applicants. 
The cost of enrolling  for  the  examination  is also relatively  high.  In addition,  the  rule 
whereby  candidates  must  wait  one  year  after  submitting  their  applications  for 
naturalisation  until  they  can  sit  the  test  is  an  obstacle  which  is  perhaps  no  longer 
entirely justifiable  given  the  small  number  of  applications  currently  in  the  pipeline. 
Not  having  Estonian  nationality  may  also  have  been  seen  as an  advantage  in  certain 
cases  (no  liability  for  compulsory  military  service  in  Estonia),  which  may  help  to 
explain the small number of applications. 

The  Estonian  authorities  have  introduced  some  improvements.  New  rules  applying 
since  1  January  1997  have  made  it  easier  to  pass.  At  all  events,  the  success  rate 
recorded  (between  80  and  90%)  seems  satisfactory.  Since  1995  too,  the  written 
examination  in  Estonian  has  been  waived  for  elderly  persons  and  they  no  longer  sit 
the oral test. 

The main weakness in the present system lies in the inadequate resources available  for 
Russian speakers to learn Estonian in order to sit the naturalisation test. In areas where 
Russian  speakers  are  in the majority,  the number  of teachers  of Estonian  is very  low 
and the cost of enrolling for courses is high. Much effort  is still required  in this area if 
the  rate  of  naturalisations  is  to  be  kept  up  in  the  future.  Since  1996  the  PHARE 
programme  has  provided  support  for  measures  undertaken  by 
the  Estonian 
Government  (a  programme  costing  ECU  1.4  million  was  launched  in  December 
1996). 

The  Estonian  authorities  should  consider  means  to  enable  stateless  children  born  in 
Estonia to be naturalised  more easily, particularly  with a view to the impending  entry 
into  effect  of  the  European  Convention  on  nationality  agreed  within  the  Council  of 
Europe. 

The  1993  Law  lays  down  clear  rules  on  the  status  of  "non-citizens".  "Foreigners' 
passports" are being issued and should resolve some practical difficulties,  in particular 
as regards freedom  of movement. 

The  Estonian  authorities  have  systematically  issued  temporary  residence  permits 
(valid  for  five  years)  to  all  foreigners,  including  residents  in  Estonia  prior  to 

14 

1 July  1990.  Issue  of  permanent  residence  permits  would  have  had  a  much  more 
positive  impact  and  would  have  carried  more  practical  benefits,  such  as the  right  to 
invite  family  members  or  friends  to  Estonia.  However,  the Estonian  authorities  have 
undertaken  to  renew  such  permits  automatically  on  expiry  and  the "Government  has 
tabled  an  amendment  in  Parliament  to  the  law  on  foreigners  so  some  can  be  given 
permanent residence permits as from 1998. 

Foreigners are subject  to some restrictions: Estonian citizenship is necessary  to sit on 
the boards of some companies  or to belong to a political  party. While only  Estonians 
can be civil servants under the Law of January  1995, transitional provisions have been 
adopted to allow non-nationals to keep their posts while applications for  naturalisation 
are in progress (e.g. in the police force). Lastly, non-citizens do have the right to vote 
in  local  elections,  a  right  enjoyed  in  few  countries  in  Europe  today  and  which 
effectively  contributes  towards  the  integration  of  non-citizens  and  the  protection  of 
their rights. 

On  the  whole,  the  rights  of  the  Russian-speaking  minority  (both  with  Estonian 
nationality  and  without)  are  observed  and  safeguarded.  Furthermore,  no  major 
problems affect  relations between Estonians and the Russian minority. 

There are no rules  granting  minorities  special representation  in Parliament.  However, 
six members belonging to the party representing the interests of the  Russian-speaking 
minority  sit  in the  Riigikogu.  Similarly, under the voting  rights  granted  to  foreigners 
in local  elections, the Russian  minority  has representatives  on the elected  councils  of 
the towns where it makes up a sizeable percentage of the population (e.g.  16 of the 64 
town  councillors 
together 
representatives of all the minorities was set up to consider matters affecting  them. The 
Law  of  October  1993  authorises  minorities  to  set  up  autonomous  institutions  to 
preserve  their  culture  and  traditions.  The  present  Estonian  Government  has  also 
appointed a Minister for inter-ethnic relations. 

in  Tallinn).  In  July  1993,  a  round  table  bringing 

National  languages  can  also  be  used  in  the  courts  and  in  dealings  with  the 
administration  in  districts  where  the  minority  represents  a  majority  of  the  local 
population.  The Russian  minority  also has a large number  of media using  its national 
language as a vehicle (three dailies and two weeklies in Tallinn, three radio networks, 
including  a  public  one,  and  many  Russian-language  broadcasts  on  State  and  private 
TV channels). 

In the field of education, Estonia offers  teaching in Russian at all levels funded  by the 
State. This  system,  planned  only  up to  the  year  2000,  should  be  maintained  without 
time  limit  in  the  future.  The  shortage  of  teachers  of  Estonian,  in  particular  in  areas 
where  Russian  speakers  are  numerous,  remains  crucial  and  is  likely  to  obstruct  the 
present plans of the Ministry  of Education to increase the number of courses taught in 
Estonian  in  schools  for  the  minorities.  The  Government  is  currently  considering  a 
programme  under  which  schoolchildren  in  schools  where  teaching  is  in  Russian  can 
be  helped  to  reach  the  level  of  skill  in  Estonian  required  for  entry  to  public  tertiary 
education. 

15 

1.3  General Evaluation 

Estonia's political  institutions function properly and in conditions  of  stability.  They 
respect the limits  on their competencies  and cooperate with each other.  Elections  in 
1992 and 1995 were free and fair, and in the latter case led to an alternation of power. 
The  Opposition  plays  a normal  part  in the  operation  of  the  institutions.  Efforts  to 
improve  the  operation  of  the  judicial  system  and  to  intensify  the  fight  against 
corruption need to be sustained. 

There are no major problems over respect for fundamental  rights.  But Estonia needs 
to  take  measures  to  accelerate  naturalisation  procedures  to  enable  the  Russian-
speaking non-citizens to become better integrated into Estonian society. 

Estonia  presents  the  characteristics  of  a  democracy,  with  stable  institutions 
guaranteeing the rule of law and human  rights. 

16 

2.  Economie  Criteria 

In examining the economic situation and prospects of Estonia, the  Commission's 
approach  is  guided  in particular  by  the  conclusions  of  the  European  Council  in 
Copenhagen  in June  1993, which  stated  that  membership  of the  Union  requires 
"the  existence  of a functioning  market  economy,  as well  as the capacity  to  cope 
with competitive pressure and market forces within the Union". 

This  part  of  the  Opinion  therefore  gives  a  concise  survey  of  the  economic 
situation  and  background,  followed  by  a  review  of  Estonia's  progress  in  key 
areas  of  economic  transformation  (liberalisation  of  the  price  and  trade  system, 
stabilisation of the economy, structural change, reform  of the financial sector) as 
well  as  its  economic  and  social  development.  It  concludes  with  a  general 
evaluation  of  Estonia  in  relation  to  the  criteria  mentioned  by  the  European 
Council and a review of prospects and priorities for further  reform. 

2.1  The  Economic  Situation 

Background 

Estonia,  with  a population  of  1.5  million,  had  in  1995 a gross  domestic  product 
(GDP)  of about  6 billion  ECU (expressed  in purchasing  power parity); the  size  of 
its population was 0.4 percent of that of the Union, while the size of its economy 
was  only  0.1 percent.  GDP per  head  was  about  23  percent  of  the  EU average  in 
purchasing  power  terms.  Average  monthly  wages  at  the  end  of  1995  were 
estimated at  179 ECU. 

Estonia  has  been  an  observer  to  the  GATT  since  June  1992  and  requested 
accession  in  March  1994.  Its  application  to  become  a  member  of  the  WTO is 
currently being examined. 

Progress  in Economic Transformation 

In the  inter-war  period,  Estonia was  an independent  state, and  highly  integrated 
in the world  economy.  In  1940, the country  was  forcibly  annexed  by  the  Soviet 
Union  and  subsequently  central  planning  was  introduced.  Over  fifty  years  of 
Soviet rule destroyed  Estonia's economic integrity. The resulting  structure  of the 
economy  was based  on the  inflow  of labour, mainly  from  Russia,  and  on  strong 
trade  and  production  links  with  the  USSR.  It  changed  the  country  from  an 
agricultural  economy  into  one  dominated  by  heavy  industry.  A  relatively  well-
developed  infrastructure,  combined  with  a  skilled  labour  force,  prompted  the 
establishment  of  relatively  sophisticated  industries,  making  Estonia  one  of  the 
most advanced Republics of the USSR. 

Pressure for  economic and political  independence  was always present in Estonia. 
It  gained  momentum  in  the  1980s  and  contributed  to  the  approval  of  a  law  on 

17 

financial 

fiscal  policy  and 

economic  autonomy  by the  Supreme  Soviet of the USSR in  1989. The  law paved 
the  way  for  economic  reforms  in  various  areas,  including  price  and  wage 
determination, 
sector.  The  economic 
the 
transformation  reached  a  critical  stage  with  the  currency  reform  and  the 
introduction  of  a  national  currency  in  June  1992.  Despite  repeated  changes  in 
government,  the  basic  course  of  reform  has  remained  unchanged  so  far.  It  is 
based  on  a  liberal  economic  policy,  fostering  competition  and  openness  of  the 
economy,  with  a  minimal  degree  of  state  intervention.  The  country  has  seen 
rapid  progress  in  domestic  economic  liberalisation,  privatisation  and  the 
introduction  of  a  liberal  external  payments  regime  for  both  current  and  capital 
transactions 

As  in  other  Soviet  republics,  state  and,  to  a  lesser  extent,  collective  ownership 
were the  dominant  forms  of ownership  in Estonia.  Private  entrepreneurship  was 
practically  non-existent.  After  independence  in  1991,  the  private  sector  has 
developed  very  rapidly.  Almost  all  small  and  large  enterprises  have  been 
privatised  and  the  government  has  embarked  upon  an  ambitious  scheme  for 
selling  the  remaining  state  assets.  The  share  of  the  private  sector  in  GDP  was 
estimated at 70% in mid-1996. 

Foreign Direct Investment 

Foreign  direct  investment  has been particularly  strong,  with  amounts  per  capita 
over the period  1989-1996 accumulating to 366 ECU (source: EBRD). However, 
the  performance  of  1996  was  far  less  satisfactory.  Foreign  direct  investment 
decreased  to  only  55 million  ECU  compared to  156 million  ECU  in  1995, and 
from  5.6%  of  GDP  in  1995  to  1.6%  in  1996.  There  are  two  main  reasons 
explaining  this  fall:  a  change  in  the  official  classification  which  tightened  the 
conditions  for  defining  FDI  and  the  slow-down  of  the  privatisation  process. 
Inflows  of  portfolio  investment  and  foreign  bonds  issues  by  banks  went  up  in 
1996.  Also,  Estonian  FDI abroad  sharply  increased  last  year,  in particular  in the 
other Baltic countries and in Russia. 

Economic  Structure 

Agriculture  has  traditionally  been  one  of  the  most  important  sectors  of  the 
Estonian  economy.  Today  it  accounts  for  8%  of  the  total  Gross  Value  Added 
(GVA)  and  employs  7%  of  the  labour  force.  The  food  processing  industry 
contributes  about one third  of gross  industrial  output.  Fishery  is the third  largest 
food processing industry. In a bold move, trade tariffs  were abolished  completely 
at  the  outset  of  the  transition  process  -  a  radical  application  of  the  general 
principle of free trade to agricultural policy. 

The  restitution  of  property  rights  on  land  has  produced  a  number  of  relatively 
unprofitable  private  farms,  with  an  average  area  of  about  23  hectares  in  1996. 
The  average  size of farms  has been  falling  in recent  years. In fact,  despite  some 
mergers  which  have  followed  the  initial  restitution,  it  will  take  years  to  restore 
efficient  and competitive private  farming. 

The  industrial  sector  grew  rapidly  during  the  Soviet  era.  In  1991, it  accounted 
for  about 40% of GDP and over 30% of employment. The transformation  from  an 
overly  energy-intensive  production  structure,  which  heavily  relied  on  CMEA 
markets, to a pattern which is more in line with the country's natural  endowments 
and  comparative  advantage  is still under way.  Industrial  production  is  estimated 
to  have  contracted  by  more  than  60%  between  1992  and  1994,  due  to  the 
disruption of traditional trade links, the terms-of-trade  shocks, and the  imposition 
of trade barriers by Russia. As a result, the share of industry  in GVA has declined 
to 23% in  1995.  Industry's  share of employment  (excluding mining, energy  and 
construction) stood at 22.5% in 1996. 

The  services  sector  has  been  expanding  at  a  very  rapid  pace  and  accounts  for 
about two-thirds of the total gross value added. Wholesale and retail trade," tourist 
services, transport and communications are the most dynamic activities.  Tourism 
in particular  has  become  very  important  for  Estonia.  In  1996  alone,  2.5  million 
tourists  visited  the  country,  67% of  whom  where  Finnish.  Most  of  the  tourists 
come  for  a  one-day  visit.  Tourism  receipts  are  extremely  important  for  the 
balance  of payments:  in  1995, the  surplus  on travel  services represented  70% of 
the surplus of services and 39% of the trade deficit.  For the three first quarters  of 
1996, the figures were 75% and 41%  respectively. 

Main  indicators  of economic  structure 

(all data for  1996 unless  otherwise  indicated) 

Population 

million 

GDP per  head 
as  % of EU-15 average 

Share  of agriculture  in: 
gross  value  added 
employment 

PPS-ECU(1995) 
per  cent (1995) 

per  cent  (1995) 
per  cent  (1995) 

Gross  foreign  debt/GDP 

per  cent 

Exports  of goods  &  services/GDP 

per  cent 

Stock  of foreign  direct  investment* 

billion ECU 
ECU per  head 

FDI stock  converted  at end-1996 exchange rate of 1 ECU=$1.25299 

Source:  Commission  services,  national sources,  EBRD 

1.5 

3900 
23 

7 

6 

73 

0.6 
366 

The  share  of  small  and  medium-sized  enterprises  has  increased  rapidly, 
especially  in  the  export  sector.  Because  of  problems  with  the  registration  of 
enterprises, all companies will have to renew their entries on September  1, 1997. 
More  than  half  of  the  entries  in  the  old  register,  which  will  be  replaced  by  the 
Trade  Register,  concerned  shell  companies  that  were  no  longer  operating.  The 

19 

new  requirements  are  expected  to  bring  about  a  rise  in  the  number  of  limited 
liability companies and a decline in the number of share companies. 

Liberalisation 

Price Regime 

Price  liberalisation  started  in  1989  and  was  almost  completed  in  1992. 
Remaining price controls affect  land and forestry,  oil shale, medicines and public 
services.  The  prices  of  a  limited  number  of  services  (e.g.,  rents  and  public 
transport)  are controlled  at the municipal  level. Administrative  price  regulations 
apply to companies  with monopoly power  in such areas as the supply of energy, 
water  and  sewerage  services.  Together  these  goods  and  services  still  make  up 
some  25%  of  the  basket  on  which  the  consumer  price  index  is  calculated. 
Administrative  decisions,  such  as  the  lifting  of  price  controls  on  alcoholic 
beverages  in December  1995, can therefore  have a sizeable  impact on month-to-
month inflation  rates. 

Trade Regime 

Estonia  proceeded  to  dismantle  the  very  restrictive  trade  regime  inherited  from 
the  Soviet  Union  immediately  after  independence. The country  has today  one  of 
the most  liberal trade regimes in the world. Import duties apply only to furs,  and 
excise  taxes  are  levied  only  on cars, motorcycles,  cycles  and  recreational  boats. 
However,  introduction of protection on a limited number of agricultural  products 
is currently under consideration. This should not be considered as a change in the 
liberal  orientation  of  trade  policy  but  rather  as  a  response  to  the  very  specific 
problems of the agricultural  sector. 

Quantitative  restrictions  have  been  completely  abolished,  as  have  import 
subsidies.  Export  licenses  are  not  restrictive,  but  serve  only  for  statistical 
purposes.  Export  tariffs  have  been  removed  completely,  with  the  exception  of 
those  on  items  of  cultural  value.  There  are  no  export  subsidies,  and  the  few 
remaining export quotas were eliminated at the end of 1994. 

Estonia  has  had  observer  status in the  WTO (and  before  that  in GATT) since  June 
1992. A working  group  to prepare  for  full  membership  has  started  its activity  in 
March  1994.  A  free  trade  agreement  between  Estonia  and  the  EU has  been  in 
force  since  January  1,  1995.  Estonia  has reached  free  trade  agreements  with  the 
EFTA countries,  and  has  applied  for  membership  to  the  Central  European  Free 
Trade  Agreement  (CEFTA).  It  also  has  a  number  of  other  bilateral  agreements. 
Since  1  April  1996, a free  trade agreement with its Baltic neighbours, Latvia and 
Lithuania,  is  in  force.  On  1 January  1997, this  agreement  was  extended  to  trade 
in  agricultural  products.  The  objective  is  to  establish  a  full  customs  union  at  a 
later stage. 

Foreign Exchange Regime 

Since  Estonia  introduced  a  currency  board  (cf.  below)  in  1992,  its, national 
currency,  the  kroon,  has  been  fully  convertible  for  current  account  transactions. 

20 

This was  formalised  in  1994, when Estonia accepted the obligations  of the IMF's 
Article  vm.  The  central  bank  guarantees  conversion  of  kroon  bank  notes  and 
reserve  deposits  into  DM, and  vice versa,  at  a rate  of  8 Estonian  kroons  for  one 
DM.  Transactions  in  13 other  foreign  currencies  are  supported.  Individuals  may 
open  currency  accounts  in  domestic  banks  or  abroad.  By  contract,  most 
repayments  on  loans  from  domestic  banks  are  denominated  in  DM. The  Law  on 
the  Security  of  the  Estonian  kroon  stipulates  that  Eesti  Pank  (the  central  bank) 
has  no  right  to  devalue  the  currency.  Such  a  decision  can  only  be  taken  by 
parliament, which is meant to reinforce the credibility of the exchange rate. 

Stabilisation of the Economy 

Domestic 

After  the  sharp  contraction  of  output  which  followed  independence,-  economic 
recovery  started  in  the  second  half  of  1993.  Estonia  has  experienced  fairly  fast 
growth  thereafter,  reaching  4.3% in  real  terms  in  1995.  Preliminary  figures  for 
1996  indicate  that  real  growth  should  have  been  of  the  same  magnitude. 
However,  a  comprehensive  assessment  of  the  economic  performance  of  the 
country  in  the  recent  past  is  made  particularly  difficult  by  the  infancy  of  the 
statistical  apparatus. 

Since  1992,  Estonia's  economic  policy  has  been  remarkably  consistent.  To  a 
large  extent,  this  reflects  the  consensus  among  policy-makers  on  the  basic 
features  of a strategy aimed at modernisation and integration in the European..and 
world  economy.  Also,  it  reflects  the  disciplines  imposed  by  the  currency  board 
system. Indeed, the currency board, introduced  in June  1992, limits the scope  for 
the authorities to intervene  in economic policy. Under this system the  authorities 
voluntarily  give up discretionary  control  of the money  supply, the exchange  rate 
is  pegged,  and  the  increase  in  base  money  needs  to  be  fully  matched  by  an 
increase in foreign  exchange reserves. Moreover, in the currency board system as 
it  has  been  adopted  in  Estonia,  neither  local  authorities  nor  the  central 
government  can  borrow  from  the  central  bank.  Central  bank  lending  to 
commercial banks is restricted to well-defined  emergency situations. 

21 

Main  economic  trends 

1994 

1995 

1996 

Real GDP growth rate 

per  cent 

-1.8 

4.3 

4.0 

Inflation  rate 
Annual average 

December on December 

Unemployment rate, end-year 

General government  budget 
balance 

per  cent 
per  cent 

47.7 
41.7 

29.0 
28.9 

23.1 
14.8 

per cent 
QLO definition) 

per  cent of GDP 

7.6 

NA 

10.2* 

1.3 

-7.1 

-0.8 

-1.6 

-5.1 

-10.2 

Current account balance 

per  cent of GDP 

Debt/export ratio 

per cent 

9.1 

10.3 

8.8 

Foreign direct investment  inflow 

per cent of GDP 

9.2 

5.6 

1.6 

* Fourth  quarter 

Source:  Commission services, national sources,  EBRD 

The  currency  board  has  worked  well  in  ensuring  exchange  rate  stability  and  in 
reducing  inflation.  It  has  also  contributed  to  fiscal  discipline.  Inflation  came 
down  rapidly  after  the  introduction  of the currency  board  system.  After  a lull  in 
1995  and  in  the  early  months  of  1996, which  can  be  explained  by  deregulation 
and  increases 
its 
downward path and has been falling rapidly since the end of  1996, reaching 9.1% 
on a year-on-year basis in March  1997. Export prices have also risen moderately. 

in  indirect  taxation,  consumer  price  inflation  resumed 

Registered  unemployment  is  quite  low  and  rather  stable.  The  number  of 
unemployed job-seekers  that  were registered  at employment  offices  in  February 
1997  amounted  to  4.4%  of  the  labour  force.  The  number  of  people  entitled  to 
receive  unemployment  benefits  is  much  smaller.  The  labour  force  has  been 
contracting,  due  to  the  emigration  of  part  of  the  Russian  population  and  the 
reduction  in  the  participation  rates.  However,  when  using  the  ILO  definition, 
unemployment  is much higher, and reached  11.6% at the end  of the  first  quarter 
of 1997. 

External 

The external  sector is characterised  by an increasing trade deficit,  which  in  1996 
exceeded  24%  of  GDP  -  a  truly  extraordinary  figure  (change  in  statistical 
methodology  in  1996  is  partly  responsible  for  a  worsening  in  the  overall 
balance).  The  bulk  of  exports  concern  processed  goods,  and  a  very  significant 
shift has taken place from  foodstuffs  to electronics and computer equipment.  One 
third  of  exports  is directly  linked  to imports, either  in the form  of processing  or 

22 

in the  form  of transit  trade. A  strong  surplus  on the  services  balance  has  so  far 
mitigated  the  negative  effect  of the trade deficit  on  the  current  account  -  which 
has  nevertheless  been  in  deficit  since  1994. The  surplus  on  services  is  largely, 
and increasingly, due to the spending of Finnish tourists. 

Foreign  currency  reserves  increased  considerably  since  the  introduction  of  the 
currency  board.  The  basis  was  formed  by  the  restitution  of  historical  gold 
reserves  by  Western  central  banks  in  1991.  At  present  levels,  however,  the 
reserves cover less than three months of imports. 

Estonia had no  legacy  of foreign  debt from the former  Soviet Union. At the  end 
of  1996  the  stock  of  external  debt  amounted  to  about  239  million  ECU, 
approximately  6.4% of GDP. The debt-to-exports ratio remained almost  constant 
at a low level, as did the debt-to-debt-service ratio. 

Structural  Change 

Foreign Trade 

Dependence  on  the  former  Soviet  market  has  been  dramatically  reduced,  and 
trade  has  been  progressively  reoriented  to  western  markets.  EU countries  now 
account  for  more than two thirds of Estonian  trade. Finland  has replaced  Russia 
as  the  main  trade  partner,  Russia  remains  a  major  importer  of  Estonian  goods, 
although  Russia  has  increased  tariffs.  A  large  part  of  the  exports  concerns 
processed  goods.  In  1996,  the  continuing  appreciation  of  the  local  currency 
against  other  European  currencies  has  led  to  a  small  reorientation  of  trade 
towards  other  transition  countries  and  non-European  regions.  For  example, 
exports to transition  countries in eastern and central Europe increased  from  14% 
to  15.6%  of  total  exports  and  the  share  of  Asia  in  the  Estonian  trade  also  rose 
significantly. 

However,  the  export  base  is  rather  limited:  the  share  of  re-exports  in  Estonia's 
exports  is  high  (33.7%  in  1996  and  45.9%  in  the  first  quarter  of  1997).  This 
reflects  Estonia's  position as a transit  centre  and also  as a favourable  processing 
base (essentially  for  the textile  industry)  because  of its low labour  costs.  Wood 
and  wood  products,  processed  food  products  and  textile  products  constituted 
more than 40% of all exports in 1996. 

A large inflow  of foreign  direct investment  and other capital has kept the  overall 
balance of payments in surplus up to now. 

Labour Market 

Employment  has  declined  steadily  since  1992,  with  major 
losses 
concentrated  in  industry  and  agriculture. However,  a  sharp reduction  in the  size 
of  the  labour  force  (due  to  emigration  by  the  Russian  part  of  the  population), 
emigration  of  Estonian  workers  (mostly  to  Finland),  and  reduced  participation 
ratios have contributed to limit the impact on unemployment. The unemployment 
rate is estimated to be close to 5%, but this does not include the part of the labour 
force  that  is  seeking  work  because  it is only  employed  on a short-term  basis.  In 

job 

23 

the  context  of  a recent  survey,  and  using  the  ILO  methodology,  unemployment 
was estimated  to represent  11.6% of the total  labour  force  in the  first  quarter  of 
1997. 

Employers  contribute  33%  of  wages  and  salaries  towards  social  security. 
Employers  are  not  allowed  to  pay  wages  under  the  minimum  level  applying  to 
full-time  government  employees. The minimum  hourly  wage  is 4 kroon  and  the 
minimum monthly wage is.680 kroon (45 ECU). 

Public Finances 

The  centrepiece  of  the  budgeting  process  in  Estonia  is the  concept  of  balanced 
budget  at  the  level  of  the  central  government.  So  far  this  principle  has  been 
respected. 

The tax  structure  has undergone  several  modifications,  VAT was  first  introduced 
in  1992. Rates  were  modified  in  1994, and  VAT now  is levied  at  18%.  Personal 
and  corporate  income  tax  are  levied  at  a  flat  26%  rate.  A  minimum  tax-free 
allowance is granted for personal income tax. The overall tax burden is estimated 
at 34-36% of  GDP. The  share of taxes  in the total  wage  bill  is estimated  to  have 
been  41% in  the  fourth  quarter  of  1995, of  which  60% concerns  social  security 
contributions. 

Substantial  decentralisation has been introduced after  independence. One-third of 
general  government  expenditure  is  spent  by  local  authorities.  In  fact,  under  the 
pressure of heavy spending by local authorities, the general government deficit  in 
1996  increased  to  an  estimated  1.  6%  of  GDP,  a  departure  over  the  previous 
years'  balanced budgets. 

Enterprise Sector: Privatisation and Enterprise Restructuring 

Privatisation  has  advanced  fast,  and  by  the  end  of  1996  practically  all  large 
enterprises  had  been  sold,  with  the  exception  of  those  in  the  transport, 
telecommunication  and  energy  sectors.  The  privatisation  process  is  handled  by 
the  Privatisation  Agency  and  is  based  on  the  privatisation  law  passed  in  1993. 
Although  the  law provided  for various forms  of sales of assets, privatisation  has 
been  carried  out  mostly  through  bids  with  preliminary  negotiations,  open  to 
foreign  bidders. This  strategy  has favoured  strategic  investors  over  management 
and employees, and it has helped to make Estonia very attractive to foreign  direct 
investment. 

Small-scale  privatisation  was  almost  completed  by  the  end  of  1995. It has  been 
regulated  by  a  law,  passed  in  1991  and  amended  in  1992,  which  allowed  for 
employee  buy-outs  and  auctions.  Privatisation  vouchers  have  been  issued  to  the 
public.  They  can  be  used  for  the  privatisation  of  housing  and  land,  and  for  the 
purchase  of  shares.  Only  limited  trading  of  vouchers  is  allowed.  Housing 
privatisation  was launched  at the end of  1993. Most  housing was expected  to be 
privatised  against privatisation vouchers, but due to uncertainties over  ownership 
titles  caused  by  the  restitution  process  it  has  proceeded  rather  slowly.  The 

24 

government  is also committed to compensate, by restitution or with vouchers, all 
owners of property in Estonia prior to 194p. 

Future privatisation plans focus  on utilities, including firms in the energy  sector, 
the  part  of  the  Estonian  telecommunications  company  which  has  not  yet  been 
privatised, railways and ports. The state has the intention to divest firms where it 
still  maintains  minority  stakes,  such  as  Estonian  Tobacco,  Estonian  Gas,  and 
others.  Restructuring  of privatised  enterprises  has  been  left  to  investors,  mostly 
through business plans submitted at the time of bidding. 

Bankruptcy  legislation  was  passed  in  1992  and  a  large  number  of  bankruptcy 
procedures has been initiated, especially concerning agricultural co-operatives. 

Financial  Sector 

A  two-tier  banking  system,  separating  central  bank  functions  from  commercial 
banking  activities,  was  formally  established 
fully 
operational  only  in  1992. The nature and extent  of the central bank's activity  are 
determined  by  the monetary  reform  of  1992 which  established  a currency  board 
and confined  its role to supervision and prudential regulation. The central bank is 
completely  independent  from  the  government,  although  it  is  accountable  to 
parliament. Lending to the government is prohibited by law. 

in  1989,  but  became 

Under  the  currency  board  arrangement  there  is  no  room  for  discretionary 
monetary  policy.  The  central  bank  has  neither  monetary  targets,  nor  credit 
restrictions for banks, nor discount rates. 

Estonia's  financial  system  is  dominated  by  the  banking  sector  while  the  capital 
market  and  non-bank  financial  institutions  are  much  less  developed.  The 
financial  sector  has  already  gone  through  a  process  of  rationalisation.  The 
banking crisis of  1992, which was followed  by several bank failures  in the period 
up to  1994, prompted the reorganisation  of the sector. This has been followed  by 
a  phase  of  consolidation,  in  which  the  involvement  of  the  state  in  the  banking 
sector  has  been  greatly  reduced.  At present,  the  sector comprises  13  domestic 
banks,  1 branch of a foreign  bank and 5 foreign banks' representative offices,  but 
the number  of banks should  decline further  in the coming months as the  industry 
continues  its  consolidation;  in  fact,  a  new  merger  between  two  banks  was 
approved in April  1997. 

Central  bank  supervision  and  prudential  regulation  have  been  reinforced.  All 
banks  meet  at  present  the  capital  adequacy  standard.  The  Bank  of  Estonia 
continues  to  gradually  increase  the  minimum  capital  requirement  for  banks 
(which  will  reach  75  million  kroons  at the  end  of  1997)  in  an  effort  to  force  a 
consolidation  of  the  banking  system.  A  draft  law  on  deposit  insurance  is  being 
prepared. 

The total assets of the banking sector amounted to 22 billion kroons at the end of 
1996.  The  share  of  non-performing  loans  in  banks  balance  sheets  dropped 
considerably  as asset  quality  and  risk  management  improved.  The  improvement 

25 

in asset quality was more pronounced in banks with state participation than in the 
private banks. At the end of March  1996 private companies made up 68 per cent 
of  the  banking  system  loans.  Although  the  segment  of  individual  borrowers  is 
starting  to  increase,  private  companies  remain  the  key  borrowers.  There  was  a 
lengthening of the average maturity of bank loans to 2.7 years at the end of 1995. 
This  trend  accelerated  in  1996  and  early  1997  as  banks  were  able  to  obtain 
longer-term  resources,  notably  in  foreign  currencies.  Loans  to  state  enterprises 
have  been  reduced  from  almost  30% of  total  outstanding  loans  in  1993  to  less 
than  4% in  1996. The modernisation  and  sophistication  of the banking  sector  is 
progressing  continuously:  20-year  housing  loans  have  been  introduced  recently 
while the number of credit cards has expanded  strongly. 

State  ownership  in  the  sector  has  declined 
considerably  throughout  the 
restructuring  process of the Estonian banking  sector in the  1990s. At present  the 
state has  some shareholdings in 2 credit institutions.. The government  intends to 
end its involvement  in banks in the coming years. Branches of foreign  banks can 
be  opened  and  operated  under  the  same  conditions  that  are  stipulated  for 
domestic  banks. At the  end  of  1995 direct  foreign  ownership  was  29.2  per  cent 
and other foreign  ownership 5.7 per cent. 

The  capital  market  and  non-bank  financial  institutions  are  less  developed 
compared  to  the  banking  sector.  The  privatisation  of  state-owned  companies 
contributed  to  the  emergence  and  development  of  the  securities  market.  The 
Tallinn  Securities  Exchange  started  its  operations  on  31  May  1996,  providing 
substantial  improvements  in the  organisation  of the  secondary  market.  The  first 
public  issue  of  shares  was  carried  out  in  1991. The  capitalisation  of  the  stock 
market  represented  about  12%  of  GDP  at  the  end  of  1996.  However,  despite 
recent  progress  (a number  of corporate  and  municipal  entities  have  raised  funds 
on the  international  capital  markets),  it remains  difficult  for  local  companies  to 
get access to long-term finance  which is needed for long-term investment. As the 
government  budget  has  been  in  balance  for  the  last  three  years,  there  are  no 
outstanding  treasury  bills.  The  main  instrument  actively  traded  on  the  money 
market  is  the  Bank  of  Estonia  certificate  of  deposit  whose  issuance  started  in 
1993. 

Economic and Social Development 

Social Indicators 

Life  expectancy  rates  have  recovered  from  the  initial  worsening  after  1989. 
Although  they  remain  considerably  higher  than  in the  EU, infant  mortality  rates 
are  no  longer  going  up.  The  population  has  been  declining  since  1991. This  is 
mostly  due to the emigration  of part  of the  Russian-speaking  minority,  which  in 
1991 represented about 30% of the total population, but also to a negative natural 
increase.  The  low  unemployment  benefits  provide  little  incentive  to  register  as 
unemployed.  A  recent  household  survey  suggest  that  10%  of  the  labour  force 
could  be  searching  for  a job. An increase  in the retirement  age  by  five  years, to 
be introduced over a ten-year period, has been agreed to counteract the decline in 
the labour force. In  1995, the retirement age was 56 for women and 61 for men. 

26 

Education  is  fairly  good.  Almost  80%  of  the  working  population  has  higher 
secondary  education  or  more.  Enrolment  rates  are  comparable  to  those  of  most 
European  countries.  Ten  per  cent  of  the  total  number  of  pupils  today  is  in 
university. Quality is high in specific areas, such as mathematics and science. 

Regional and Sectoral Differences 

Business activity  is liveliest in Tallinn and the north-western part of Estonia and 
most  depressed 
in  the  north-  and  south-eastern  corners  of  the  country. 
Employment  in  north-eastern  Estonia  used  to  be  heavily  dependent  on  energy 
generation,  heavy 
the  Soviet  military-industrial  complex. 
Unemployment  in this region has risen  sharply,  probably  to  more than  15%  of 
the  labour  force  after  the  closure  of  the  factories  involved.  Unemployment  in 
the  south-eastern  region  is also  probably  higher  than  15%, but  there  it  is due  to 
the  decline  in  agricultural  production,  which  is  the  main  activity  in  southern 
Estonia. 

industry  and 

Small  businesses  flourish  in  the  north-western  part  of  the  country,  including  a 
wide  area  around  Tallinn,  and  in  the  transit  area  to  Russia.  As  a  result  of  the 
disappearance of heavy industry, long-term unemployment  is high in both south 
east and north-east Estonia. South-eastern households have the lowest income. 

Six  major  regional  programs  were  approved  by  the  government  in  1995, 
modelled  in part  on the  regional  objectives  of the  EU. One* program  is  aimed  in 
particular  at the integration  of the Russian speaking population  in East-Virumaa, 
the  most  north-eastern  region.  A  secondary  objective  of the  same  program  is  to 
ensure the efficient  use of natural resources (oil shale). 

2.2  The  Economy  in  the  Perspective  of  Membership 

Introduction 

The  European  Council  in  Copenhagen  in  1993  defined  the  conditions  that  the 
associated  countries  in  central  and  eastern  Europe  need  to  satisfy  for  accession. 
The economic criteria are: 

• 

the existence of a functioning  market economy; 

• 

the  capacity  to  cope  with  competitive  pressure  and  market  forces  within  the 
Union. 

These  criteria  are  linked.  Firstly,  a  functioning  market  economy  will  be  better 
able to  cope  with  competitive  pressure.  Secondly,  in the  context  of  membership 
of  the Union,  the  functioning  market  is the  internal  market.  Without  integration 
into the  internal  market,  EU membership  would  lose  its economic  meaning, both 
for Estonia and for  its partners. 

27 

essential  for  a  candidate  country,  which  must  commit 

The  adoption  of  the  acquis,  and  in  particular  the  internal  market  acquis,  is 
itself 
therefore 
permanently  to  the  economic  obligations  of  membership.  This  irreversible 
commitment  is needed to provide the certainty that every part of the enlarged EU 
market will continue to operate by common rules. 

The  capacity  to  take  on  the  acquis  has  several  dimensions.  On  the  one  hand, 
Estonia  needs  to  be  capable  of  taking  on  the  economic  obligations  of 
membership,  in such a way that the single market  functions  smoothly  and  fairly. 
On  the  other  hand,  Estonia's  capacity  to  benefit  fully  from  the  competitive 
pressures  of  the  internal  market  requires  that  the  underlying  economic 
environment be favourable,  and that the Estonian economy have flexibility  and a 
sufficient  level  of  human  and  physical  capital,  especially  infrastructure.  In  their 
absence,  competitive  pressures  are  likely  to  be  considered  too  intense  by  some 
sections  of  society,  and  there  will  be  a  call  for  protective  measures,  which,  if 
implemented, would undermine the single market. 

The  capacity  and  determination  of  a  candidate  country  to  adopt  and  implement 
the  acquis  will  be  crucial,  since  the  costs  and  benefits  of  doing  so  may  be 
unevenly  spread  across  time,  industries  and  social  groups.  The  existence  of  a 
broad based consensus about the nature of the changes to economic policy  which 
membership  of the Union  requires, and  a sustained  record  of  implementation  of 
economic  reforms  in  the  face  of  interest  group  pressure  reduce  the  risk  that  a 
country  will  be  unable  to  maintain  its  commitment  to  the  economic  obligations 
of membership. 

At  the  level  of  the  public  authorities,  Membership  of  the  Union  requires  the 
administrative  and  legal  capacity  to transpose  and  implement  the  wide  range  of 
technical  legislation needed to remove obstacles to freedom  of movement  within 
the  Union  and  so  ensure  the  working  of  the  single  market.  These  aspects  are 
examined  in  later  chapters.  At  the  level  of  individual  firms,  the  impact  on  their 
competitiveness  of adopting  the acquis depends  on their capacity  to  adapt to the 
new economic  environment. 

The Existence of a Functioning Market Economy 

The existence of a market economy requires that equilibrium between supply and 
demand  is established  by the  free  interplay  of market  forces.  A market  economy 
is functioning  when the legal  system, including the regulation  of property  rights, 
is  in  place  and  can  be  enforced.  The  performance  of  a  market  economy  is 
facilitated  and  improved  by  macroeconomic  stability  and  a degree  of  consensus 
about the essentials of economic policy. A well-developed financial sector and an 
absence  of  significant  barriers  to  market  entry  and  exit  help  to  improve  the 
efficiency  with which an economy works. 

Estonia  can  be  regarded  as  a  functioning  market  economy.  The  good 
macroeconomic  performance  observed  over  the  past  few  years  is  the  result  of 
rapid  progress  in  economic  liberalisation  and  privatisation.  A  new  and  rigorous 
policy  framework  has been enshrined  in law, and any loopholes tend to be closed 

28 

off  rather  quickly.  The  currency  board  system  and  the  generally  prudent  stance 
on fiscal  policy, have helped to maintain internal equilibrium  and to attract  large 
capital  inflows. 

Price  setting  has been liberalised  to a large extent,  in labour  and  capital  markets 
as  well  as  in  output  markets.  The  imposition  of  hard  budget  constraints,  by 
cutting  subsidies  and  putting  a stop to  easy  credits  to  enterprises,  and  the  rapid 
privatisation  have  strengthened  the  role  of  market  forces  in  investment  and 
production  decisions. The liberal trade policy, openness to foreign  investment  as 
well  as the  emergence  of a strong banking  sector ensure that  market  signals  and 
hard budget constraints are transmitted fairly rapidly unto the economy. 

in  government  as  well  as 

The consensus on the basic features  of the economic  strategy, the consistency  in 
policy-making  despite  repeated  changes 
the 
strengthening  of  the  economic  links  with  current  EU member  States  have  all 
contributed  to  a  favourable  environment  for  investment  and  economic  activity. 
While the growing  external  imbalances  are a serious cause for  concern and  need 
to be addressed  in order to maintain the credibility of the currency board  system, 
macroeconomic  stability  has  strengthened  the  market  mechanisms.  Good 
progress  in the future  implementation  of the  EC-Estonia  Free Trade  Agreement 
should also help to complete the functioning  of the market economy. 

The Estonian  legal system has its roots in the period of pre-war  independence. It 
is  similar  to  German  law,  in  particular  where  private  law. is  concerned.  In 
restoring  and  renewing  the  legal  system, the  laws  enacted  in  EU Member  States 
have served as examples. 

The  prospect  of  EU integration  has  acted  as  a major  impetus  for  gearing  up  the 
process  of  administrative  reform.  The  process  is  guided  and  co-ordinated  by 
government  commissions  at  the  level  of  ministers  and  top  civil  servants.  It  is 
recognised that a large group of middle and lower ranking civil servants involved 
in the implementation  of the new laws and procedures will need more training to 
adapt  to  the  requirements  of  a more  market-oriented  public  administration.  The 
authorities  are  also  planning  to  significantly 
increase  spending  linked  to 
transposition  of  EU  legislation  and  modernisation  of  Estonia's  public 
administration.  The government  is also keenly  aware that the fiscal  restraints  on 
the  central  government  will  need  to  be  extended  to  the  local  authorities. 
Commitment to reform  and modernisation of the economy  is not disputed  among 
Estonia's political  forces. 

The  Capacity  to Cope with  Competitive Pressure  and  Market  Forces 

It  is difficult,  some  years  ahead  of prospective  membership,  and  before  Estonia 
has  adopted  and  implemented  the  larger  part  of  Community  law,  to  form  a 
definitive judgement  of the country's  ability to fulfil  this criterion. Nevertheless, 
it  is  possible  to  identify  a  number  of  features  of  Estonia's  development  which 
provide  some  indication  of  its  probable  capacity  to  cope  with  competitive 
pressure and market forces within the Union. 

29 

This  requires  a  stable  macroeconomic  framework  within  which  individual 
economic  agents  can  make  decisions  in  a  climate  of  a  reasonable  degree  of 
predictability.  There  must  be a sufficient  amount  of human  and physical  capital 
including  infrastructure  to provide the background  so that  individual  firms  have 
the ability  to  adapt  to face  increased  competitive pressures  in the  single  market. 
Firms need to invest to improve their efficiency,  so that they can both compete at 
home  and  take  advantage  of  economies  of  scale  which  flow  from  access  to  the 
single market. This capacity to adapt will be greater, the more firms have  access 
to  investment  finance,  the  better  the  quality  of  their  workforce,  and  the  more 
successful  they are at innovation. 

Moreover,  an ' economy  will  be  better  able  to  take  on  the  obligations  of 
membership  the  higher  the  degree  of  economic  integration  it  achieves  with  the 
Union  ahead  of  accession.  The  more  integrated  a  country  already  is  with  the 
Union,  the  less  the  further  restructuring  implied  by  membership.  The  level  of 
economic  integration  is  related  to  both  the  range  and  volume  of  goods  traded 
with member states. Direct benefits from access to the single market may also be 
greater in sectors where there are a sizable proportion  of small firms, since these 
are relatively more affected  by impediments to trade. 

Estonia has made great progress to improve the capacity  of the economy  to cope 
with  competition  and  market  forces  within  an  enlarged  Union.  The  rapid  and 
successful  transition  of  the  Estonian  economy  thus  far  is not  merely  a result  of 
making  the  right  policy  choices, and  of following  with resolve  a clear  medium-
term  strategy  of  structural  reforms.  Estonia  has  always  benefited  from  its 
location  between  eastern  and  western  Europe.  The  allocation  of  capital  and 
labour was less distorted than in other states of the former  Soviet Union. This has 
allowed  exports  of processed  goods  and  of the  light manufacturing  industries  to 
expand  rapidly,  without  the  need  to  renew  the  capital  stock  completely.  The 
switch  of  exports  markets  from  the  East  to  the  West  has  been  facilitated  by  the 
initial  setting  of  the  exchange  rate  and  the  maintenance  of  a  favourable  edge  in 
terms of unit  labour  costs. The prices of traded  goods have risen much  less than 
the prices in the sheltered sector of the economy. 

Estonia has  a number  of comparative  advantages  which  should  help the  country 
compete  in  the  context  of  the  Single  Market.  Light  industries  such  as  clothing, 
textiles,  wood  and  electrical  construction  are  already  expanding  strongly» 
although  the  restructuring  of  some of these  sectors  is far  from  being  completed. 
The wood  industry  in particular  appears to be well placed  to perform  strongly  in 
the  Single  Market:  wood  is  abundant  (almost  48%  of  Estonia's  territory  is 
covered  with  forests),  FDI  from  Nordic  countries  is  helping  modernise  the 
production  base,  skilled  labour  is  abundant  and  wages  are  still  relatively  low. 
Exports  of  wood  and  furniture  have  been  buoyant  and  the  country  had  a 
substantial  trade  surplus  in these categories  in  1996. The rapid  modernisation  of 
this  sector  is  an  encouraging  sign  of  Estonia's  capacity  to  face  the  competitive 
pressures of the single market. 

Transport,  travel  and  financial  services  represent  other  promising  and  relatively 
strong  sectors  of  the  economy,  which  would  perform  well  in the  context  of  the 

30 

single market. The emergence of a healthy banking  and financial  services  sector, 
as well as its gradual consolidation and expansion in neighbouring  countries, is a 
positive  indication  of  the  capacity  of  Estonian  managers  to  adapt  to  new 
circumstances and take advantage of market opportunities. The niodemisation of 
the  transport  infrastructures,  with  the  help  of  multilateral  lenders,  should  help 
Estonia develop its activities as a transport hub and goods processing centre. 

The degree  of trade  integration  and  the nature  of trade with the  Union  suggests 
that  Estonia  is well  placed  to  cope with  competitive  pressures  within  the  single 
market.  In  1996,  the  EU  was  the  largest  trading  partner  of  Estonia  in  1996, 
accounting  for  65%  of  imports  and  51%  of  exports.  Moreover,  despite  the 
importance  in  value  of  exports  of  wood,  furniture  and  textiles,  exports  have 
become  less  concentrated  and  intra-industry  trade  is  increasing.  For  example, 
compared  to  the  same  period  of  1995, EU imports  of  machinery  and  electrical 
apparels have grown faster  in the first six months of  1996 than EU exports of the 
same  products.  During  the  same  period,  wood  products  and  textiles  have 
remained constant as the percentage of EU imports from Estonia. Estonia industry 
has  succeeded  in  exporting  other  goods  to  the  West  (including  electronic 
products)  because  of  improvements  in  quality  standards  and  close  business 
relationships  with western  companies. Another  positive  indication  is the  growth 
of  Estonian  exports  on  the  competitive  and  dynamic  markets  of  Asia,  although 
these exports still represent very small quantities. 

However,  the  export  base  remains  limited,  and  can  be  easily  eroded  if  inflation 
continues  to  be  higher  than  in  the  countries  which  are  the  main  importers  of 
Estonian  goods.  With  the  complete  liberalisation  of  external  trade,  and  the  firm 
commitment  of the government to a fixed exchange rate, it would be difficult  for 
Estonian  exporters to adjust  to a fall  in foreign  demand. The external  position of 
Estonia  therefore  has  to  be  regarded  as  rather  vulnerable.  It  is  clear  that  any 
increase  in real wages exceeding or preceding  labour productivity  improvements 
in the open sector of the economy would risk to jeopardise the export position. 

The continuation of foreign  direct investment is crucial to the Estonian  economy, 
both  as  a means  to  finance  the  current  account  deficit  under  the  currency  board 
system  and  as  a  means  to  renew  the  existing  capital  stock  and  diversify  the 
industrial  base.  Roughly  one  third  of  all  Estonian  firms  is  relying  on  foreign 
capital. The  share of foreign  capital  in these firms is 65%, on average, and  most 
of them  are engaged  in export activities. Despite the fall  of  1996, there are  good 
reasons to believe that the inflow of capital will increase again in  1997 and  1998. 
The  entry  of  foreign  banks  on  the  Estonian  financial  market  is  cautiously 
encouraged  and  the  Estonian  banks  are  gradually  extending  their  range  of 
services. 

Prospects  and  Priorities 

The  Estonian  authorities  are  guided  by  some  clear  principles  and  a  strong 
commitment 
in  the  European  and  World  economy.  The 
strengthening  of  the private  sector,  in particular  by  the  emergence  of  small  and 

integration 

to 

31 

medium-sized  enterprises,  is the  main  priority.  As  announced  in  early  February 
1997, the  authorities  intend  to complete the privatisation  of the  industrial  sector 
and to start with the privatisation of large infrastructure  companies.  Privatisation 
proceeds  are primarily  used to set up property  reform,  housing  and  environment 
funds.  The  rigorous  monetary  and  fiscal  framework  will  be  maintained  and  its 
legal  basis  will  be  solidified.  Other  priorities  of  the  government  are  the 
development  of  the  financial  sector  and  of  anti-monopoly  safeguards  and  the 
promotion of investment and exports. 

Estonia  has  reached  the  stage  where  mainly  land  and  infrastructure  enterprises 
are  left  to  be  privatised,  but  these  last  privatisation's  are  far  from  being 
unproblematic.  Progress  in  land  reform  has  been  slow  and  this  has  been  an 
obstacle  to  the  privatisation  of  residential  property,  agricultural  land  and 
undeveloped  land which otherwise would be available for  greenfield  investment. 
It  has  been  legally  possible  for  anyone  to  purchase  land  since  1991,  but  in 
practice  very  little  of  the  total  land  available  has  been  privatised.  The 
government  has  had  great  difficulty  in  reconciling  the  rights  of  the  original 
owners  with  the  interests  of  prospective  investors.  The  programme  of  property 
restitution  has  been  unexpectedly  lengthy  and  slow.  Although  the  validity  of 
claims  for  the large majority'of  properties has been resolved, property which has 
actually  been returned to legitimate owners, or vouchers  issued  as  compensation, 
covers  only  a very  small  part  of the total. Fortunately,  this  is no  longer  holding 
up  the  privatisation  of  existing  enterprises,  since  the  practice  has  been  to  lease 
the  land  to  the  buyer  of  the  physical  capital  pending  the  settlement  of  any 
disputes. Nevertheless,  it is far  from  clear how these disputes will be resolved  in 
the end. 

Privatisation  of  public  utilities  is  complicated  because  of  their  size  and  their 
essentially  monopolistic  character.  The  government  is  now  focusing  on  energy 
providers,  to  be  followed  by  railways, ports  and  telecommunication  companies. 
The first step is to split the state enterprises into companies that are ready to  face 
competition,  and  activities  which  should  remain  in  state hands.  The  next  step  is 
to put an effective  regulatory  framework  in place for establishing prices. This is a 
particular problem in the area of energy pricing, complicated by the necessity,  for 
environmental  reasons,  to  switch  from  oil  shale  to  natural  gas  and  other 
domestically unavailable sources of energy. 

Although  the whole  process  is not  likely  to be completed  before  the  end  of this 
century,  implementation  has  started  with  the  1997  privatisation  programme. 
According  to the government's  plan, the Estonian  Railways will  be divided  into 
four  subsidiaries  by  September  1997,  which  will  then  be  privatised  separately. 
Other  monopolies  and  infrastructures  companies  put  up  for  sale  in  1997  include 
Estonian  Energy,  Tallinn  Port  and  Estonian  Oil  Shale  Mining  company. 
However,  the  privatisation  of  infrastructure  enterprises  may  take  even  longer 
than  that  of  energy  companies,  since  it  is unclear  which  parts  should  remain  in 
state hands. 

A  problem  of  a  different  nature  is  the  autonomy  of  local  authorities.  They  are 
relatively  free  to  spend  their  share  of  general  government  revenue,  which  is 

32 

largely  collected  at  the  level  of  the  state.  Up  to  1996  local  governments  were 
allowed  to  borrow  abroad,  whereas  the  central  government  was  not.  This 
loophole in the law has been plugged, but this may lead to higher claims by local 
authorities on general government revenue. 

that 

inflation 

in  Estonia  exceeds 

The. main  risk  on  the  macroeconomic  side  is that  at  some  point  in  time  it  may 
become difficult  to finance the rising current account deficit.  Indeed, in  1996, the 
trade  balance  showed  arising  deficit,  which  surpassed  the  level  of 20% of  GDP. 
Because  the  nominal  exchange  rate  vis-à-vis  the  D-mark  is  kept  unchanged,  as 
long  as 
in  Germany,  export  price 
competitiveness  is continuously  eroded  on the markets with currencies  linked  to 
the  DM. Data  on  the  evolution  of  the  real  effective  exchange  rate  of  the  kroon 
since  July  1992  show  a  gradual  but  clear  appreciation  of  the  kroon.  This  is  the 
result  of two  opposite trends: a sharp real appreciation  vis-à-vis  Western  trading 
partners  (although, more recently, the real exchange rate has depreciated  against 
the  dollar), partially  offset  by  a depreciation  vis-à-vis  the  other  Baltic  republics 
and former  Soviet partners. To the extent that Estonia wants to reorient  its trade 
to  the  West,  this  may  increasingly  become  a  problem,  as  demonstrated  by  the 
evolution of the structure of trade in  1996, when the share of the EU in total trade 
stagnated. The export base is rather limited, and a relatively large part consists of 
processed goods. 

A  deficit  which  is  rapidly  increasing  should  not  necessarily  be  cause  for 
concern,  especially  as  long  as  it  reflects  mainly  investment  activity  and  is  not 
accompanied  by  significantly  higher  inflation.  In the  case  of  Estonia,  however, 
the  widening  trade  deficit  is  caused  by  a  deceleration  in  export  growth, 
accompanied  by  an  increase  in  imports  involving  a  shift  towards  a  greater 
proportion of consumer goods. While the deficit  was largely financed up to  1996 
by  the  inflow  of  foreign  direct  investment,  this  was  not  the  case  in  1996. 
Moreover,  a  large part  of  the  deficit  was  financed  by  Finnish  tourists  spending 
and  by  what  could  be  interpreted  as  speculative  capital  flows,  attracted  by  high 
interest  rates  on  kroon  deposits.  A  sharp  fall  of  tourism  receipts  as  well  as  a 
turnaround  of international  investors'  positive views  on Estonia's  economic  and 
political  stability  would  put  a  severe  constraint  on  the  overall  balance  of 
payments  and  represent  a  source  of  weakness  for  the  economy.  On  the  other 
hand,  Estonian  residents  have  heavily  invested  in  government  bonds  of  other 
Nordic and Baltic countries. 

Serious  problems  are present  also  in the  farming  sector,  where  output  has  been 
declining  steadily  since  independence.  Rural  interest  groups  blame  excessive 
laissez-faire  policies  for  high  unemployment  and  falling  living  standards  in  the 
countryside.  While  it  is  true  that  domestic  agriculture  has  faced  very  stiff 
competition  from  external  producers, it is important  that  if tariffs  are  introduced 
they  do  not  delay  the  necessary  modernisation  of  the  sector.  In  fact,  there  is  a 
need  for  sustained  investment  in  agriculture  and  food-processing  industries. 
Moreover,  land  reform  is  still  far  from  completed,  and  the  land  ownership 
question remains open. This has adversely affected  investment in the farm  sector. 

33 

2.3 

General Evaluation 

Estonia  can  be  regarded  as  a  functioning  market  economy.  It  has  radically 
liberalised  foreign  trade  and  privatised  the  public  sector.  Prices  have  been 
liberalised  to a very  large extent. The currency  board  system  and the prudent 
fiscal stance  have  helped  to  reduce  inflation.  The  legislative  framework  is 
largely in place. However, land reform has been slow, and reform of the pension 
system has not yet started, 

Estonia should be able to make the progress necessary to cope with competitive 
pressures and market forces within the Union in the medium term, provided in 
particular that the export base is broadened. The setting of a low exchange rate 
and  low  unit  labour  costs  have  facilitated  the  switch  to  light  manufacturing 
industry  as  a  source  of  foreign  reserves.  The  banking  sector  is  healthy  and 
expanding  strongly.  Estonia  has  been  a  major  recipient  of  foreign  direct 
investment,  although  the  inflow  has  decreased  recently.  However,  the  export 
base  is  rather  narrow,  and  the  need  to finance the  rising  trade  and  current 
account deficits is a matter of concern. 

34 

3.  Ability to Assume the Obligations of Membership 

The European  Council  in Copenhagen  included  among  the criteria  for  accession  "the 
ability  to take  on  the  obligations  of membership,  including  adherence  to  the aims  of 
political, economic and monetary union". 

In  applying  for  membership  on the basis of the Treaty,  Estonia has  accepted  without 
reserve  the  basic  aims  of  the  Union,  including  its  policies  and  instruments.  This 
chapter  examines  Estonia's  capacity  to  assume  the  obligations  of  membership  -  that 
is, the legal and institutional framework, known as the acquis, by means of which the 
Union puts into effect  its objectives. 

With  the  development  of  the  Union,  the  acquis  has  become  progressively  more 
onerous, and presents a greater challenge for future  accessions than was the case in the 
past.  The  ability  of Estonia to  implement  the acquis  will  be  central  to  its  capacity  to 
function  successfully  within the Union. 

The  following  sections  examine,  for  each  main  field  of  the  Union's  activity,  the 
current  and prospective  situation  of Estonia. The starting-point  of the description  and 
analysis  is  a  brief  summary  of  the  acquis,  with  a  mention  of  the  provisions  of  the 
Europe  Agreement  and  the  White  Paper,  where  they  are  relevant.  Finally,  for  each 
field  of  activity  there  is  a  brief  assessment  of  Estonia's  ability  to  assume  the 
obligations of membership on a medium-term horizon. 

3.1 

Internal  Market  Without  Frontiers 

Article 7a of the Treaty defines the Union's internal market as an area without  internal 
frontiers  in  which  the  free  movement  of  goods,  persons,  services  and  capital  is 
ensured.  This internal market, central to the integration process, is based on an open-
market economy  in which competition and economic and  social cohesion must play a 
full  part. 

Effective  implementation  of  the  liberties  enshrined  in  the  Treaty  requires  not  only 
compliance  with  such  important  principles  as,  for  example,  non-discrimination  or 
mutual  recognition  of national  regulations  - as  clarified  by  Court  of Justice  rulings  -
but also concomitant,  effective  application of a series of common  specific  provisions. 
These  are designed,  in particular,  to provide  safety,  public  health, environmental  and 
consumer  protection, public  confidence  in the  services  sector,  appropriately  qualified 
persons to practise certain specialist occupations and, where necessary, introduction or 
coordination  of  regulatory  and  monitoring  mechanisms;  all  systematic  checks  and 
inspections  necessary  to  ensure  correct  application  of the  rules  are carried  out  on the 
market, not at frontier  crossings. 

It  is  important  to  incorporate  Community  legislation  into  national 
legislation 
effectively,  but  even  more  important  to  implement  it  properly  in  the  field,  via  the 
appropriate  administrative  and  judicial  structures  set  up  in  the  Member  States  and 
respected  by companies. This is an essential  precondition  for  creating the mutual  trust 
indispensable for smooth operation of the internal market. 

35 

This chapter must be read in conjunction  with, inter alia, the chapters on social policy, 
the environment, consumer protection and sectoral policies. 

The Four Freedoms 

A  step-by-step  approach  is  being  taken  to  absorption  of  the  acquis  by  the  applicant 
countries: 

-  The  Association  Agreement  between  the  Community,  its  Member  States  and 
Estonia  was  signed  in  June  1995  and  is  being  ratified.  With  regard  to  the  four 
freedoms  and  approximation  of legislation, the Agreement  provides, in particular,  for 
immediate or gradual application of a number of obligations, some of them reciprocal, 
covering,  in  particular,  freedom  of  establishment,  national  treatment,  free  trade, 
intellectual property and public procurement. 

-  The Commission's  1995 White Paper (COM(95)  163 final), guidelines  intended to 
help  the  applicant  countries  prepare  for  integration  into  the  internal  market,  gives  a 
closer definition  of the legislation  concerned.  It identifies  the "key  measures" with  a 
direct effect  on the free  movement of goods, services, capital and persons and outlines 
the  conditions  necessary  in  order  to  operate  the  legislation,  including  the  legal  and 
organizational  structures.  Twenty-three  areas  of  Community  activity  are  examined, 
dividing  the  measures  into  two  stages,  in  order  of  priority,  to  provide  a  work 
programme  for  the  pre-accession  phase.  The  Technical  Assistance  and  Information 
Exchange  Office  (TAIEX) was set up with the objective  of providing  complementary 
and focused  technical assistance in the areas of legislation covered in the White Paper. 
A legislative database has recently been established by the  Office. 

-  The  applicant  countries  will  have to transpose  and  implement  all  the  acquis.  The 
"Action  plan  for  the  single  market"  submitted  to  the  Amsterdam  European  Council 
gives details of the priority measures necessary to make the single market work better 
among the fifteen  current  Member  States  in preparation  for  introduction  of the  single 
currency.  This will inevitably entail development of the acquis. 

General  Framework 

Whatever  their  field  of activity,  undertakings  must  be able to  operate  on  the  basis  of 
common  rules.  These  are  important  since  they  shape  the  general  framework  within 
which  economies  operate  and,  hence,  the  general  conditions  of  competition.  They 
include  the  rules  on  competition  (on  undertakings  and  State  aid)  and  tax  measures 
discussed  elsewhere  in  this  opinion,  the  opening-up  of  public  works,  supply  and 
service  contracts,  harmonisation  of  the  rules  on  intellectual  property  (including  the 
European  patent),  harmonisation  of  the  rules  on  company  law  and  accountancy, 
protection  of  personal  data,  transfer  of  proceedings  and  recognition  of  judgments 
(Article 220 EC Conventions). 

Descriptive  Summary 

56 

The Public Procurement Office  under the Ministry of Economic Affairs  is in charge of 
managing  and  supervising the various aspects of public procurement  policy,  although 
its enforcement  powers are rather limited. The Law on Public Procurement  came  into 
force on  1  January  1997. 

The Estonian legislation  for  intellectual  and industrial property  is only to some  extent 
in  accordance  with  Community  requirements.  The  Estonian  Patent  Law  is  based  on 
the requirements  of the Munich convention. Estonia is also preparing  for  accession to 
the WTO/TRIPS  Agreement  (Trade Related Aspects of International  Property  Rights) 
during  1997. 

Company  law is governed by the Commercial  Code, which has undergone  substantial 
reform.  A  number  of  different  kinds  of  enterprise  are  recognised  by  law,  including 
private  and  public  limited  companies.  These  form  by  far  the  majority  of  the 
approximately  50.000  enterprises  actually  registered  in  Estonia.  Generally  speaking 
there  are  no  regulations  dependent  upon  a  company's  size  apart  from  certain 
provisions  relating  to  corporate  governance.  Public  limited  companies  may  issue 
shares  and  there  are  measures  to  protect  the  interests  of  shareholders.  Minimum 
capital  requirements  are  laid  down  by  law.  There  is  a  basic  level  of  protection  for 
creditors.  Companies  are  required  to  publicise  nationally  any  major  decisions 
affecting 
them.  A  Commercial  Register  is  maintained  which  records  the  key 
information  about each company. The Register is open to the public. 

The Law on Accounting  (1995) provides the basic framework  for the annual  accounts 
of  companies,  including  standards,  guidelines  and  recommendations.  An  Estonian 
Accounting  Board  has been  set up. Auditors  are authorised  by the  Estonian  Auditing 
Board. Estonian Regulations on Auditing were issued in September  1994. 

The Personal  Data Protection Act entered into force  in July  1996. A time  limit of one 
year  was given  by the law to administrations  and undertakings  to bring processing  of 
personal  data  into  conformity  with  the  Act.  This  law  establishes  the  institutional 
framework  for  the  protection  of  personal  data,  including  an  independent  supervisory 
authority. 

Current  and  Prospective  Assessment 

Legislation on Public Procurement complies to some extent with the acquis. However, 
in  some  important  fields  it  does  not  fulfil  the  Community  requirements.  This  is  the 
case,  for  instance,  as regards  the  utilities  sector,  the  remedies  system  or  the  Stage  II 
measures  of  the  Commission  White  Paper  for  the  Single  Market.  The  Law  provides 
for  domestic  preference  clauses  which  will  need  to  be  abolished  once  the  Europe 
Agreement  enters  into force.  It is clear that  further  amendments  to the  legislation  are 
needed, but the work is progressing well. 

A  considerable  amount  of  legislative  work  is  still  needed  in  the  field  of  intellectual 
and industrial property  in order to ensure full  compliance with the Community  acquis. 
Drafts  of  Copyright  Law  and  Trademark  Laws  are  foreseen  by  the  Estonian 
authorities  for  1997  in  order  to  comply  with  the  acquis.  According  to  Estonian 

37 

authorities  Patent  Law  is  compatible  with  the  Munich  convention.  Legislation  is 
foreseen  for  1998  and  1999  for  the  protection  of  semi-conductors  and  border 
enforcement. 

Effective  implementation  and  enforcement  will  remain  a  significant  concern  in  the 
medium  term  due  to  the  lack  of  experience  of  the  authorities  involved  and  to  the 
current weakness of internal control and border enforcement  mechanisms. 

According  to  the  information  on company  law provided  by  Estonia,  the  Commercial 
Code already reflects  the provisions of the Second, Third and Eleventh Directives and 
most  of the First  and  the Twelfth  Directive. It is understood  that efforts  are  currently 
being made to bring the Commercial Code Completely in line with the First Directive. 

Concerning  Accounting  the  1995  law  is  largely  in  line  with  the  4th  Directive.  The 
Estonian  Accounting  Board  will  issue  a  guideline  on  consolidation  based  on 
international  standards as well as on the 7th Directive. A number  of further  standards 
are under preparation. A law on auditing is under preparation, which will be  designed 
to transpose the 8th Directive. Certain transitional problems are in evidence relating to 
the  implementation  in  practice  of  the  new  rules,  including  a  shortage  of  qualified 
accountant  and  auditors  and major  efforts  will be required  if they  are to be  solved  in 
the medium term. 

The  law  on  the  protection  of  personal  data  has  clearly  been  inspired  by  the  EC 
framework  Directive.  However,  it will need  improvement  to  be  fully  in  line with  the 
Directive. The  Commission  has no  information  concerning  the implementation  of the 
law, in particular  as far  as the establishment  of the independent  supervisory  authority 
is concerned.  Accession to Council of Europe Convention n°  108 for the protection of 
personal data is not planned in the near  future. 

Conclusion 

The  process  of  approximation  in  the  field  of  public  procurement  needs  to  be 
strengthened.  Further  amendments  will be needed  to meet  all the  requirements  of the 
Public Procurement  Directive. A considerable amount of legislative work  will  still be 
necessary  in the fields of intellectual and industrial property. 

As far  as company  law is concerned, there would not appear to be any major  problem 
with Estonia's  implementing the acquis, although there is as yet no clear timetable  for 
the  adoption  of  the  remaining  measures  required  to  bring  their  legislation  fully  into 
line. 

In  accounting,  actions  to  achieve  full  conformity  with  the acquis  are  programmed  in 
Estonia  and  seem  realisable  in accordance  with the programme  foreseen.  In  auditing, 
the  information  provided  does  not  provide  a  sufficient  basis  on  which  to  make  a 
detailed  assessment  of conformity  with the acquis or Estonia's  prospects  of  achieving 
this in the medium term. 

38 

Estonia has made  progress  in the field of data protection. The implementation  of the 
1996 law will provide Estonia with useful  experience, but further  efforts  are required 
to bring the law fully  in line with the EC framework Directive. 

Free Movement of Goods 

Free  movement  of  goods  can be  achieved  only  by removing  measures  which  restrict 
trade  -  not  only  customs  duties  and  quantitative  restrictions  but  all  measures  with 
equivalent, i.e. protectionist, effect,  irrespective of whether or not they are  specifically 
aimed  at  domestic  or  imported  products.  Where  technical  standards  are  not 
harmonised, the free movement of goods must be ensured by applying the principle of 
mutual recognition of national rules and accepting the rule that national  specifications 
should  be  no  more  stringent  than  is  required  to  achieve  their  legitimate  objectives. 
This rule was established in the Cassis de Dijon judgment. 

For the purpose of harmonisation,  the European  Community has developed  the  "New 
Approach" which introduces an approach carefully  balanced between government  and 
private  autonomous  bodies  and  in  which  Community  legislation  and  European 
standards  play  a  distinct  complementary  role.  Thus,  instead  of  imposing  technical 
solutions, Community  legislation  is limited  to establishing  the essential  requirements 
which  products  must  meet.  Products  manufactured  in  accordance  with  European 
standards  are  presumed  to  meet  such  essential  requirements,, but  European  standards 
are  not  the  only  way  to  prove  such  conformity.  The  "New  Approach"  works  in 
conjunction  with  the  "Global  Approach"  on  product  certification  which  governs  the 
apposition  of  the  "CE  Mark"  on  the  product.  For  other  products  such  as 
pharmaceuticals, chemicals, motor vehicles, and food products, Community  directives 
follow the traditional regulatory pattern of providing fully  detailed rules. 

The free movement of goods also dictates that a number of Community  harmonisation 
measures  be  transposed  into  national  law.  Implementation  of  health  and  safety 
harmonisation  rules  is  particularly  important  and  requires  the  establishment  of 
appropriate mechanisms and organisations, both for businesses and the authorities. 

Two  of  the  "horizontal"  directives  essential  to  smooth  running  of  the  single  market 
are the Directive  on general  product  safety  and the Directive on liability  for  defective 
products. The regulations concerning general product safety  are covered in the section 
on consumer protection (see section 3.6). 

The  rules  on  agricultural  products  (compliance  with  veterinary  and  plant-health 
standards) are explained in detail in the section on agriculture (see section 3.4). 

Descriptive  Summary 

The  liberal  trade  policy  of  Estonia,  in  general,  means  that  very  few  restrictions  are 
imposed  on  the  free  movement  of  goods.  No  legislation  on  trade  barriers  or 
quantitative  restrictions  is in  force.  No  significant  problems  are  foreseen  concerning 
the implementation of the Articles 8-35 of the Europe Agreement. 

39 

Except for some energy prices (electricity, gas, petrol), prices are freely  determined  in 
the  market.  Licenses  are  needed  for 
tobacco,  cars, 
pharmaceuticals,  arms, precious  metals,  and  metals.  The  principal  objective  of  this 
system  is  the  protection  of  the  consumer.  The  system  does  not  differentiate  on  the 
basis of the origin of the products and does not impose any quantitative restrictions. 

importation  of  alcohol, 

In  the  fields  of  standardisation,  conformity  assessment  and  metrology  a  series  of 
legislative  measures  were  adopted  since  1993 to  improve  compatibility  with  the  EU 
system.  A law on standardisation  drawing the line between technical  regulations  and 
voluntary  standards was enacted by the end of  1996.  Estonia has affiliate  membership 
of  the  European  Centre  for  Standardization  (CEN)  and  the  European  Centre  for 
Electromechanical  Standardization  (CENÉLEC)  and  will  apply  for  European 
Telecommunication  Standardisation Institute (ETSI) membership in  1997. 

Current and Prospective Assessment 

The  implementation  of  free  trade  in  goods  between  Estonia  and  the  EU  is  already 
advanced.  The licensing  system will need to be reviewed  and, if necessary,  adjusted. 
The  implementation  of  a  new  system,  in  conformity  with  WTO  (World  Trade 
Organization) rules, is foreseen  during 1997. 

According  to  the  Estonian  work  programme  for  the  approximation  of  technical 
legislation;  1977  should  be  an  important  year  for  the  alignment  on  White  Paper 
priority measures.  However, little evidence is available of substantial legislative work 
going  on with  respect  to  such priority  measures, nor  have  indications  been  given  on 
approximation  plans  for  the  rest  of  White  Paper  measures.  A  number  of  New 
Approach  directives  are  planned  for  adoption  by  the  end  of  1997,  and  so  is  basic 
legislation  on  foodstuffs  and  chemicals.  Legislative  alignment  on  pharmaceuticals 
seems  to  proceed  rather  speedily,  while  in  the  automotive  sector  a  type-approval 
based  on  the  EU  system  will  become  operational  in  1997  following  Estonia's 
signature of the UN-ECE Agreement two years ago.  It needs to be borne  in mind,  in 
any  case,  that  secondary  legislation  is  often  necessary  in  order  to  implement  the 
general legislative  framework. 

In the field of certification,  Estonia is in principle ready to accept EC marking  without 
submitting  products  imported  from  the  EU  to  additional  conformity  assessment 
procedures. 

It  is  not  easy  to  assess  the  state  of  Estonia's  legislation  on  product  liability.  Draft 
legislation  is  under  consideration  but  no  timetable  is  available  and  Estonia  has 
indicated a need for technical assistance. 

In  the  areas  subject  to  national  rules  and  not  covered  by  Community  harmonisation, 
there  is too  little  information  available to assess whether  Community  legal  principles 
on  the  free  movement  of  goods  are  properly  applied  in  Estonia.  The  reporting 
procedures  which  form  part  of the  internal-market  machinery  are  not  yet  operational 
and so cannot be used  in the pre-accession period. The most important instruments  in 
this  connection  are: Directive  83/189, requiring  governments  to  report  draft  national 

40 

technical  standards  and  regulations;  Decision  3052/95  on  measures  derogating  from 
the principle of the free  movement  of goods; procedures by which complaints  can  be 
submitted  to the  Commission;  and Article  177 of the Treaty, enabling Member  States 
to  ask  for  preliminary  rulings  from  the  Court  of  Justice.  It  is  also" hard  to  assess 
whether  Estonia complies with the principle of mutual recognition; more  information 
is  required  on  its  national  rules,  and  on  administrative  practices, which  can  have  an 
effect  on product marketing. 

Conclusion 

The  free  movement  of  goods  will  not  represent  a  serious  obstacle  to  Estonia's 
accession  provided  that  the  on-going  law  reform  is  continued  and  enforced,  in 
particular  as regards  standardisation  and conformity  assessment.  The degree to  which 
Estonia  will  have  a  good  record  of  legislative  alignment  by  the  end  of  the  pre-
laudable 
accession  period 
approximation  efforts  in  the  fields  of  standardisation  and  conformity  assessment, 
some doubts remain as to a substantial  and speedy process of legislative  alignment  in 
a number of technical fields. 

to  assess  for  the  time  being.  Despite 

is  difficult 

The  Estonian  authorities  will  also  have  to  ensure  that  in  fields  not  covered  by 
harmonisation  at  Community  level  their  national  legislation  is  not  likely  to  hinder 
trade,  in  particular  by  checking  whether  the  law  in  force  is  commensurate  with  the 
goals sought. 

Free Movement of Capital 

The  Europe  Agreement  establishes  the  principle  of  the  free  movement  of  capital 
between Estonia and the EU.  This, as far as the obligations of Estonia are  concerned, 
applies  from  the  entry  into  force  of  the  Europe  Agreement  as  regards  direct  and 
portfolio  investment,  commercial  credits  and  financial  loans  made  by  companies 
already  established  in  Estonia  and  as  regards  branches  and  agencies  of  Community 
companies (as well as the self-employed),  gradually during the transitional period. 

The White Paper highlights the link between the free movement of capital and the  free 
movement  of  financial  services.  It  suggests  a  sequence  of  capital  movements 
liberalisation,  starting  from  medium  and  long  term  capital  movements  and  those 
linked to commercial operations, to short term capital. 

Descriptive  Summary 

Since  the  1992  monetary  reform,  Estonia  has  pursued  a  liberal  policy  as  regards 
foreign  exchange  controls.  Convertibility  for  current  payments  was  introduced 
simultaneously  with the monetary reform.  Estonia accepted formally  the provisions  of 
Article  VIII  of  the  Articles  of  Agreement  on  15  August  1994.  Most  capital 
movements were liberalised  in  1992. All foreign  exchange controls were abolished  in 
1994,  as  confidence  to  monetary  policy  increased.  At  present,  there  are  no  foreign 
exchange  controls  in  Estonia  and  payments  between  Estonian  and  foreign  entities  as 
well as currency conversions can be effected  free of any restrictions. 

41 

Investments  in  real  estate  by  non-residents  is  the  only  capital  transaction  for  which 
restrictions  still apply. As a general rule, land and real estate can be acquired  by non 
residents under license of the county-governor. In special cases (islands, border zones) 
acquisition of land by non-residents and foreign  legal persons is not permitted. 

Since  1993 foreign  direct investment has had an important role in the development  of 
the economy and the modernisation of enterprises.  The volume of FDI made up to 9.8 
%  of  GDP  in  1993  and  9.3  %  in  1994  .  The  total  amount  of  FDI  reached 
approximately  600  MECU  for  the  period  1990-1996.  The  share  of  FDI  from  EU 
countries  in  total  was  65.7  %  in  1994  and  75.8  %  in  1995. 
Industry  trade  and 
transport were the sectors which attracted most FDI capital. 

In  regard  to  the  physical  cross-border  transfer  of  means  of payments  measures  were 
taken in order to prevent money-laundering. 

Current  and Prospective  Assessment 

The  degree  of  capital  liberalisation  already  introduced  by  Estonia  goes  beyond  the 
obligations  undertaken  under  the  Europe  Agreement.  Estonia  should  have  no 
difficulties  in removing  the residual  restrictions, concerning  acquisition  of real  estate 
by non-residents  and  assume the  Community  acquis  in the area of capital  movement 
in the next few years. 

Conclusion 

The  field  of  free  movement  of  capital  does  not  present  any  major  obstacles  for 
accession in the medium term. 

Free Movement  of Services 

The  basis  of  the  free  movement  of  services  is  the  prohibition  of  discrimination,  in 
particular  on grounds  of nationality,  and rules  on the alignment  of divergent  national 
legislation.  These  rules  often  concern  both  the  right  of  establishment,  which  comes 
under  the  heading  of  the  free  movement  of  persons,  and  the  freedom  to  provide 
services.  Their  implementation  implies  the  establishment  of administrative  structures 
(banking  control  boards,  audio-visual  control  authorities,  regulatory  bodies)  and 
greater  cooperation  between  Member  States  in  the  area  of  enforcement  (mutual 
recognition  arrangements). 

A  substantial  amount  of  the  legislation  applicable  to  the  free  movement  of  services 
relates to  financial  services.  It also  concerns the problems relating  to the  opening-up 
of  national  markets  in  the  sectors  traditionally  dominated  by  monopolies,  e.g. 
telecommunications  and, to a certain extent, energy  and transport. These subjects  will 
be dealt with in the sections of the Opinion specifically  referring  to them. 

Descriptive  Summary 

42 

Estonia's  Banking  sector experienced  a crisis rather early on in the transition  process 
(1992-3). The Law on Credit Institutions came into effect  in  1995 and was drafted  on 
the basis  of  the  EC's  Banking  Directive.  Banking  supervision  is being  taken  care  of 
by  a  department  of  the  main  Bank  of  Estonia,  which  is  also  responsible  for  the 
prevention of money  laundering. 

The market is fairly concentrated but market penetration is fairly  low 

Privatisation  of  commercial  banks  has  been  quick.  It  is  planned  to  fully  end  State 
ownership in banks in the coming years. 

The  Estonian  Securities  market  is  relatively  new.  The  Securities  Market  Act  dates 
from  1993.  The  first  public  issue  of  shares  was  carried  out  in  1991  while  the  first 
government  bonds  were  issued  in  1993.  In  1994,  the  Estonian  Central  Register  of 
Securities  was  established  and  supervisory  activities  over the  securities  market  were 
launched.  The  Tallinn  Stock  Exchange  began  its  activities  operations  in  May  1996 
and disposes of an electronic trading system. 

All members of the Exchange must be legal persons registered in Estonia, having been 
granted  a  securities  intermediary  licence  by  the  Ministry  of  Finance,  and  holding 
Tallinn  Stock  Exchange  shares  at  the  minimum  equivalent  of  400000  EEK  (26000 
ECU). 

The  insurance  sector is regulated  by the Insurance Act of  1992 which was drafted  on 
the basis  of  EU  insurance  legislation.  However,  it complies  only  to  a certain  degree 
with  the  acquis.  The  insurance  sector  is  monitored  by  the  Insurance  Supervisory 
Authority  which  was  set  up  in  1993  under  the  responsibility  of  the  Ministry  of 
Finance. 

Current  and Prospective  Assessment 

The First Banking Directive, the Own Funds Directive and the Solvency Directive are 
mostly  incorporated  into  Estonian  banking  law.  However,  there  are  certain  key 
aspects which  do not yet fulfil  EU requirements. The Second Banking  Directive,  The 
Annual  Accounts  and  Consolidated  Accounts  Directive  and  the  Large  Exposures 
Directive  have  also  been  partially  implemented.  There  is  no  specified  timetable  for 
full  implementation of the Capital Adequacy Directive. 

There  is  currently  no  legislation  in  force  for  bank  deposit  guarantee  schemes. 
However,  a draft  law has  been  submitted  to  Parliament  and  its adoption  is  expected 
for  October  1997.  The  Government  will present  to  Parliament  in  September  a  new 
law  on  credit  institutions,  which  will  deal  with  all  the  Stages  I  and  II  directives, 
including  money  laundering  with  the  exception  of  the  Capital  Adequacy .Directive. 
Adoption is expected at the end of this year. 

The Estonian legislation for  Securities only to a limited degree covers the  Community 
the  acquisition  or  disposal  of  majority 
acquis,  with  specific  provisions  for 

43 

shareholding  in  listed  companies,  insider  dealing,  and  public  offers  of  transferable 
securities missing. 

Also  a  licence  regime  and  state  supervision  with  regard  to  investment  services  other 
than securities trading on the stock exchange is not available. Stage II measures of the 
White  Paper  so  far  have  not.  been  implemented  yet  in  this  field.  As  regards 
enforcement,  the  Securities  Inspectorate  must  be  strengthened  considerably  in  terms 
of  staff  and  other  resources.' A  draft  Securities  Market  Act  is  under  preparation  for 
submission  to the Parliament  before  the end of  1997. In this connection  fulfilment  of 
Stage  I measures  is  foreseen  for  the public  issue  of  securities, the  legal  status  of  the 
stock exchange and insider training. 

A revision of the existing Insurance Act is currently  under preparation  with a view to 
increasing  the  minimum  capital  requirements  and  completing  the  privatisation.  An 
insurance  supervision  system  responding  to  a  free  market  system  still  needs  to 
developed. 

Conclusion 

Although  the  Estonian  Banking  system  is  based  on  a  free  market  policy,  apparently 
stable  and  well  supervised,  in  the  context  of  EU  accession  there  are  still  some 
elements which either do not fully  correspond  to EU requirements  or will  need  rather 
significant  amendment for full  harmonisation. 

In the  field  of  Securities, the  ongoing  reform  of  legislation  needs to be  intensified  in 
order to fulfil  EU requirements  in the mid-term perspective.  Special attention must be 
given to the strengthening of the regulatory bodies. 

On  the  assumption  of  an  intensification  of  the  current  legal  reform  work  it  is  not 
expected that the insurance sector will present major problems for  accession. 

The  financial  services  sector  in  Estonia  is  rather  well  developed.  However,  the 
approximation  process  seems  to  be  rather  slow,  both  on  the  point  of  view  of  the 
enactment  of  the  appropriate  regulations  and  of  their  actual  implementation  which 
makes  it  difficult  to  integrate  the  EU  financial  market  within  reasonable  delay.  The 
field  of  free  movement  of  services  is not  expected  to present  any  major  obstacles  to 
accession in the medium-term. 

Free Movement of Persons 

The  free  movement  of  persons  encompasses  two  concepts  with  different  logical 
implications  in the  Treaty.  On  the  one  hand,  Article 7a  in  Part  One  of  the  Treaty  on 
'Principles'  mentions the concept  in connection with the establishment  of the  internal 
market  and  implies  that  persons  are  not  to  be  subject  to  controls  when  crossing  the 
internal  frontiers  between  the  Member  States.  On  the  other  hand,  Article 8a  in  Part 
Two of the Treaty  on  'Citizenship of the Union'  gives every  citizen  of the Union  the 
individual  right  to  move  and  reside  freely  within  the territory  of  thé  Member  States, 
subject  to  certain  conditions.  The  abolition  of  frontier  checks  must  apply  to  all 

44 

persons,  whatever  their  nationality,  if  Article 7a  is not  to  be  meaningless.  While  the 
rights  deriving  from  Article 8a  apply  in  all  Member  States,  those  stemming  from 
Article 7a have not yet been fully  applied throughout the Union. 

(a)  Free  Movement  of  Union  Citizens.  Freedom  of  Establishment  and  Mutual 

Recognition of Diplomas and Qualifications 

The Europe Agreement provides  for  the non-discriminatory  treatment  of workers that 
are legally employed (as well as their families). It covers the possibility  of cumulating 
or  transferring  social  security  rights,  and  encourages  Member  States  to  conclude 
bilateral  agreements  with  Estonia  on  access  to  labour  markets.  From  1999,  the 
Association  Council  will  examine  further  ways  of  improving  the  movement  of 
workers. 

The  White  Paper  considers  the  legislative  requirements  in  order  to  achieve  a 
harmonious  development  of  the  labour  market,  whilst  simultaneously  preventing 
distortions of competition. 

The  free  movement  of  workers  is  one  of the  fundamental  freedoms  enshrined  in  the 
Treaty;  freedom  to  practise  certain  professions  (e.g.  in  the  legal  and  health  fields) 
may, however,  be  subject  to certain  conditions,  such  as qualifications.  Depending  on 
the case, these may be dealt with through coordination or by applying the principle of 
mutual recognition. Freedom of establishment  is also guaranteed'under the Treaty and 
covers the economic activity of self-employed  natural persons and companies. 

The free choice of place of residence may thus be subject to minimum conditions as to 
resources and health  insurance where the person does not exercise a profession  in the 
country  concerned. 

Descriptive  Summary 

Nationals  of  third  countries  can  move  to  Estonia  for  residence  or  employment 
purposes.  For  residence  purposes,  they  can  obtain  residence  permits  for  personal 
reasons  or for  family  reunification.  Third country  nationals who enter,  stay  and  work 
in  Estonia  illegally,  without  a  valid  visa,  residence  permit  or  combined  residence-
working permit, as well as their employers, may be prosecuted  according to the  Code 
of Administrative  Offences. 

The  existing  legislation  concerning  the  education  and  training  of  dentists,  doctors, 
veterinary surgeons, architects, midwives and nurses, only to a limited extent take into 
account  the  Community  requirements  regarding  mutual  recognition  of  professional 
qualifications.  Furthermore, enforcement  structures are still mainly to be set up. 

Current  and  Prospective  Assessment 

Estonian  legislation  will  need  to  be  prepared  for  the  equal  treatment  of  EU  citizens 
with nationals working in Estonia. 

45 

In  order  to  fulfil  the  Community  requirements  regarding  mutual  recognition  of 
professional  qualifications,  a  general  Law  on  Professions 
is  being  prepared. 
Finalisation  of  a  draft  is  foreseen  for  the  end  of  1997.  The  curricula  for  dentists, 
pharmacists, midwives and nurses are being reviewed and reformed  in the light of the 
Community requirements. The existing legislation only to some degree conforms  with 
the  acquis  and  a  sustained  and  intensive  continuation  of  the  current  reforms  will  be 
needed  to  take  up  the  acquis  in  the  medium  term.  The  time  schedules  for  possible 
reforms  of  specific  educational  structures  must,  however,  be  carefully  considered  as 
such reforms, by their nature, will take several years to implement. 

Conclusion 

The acquis  for free movement  of persons does not in general present major  problems 
in  terms  of  accession  in  the  medium  term.  As  regards  mutual  recognition  of 
legislative  and 
professional  qualifications, 
enforcement  measures  will  need  to be  intensified  in  order  for  it to  be  in place  in  the 
mid-term perspective. 

the  preparation  of 

the  necessary 

(b) Abolition  of Checks on Persons at Internal Frontiers 

The free  movement  of persons within the meaning of Article 7a of the EC Treaty,  i.e. 
the  abolition  of  checks  on  all  persons,  whatever  their  nationality,  at  the  internal 
frontiers  has not yet been fully  implemented in the Union. Doing away with checks on 
persons  is  conditional  on  the  introduction  of  a  large  number  of  accompanying 
measures,  some  of  which  have  yet to be  approved  and  implemented  by  the  Member 
States (see separate section on Justice and Home Affairs).  However, that objective  has 
been  achieved  by  a  limited  number  of  Member  States  in  accordance  with  the 
Schengen  Convention  (seven  Member  States  already  apply  it  and  another  six  are 
working towards implementation). 

The  draft  Treaty  aims  to  make  that  objective  easier  to  achieve  within  the  Union  by 
including  a new chapter on an area of freedom,  security  and justice and  incorporating 
the Schengen acquis into the Union. 

Estonia  has  stated  its  desire  and  readiness  to  fulfil  the  provisions  of  the  Schengen 
Agreement.  It  has  begun  preparations  to  this  end  and  has  sought  assistance  in  this 
connection  from  Member  States,  notably  in  regard  to  the  strengthening  of  border 
controls. 

General  Evaluation 

1. Estonia's  progress  in the  implementation  of legislation  relating to the  White  Paper 
is  summarised  at  annex.  According  to  that  table,  Estonia  considers  that  by  30  June 
1997  it  will  have  adopted  national  implementing  legislation  for  283  of  the  899 
directives and regulations in the White Paper. That figure  covers provisions for  which 
Estonia considers  it will have adopted  implementing  legislation  or which  it will  have 
checked  for  compatibility  with  Community  rules  and  does  not  prejudge  actual 

46 

compatibility  as  such,  on  which  the  Commission  is not  able  at this  stage  to  state  an 
opinion. 

2.  Estonia  has  made  significant  progress  with  the  alignment  of  its  legislation  with 
Community  rules  in  most  of the  areas  covered  by  this  chapter.  Legislation  has  been 
adopted in full  or in part to implement most of the measures according to the Estonian 
authorities' assessment, though the Commission cannot at this stage express a position 
on its total compatibility with Community  law. However, considerable efforts  are still 
necessary  to  achieve  full  conformity  with  the  acquis,  in  particular  in  the  areas  of 
public procurement, intellectual and industrial property and financial services. 

The Estonian authorities are well aware of these requirements, and amendments to the 
legislation  or new texts are under preparation. Most of them should be adopted  in the 
next two years. 

3.  Despite  the  progress  already  achieved  in  the  field  of  legislation,  serious  doubts 
should  be  raised  about  the  capacity  of the  Estonian  administration  to  implement  this 
legal  framework.  For  the  time  being,  the  Estonian  administration  still  shows 
significant  weaknesses.  However,  these  can  be  considered  transitional  given  the 
relatively high potential of the presently understaffed  public  administration. 

As  things  currently  stand,  the  Commission  cannot  yet  express  an  opinion  on  the 
capacity of companies, particularly  small and medium-sized  businesses, to  implement 
the acquis. 

4.  Leaving  aside  certain  specific  aspects relating to agriculture, checks  at the  internal 
frontiers  of the Union  can only be abolished  once sufficient  legislative  harmonisation 
has  been  achieved.  This  calls  for  mutual  confidence,, based  in  particular  on  sound 
administration  (e.g. the  importance  of safety  checks on some products  at the place of 
departure).  As  far  as  goods  are  concerned,  the  completion  of  the  internal  market  on 
1 January  1993 was only  achieved  by doing  away with all the formalities  and  checks 
performed  by  the  Member  States  at  the  internal  borders  of  the  Union.  In  particular 
these  checks  covered  technical  points  (product  safety),  veterinary,  animal-health  and 
plant-health  matters,  economic  and  commercial  matters  (e.g.  prevention  of 
counterfeiting  of  goods),  security  (weapons,  etc.)  and  environmental  aspects  (waste, 
etc.).  In  most  cases, the  abolition  of checks was  only  made  possible  by  the  adoption 
and  application  of  Community  measures  harmonising  the  rules  on  movement  and 
placement  on  the  market  (particularly  as  regards  product  safety)  and,  where 
applicable,  by  shifting  the  place  where  controls  and  formalities  are  conducted  to 
within  the  Member  States  or their  markets  (in  particular  as  regards  VAT  and  excise 
duties,  veterinary  and  plant-health  checks, and  the  collection  of  statistics).  A  section 
of Estonia's present  borders will  become the Union's external  frontier  and this  means 
border checks will need to be stepped up (see separate section on Customs). 

In view  of the  overall  assessment  that  can  be made  of progress  achieved  to  date  and 
the  rate  at  which  work  is  advancing  in  the  various  areas  concerned,  it  is  difficult  at 
present  to  put  a  time-scale  on  Estonia's  ability  to  take  over  and  implement  all  the 

47 

instruments  required  to abolish  internal  border  checks and to transfer  those checks  to 
the Union's external  frontier. 

5. Estonia has already  adopted significant  elements of the acquis relating to the single 
market. However, the Commission  is not yet able to take a position on every  measure 
whose  transposition  has  been  reported  by  Estonia.  Further  progress  will  be  needed 
with regard notably to public procurement, intellectual and industrial property and the 
financial  services  sector.  In  most  areas,  enforcement  needs  to  be  strengthened.  A 
particular  effort  will  be  necessary  with  regard  to  the  strengthening  of  the 
administration.  In the medium  term, provided  current  efforts  are  stepped  up,  Estonia 
should have adopted  and implemented most of the single market legislation  and made 
the  necessary  progress  on  the  mechanisms  of  enforcement,  in  order  to  be  able  to 
participate fully  in the internal market. 

Competition 

European  Community  competition  policy  derives  from  Art.  3  (g)  of  the  Treaty 
providing  that  the  Community  shall  have  a  system  ensuring  that  competition  in  the 
internal  market  is not  distorted.  The main areas of application  are anti-trust  and  state 
aid. 

The  Europe  Agreement  provides  for  a  competition  regime  to  be  applied  in  trade 
relations between the Community  and Estonia based on the criteria of Articles  85 and 
86 of the  EC  Treaty  (agreements  between  undertakings/abuses  of  dominant  position) 
and  in Article  92  (State  aid) and  for  implementing  rules  in these  fields  to be  adopted 
within three years of the entry into force of the Agreement. 

Furthermore,  it provides that Estonia will make its legislation compatible with that of 
the Community  in the field of competition. 

The  White  Paper  refers  to  the  progressive  application  of  the  above  provisions  and 
those  of  the  Merger  Regulation  (Regulation.  (EEC) No  4064/89)  and  of  Articles.  37 
and 90 (Monopolies and Special Rights). 

Descriptive  Summary 

The Estonian  Competition  Act came into force  on  1 January  1994 and  safeguards  the 
principles of a free  market. It only contains very rudimentary provisions on restrictive 
agreements  and  abuse  of dominance,  and does not  contain  any provisions  for  merger 
control  or  provisions  for  granting  block  exemptions.  Procedural  aspects  also  need  to 
be reviewed. 

The  Competition  Board  was  established  in  1993  under  the  Ministry  of  Finance  to 
supervise the implementation  of the Competition  Act and the Act of Prices. The field 
of  state  aid  is  monitored  by  the  Budget  Department  of  the  Ministry  of  Finance  in 
cooperation with the Competition  Board. 

48 

In  order  to  be  in  line  with  the  current  and  foreseeable  situation  regarding  sectors 
subject  to the monopolies, Estonia has apparently  started its policy of liberalising  and 
opening  up  to  competition  certain  sectors  such  as  telecommunications  and  postal 
services. 

The state aid  inventory  is not complete and some way from the methodology  used by 
the Commission in its aid survey. 

Current and Prospective Assessment 

The  main  weaknesses  of  the  existing  Competition  Act  will  be  removed  with  the 
adoption in  1997 of the new Competition Act. 

In various commercial  sectors, systems of exclusive rights have been established  and 
will  have  to  be  progressively  adjusted  or  abolished  before  accession.  This,  for 
instance,  is  the  case  in  telecommunication  services,  and  air,  railway  and  maritime 
transport.  Existing  state  monopolies  would  need  to be discontinued  before  accession 
in such areas as oil shale, electricity supply, and export of scrap metals. 

A substantial effort  must be made to establish a state aid inventory in accordance with 
Community practice. The compatibility of the existing "Fund for  state export aid" and 
"Export  credit  fund"  is  very  doubtful.  Other  aid  measures  constitute  operating  aids 
which are only allowed under very strict conditions. Due to the lack of transparency, it 
is unclear whether the conditions for the granting of operating aid are complied with. 

In  addition  to  the  adoption  of  legislation  sufficiently  approximate  to  that  of  the 
EC,credible  enforcement  of  competition  law  requires  the  establishment  of  well 
functioning  anti-trust  and  state  aid  monitoring  authorities.  It  requires  moreover  that 
the judicial  system,  the  public  administration  and  the  relevant  economic  operators 
have a sufficient  understanding of competition law and policy. 

Conclusion 

With  the  forthcoming  adoption  of  the  new  draft  Competition  Act  the  progress  in 
approximation  of  legislation  in  the  field  of  anti-trust  is  significant.  Subject  to  the 
introduction in the new draft text Competition Act of some amendments, the degree of 
approximation  in the state aid area would also be  satisfactory. 

As regards  enforcement  the  Estonian  Competition  Board  seems to be working  rather 
well and seems to be capable of enforcing the new Competition law when adopted. 

However,  considerable  efforts  will  be necessary  to  fulfil  the requirements  as  regards 
state  aid  monitoring  in  the  medium  term,  in  particular  in  respect  of  transparency. 
Close cooperation with the Commission in this field will be necessary. 

It  appears,  moreover,  that  in  certain  exclusive  and  special  rights  exist  which  are  not 
compatible  with  the  Community  acquis. These  problems  should  be  addressed  in  the 
near  future. 

49 

3.2 

Innovation 

information  Society 

Present  Situation 

The  economic  and  social  effects  made  possible  by  the  combination  of  information 
technology  and  telecommunications  are  great. 
In  Estonia  these  possibilities  were 
neglected  before  1990  although  education  generally  was  not.  Today  the  education 
sector  has  taken  a  leading  role  in  promoting  the  Information  Society.  Trade  data 
for  the  information  technology  (IT)  sector  are  lacking  but  the  number  of  PCs  per 
100  inhabitants  (5.5  in  1995)  is  high  in  relation  to  GDP  per  capita.  The  existence 
of host computers  on the Internet,  as a relative measure  of development  towards  the 
information  society  (IS),  suggests  that  Estonia  exceeds  the  achievement  today  of 
five  EU countries.  Perhaps  taking  a lead  from  the experience  in Finland  which  one 
of  the  EU's  leading  countries  in  this  respect,  the  Government  of  Estonia  has  been 
active  in  cooperating  with  EU  initiatives  and  in  promoting  the  use  of  Information 
and  Communication  Technologies  (ICTs) and particularly  in the education  sector. 

Conclusion 

Because  of  the  positive  approach  to  telecommunications  liberalisation  combined 
with  the  excellence  of  efforts  at  national  level  in  the  national  education  sector, 
Estonia  can expect to realise the potentialities  of the Information  Society  earlier  than 
the average CEEC  and no later than many  EU member  states. 

Education. Training and Youth 

Articles  126 and  127 of the EC Treaty provide that the Community  shall contribute to 
the  development  of  quality  education  and  implement  a  vocational  training  policy 
aimed  at promoting  the European  dimension  in education  and  at enhancing  industrial 
adaptation  and  the  responsiveness  of  the  labour  market  through  vocational  training 
policies. 

The Europe Agreement provides for co-operation  in raising the level of education  and 
professional  qualifications.  The White Paper includes no measures in this field. 

Descriptive  Summary 

Estonia's educational  spending amounts to 5.7 % of GDP.  Education takes  17.0 % of 
the state budget. 

There are  240,000 pupils, 27,000 students and  19,000 teachers in Estonia. 

Estonia  has  six  state  universities,  one  private  university,  and  20  higher  vocational 
education institutions (12 of which are private). 

50 

Estonia  is currently  undertaking  reforms  at all levels of the  systems  of  education  and 
training  in  order  to  further  adapt  the  country  to  the  needs  of  a  democratic  society 
based on a market economy. This is necessary, not only to achieve progress  in regard 
to  key  economic  factors  (such  as  productivity  and  the  quality  of  production, 
competitiveness  on  the  international  markets,  development  of  the  private  sector, 
labour  mobility,  and  unemployment),  but  also  to  ensure  the  democratic  functions  of 
society. 

No  nationally  agreed  comprehensive  vocational  training  policy  exist  at  the  moment 
but vocational training  importance is increasing in national policy. 

A  vocational  education  and  training  department  was  established  by  the  restructuring 
of the Ministry of Education which took place at the beginning of 1996. 

The  Tempus  programme  has  contributed  to  the  achievement  of  the  goals  of  higher 
education  reform  and  created  the basis for  cooperation  with the EU  higher  education 
institutions. 

About  14,2 % of the total population  of Estonia is aged between  15 and 25.  The  law 
on  youth  is  currently  being  developed,  which  aims  to  improve  conditions  for  young 
people,  stimulate  active  participation  in  the  process  of  démocratisation  of  civil 
society,  and  to  provide  the  conditions  for  voluntary  service  activities  for  young 
people.  Some  Estonian  youth  organisations  have  been  participating  in  European 
youth  activities  since  1995,  as  a  first  step  towards  participation  of  Estonia  to  this 
programme. 

Current  and  Prospective  Assessment 

In order, to achieve a comprehensive upgrading of the education and training  systems, 
considerable 
text  books, 
equipment  and buildings will be needed. Due to the financial  constraints, this  process 
is likely to take a number of years to achieve. 

in  curriculum-reform, 

investments 

training, 

teacher 

Despite achievements, reforms  are still at the very beginning  and there remains  much 
to  do  before  the  vocational  system  can  be  considered  in  accordance  with  EU  and 
Member States requirements. 

Estonia's  participation  in  Community  programmes  will  have  positive  effects  on  the 
people  concerned  and  represent  a  good  preparation  for  integration  in  Community 
programmes. 

Conclusion 

In the perspective of accession, no major problems should be expected in these  fields. 

Research  and  Technological  Development 

51 

Research  and  Technological  Development  (RTD)  activities  at  Community  level,  as 
provided  for  by  the  Treaty  and  in  the  Framework  Programme,  aim  at  improving  the 
competitiveness  of  European  industry,  the  quality  of  life,  as  well  as  supporting 
sustainable development, environmental protection, and other common policies. 

The  Europe  Agreement  will  provide  for  co-operation  in these  areas, notably  through 
participation  in  the  Framework  Programme.  The  White  Paper  includes  no  direct 
measures in this  field. 

Descriptive  Summary 

The  Estonian  Research  and  Development  Council  is  the  main  Estonian  institution 
responsible  for  implementing  science  and  technology  policy,  managing  strategic 
government  programmes  and  planning,  co-ordinating  and  financing  all  state  funded 
activities.  Competitive  mechanisms  for  research  funding  have  been  introduced.  The 
current science expenditures represents 0.7% of GDP in 1994. 

In addition to the  universities, Estonia has 32 state research institutions. The  research 
is mostly  state-funded,  and concerns both basic and applied research (figures  for  basic 
research fell below 50% of the budget in 1995). 

Estonia's long term priorities are: 
- 
- 

to bring financing  up to the average European Union level, 
to orient priorities towards those of the Community. 

In the short term, Estonia is aiming to: 
-  ensure that the  state  budget  allocations  for  research  are kept  at the  level  of 2 % of 

expenditures, 
-  substantially 

innovation, 
increase  state  budget  expenditure  on  technological 
predominantly  via  the  Innovation  Foundation  under  the  Ministry  of  Economic 
Affairs. 

Regular  cooperation  with  the  European  Community  started  in  1992  with  the  3rd 
Research  and  Technology  Development  Framework  Programme.  So  far,  cooperation 
was  mainly  concentrated  on  COPERNICUS  (Specific  Programme  for  Cooperation 
with  CECs  and  NIS)  and  remains  rather  low  for  participation  in  the  4th  Framework 
Programme.  Estonia  is  a  member  of  COST  (European  cooperation  in  the  field  of 
scientific  and technical research). 

Since  1992, the statistics in this field are compatible with OECD standards. 

Current  and  Prospective  Assessment 

Important  changes  and  improvements  have  already  taken  place  in  this  sector.  A  big 
effort  has  been  made  in  the  improvement  of  the  internal  structure,  liberalisation, 
financial  support. Human resources and potential remain strong despite the cutbacks. 

52 

Nevertheless,  it  is  necessary  to  improve  the  level  of  innovativeness  in  the  economy 
generally and in industry and to reinforce  the links of research institutes with  industry 
and small and medium enterprises. 

Estonia  is prepared  to play  an active role  in the European  research  and  technological 
development  and  allocate the funds  to this  activity.  It has declared  its intention  to  be 
fully  associated to the 5th Framework  Programme. 

Conclusion 

In  the  perspective  of  accession  no  major  problems  are  expected  in  this  field. 
Accession would be of mutual  benefit. 

Telecommunications 

The  objectives  of  EC  telecommunications  policy  are  the elimination  of  obstacles  to 
the  effective  operation  of  the  Single  Market  in  telecommunications  equipment, 
services  and  networks,  the  opening  of  foreign  markets  to  EU  companies  and  the 
achievement  of  universally  available  modern  services  for  EU  residents  and 
businesses.  These  are  achieved  through  harmonisation  of  the  standards  and 
conditions  for  service  offerings  the  liberalisation  of  the  markets  for  terminals, 
services  and  networks  and  the  adoption  of  necessary  regulatory  instruments.  The 
Directives  and  policies  needed  to  achieve  this  have  now  been  established,  but  the 
liberalisation  of  public  voice  telephony  and  operation  of  related  infrastructure  will 
be deferred  for  a year  or two after  1998 in certain member  states. 

towards 

The  Europe  Agreement  provides  for  cooperation  aimed  at  enhancing  standards  and 
practices 
telecommunication  and  postal  policies, 
standardisation,  regulatory  approaches  and  the modernisation  of  infrastructure.  The 
White  Paper  focuses  on  the  approximation  of  regulation,  networks  and  services, 
followed  by  further  steps ensuring  gradual  sector  liberalisation. 

levels 

EC 

in 

Descriptive  Summary 

Until  1991, the  national  communications  networks  were  part  of  the  Soviet  networks 
so  that,  for  instance,  all  international  lines  were  routed  via  Russia.  The  Estonian 
network  was  entirely  automatic,  but  consisted  largely  of  electrical  engineering 
equipment.  Since regaining independence, the development  of telecommunications  in 
Estonia has been characterised by a general growth in capacity and an improvement of 
quality.  The  telephone  penetration  rate  was  expanded  to  30  per  100  by  the  end  of 
1996 although the waiting list remains large. 

A telecommunications  law was enacted  in  1991 which provides the basis for  a policy 
of  liberalisation  and  licensing.  A concession  agreement  was  negotiated  with  foreign 
investors  in  the  national  operating  company.  The  concession  gives  the  company, 
which  is 49% foreign  owned,  a monopoly  of  switched  telephone  until  the  end  of  the 
year 2000. 

53 

Current and Prospective  Assessment 

Degree of  Liberalisation 

The  Government  has  adopted  a  pro-competitive  policy  for  the  telecommunications 
sector  in  1992  and  partially  privatised  the  state-owned  operating  company  Eesti 
Telecom  (ET). This joint  venture, consisting  of ET (51%), Telecom  Finland  (24.5%) 
and  Telia  (24.5%)  a  monopoly  for  long  distance  and  international  voice  telephony 
until  the year  2001  and  also has  a licensed  mobile telephone  network  using  the  pan-
European standard (GSM). 

Tariff  rebalancing  has  begun  and  although, the  country  already  has  a  relatively  high 
penetration  of  lines,  universal  service,  as  required  by  the  acquis,  remains  to  be 
achieved.  Although  other  infrastructures  (CATV,  internal  road,  rail  electricity)  are 
allowed  to  compete  with  the  public  network,  no  application  for  a  licence "has so  far 
been  made.  Thus  there  is  no  competition  in  this  area.  The  local  market  is  already 
open to  new  entrant  operators  but there  is only  one  small  company  operating.  There 
are  10 mobile  operators,  (1  analogue,  1 using  NMT  450,  4  using  GSM  and  4  using 
DCS  1800)  and  also  5  operators  offering  paging  services.  Satellite  communication 
services  and  value  added  services  can  be  offered  without  licence  as  long  as  no 
connection to the public network is needed. 

Approximation  to  EC Law 

The  regulatory  authority  (the  Inspectorate  of  Telecommunications)  is  functioning 
within  a ministry  where the responsible  minister also exercises  ownership  rights  over 
the principal  operator. About half of EU law has been transcribed  into Estonian law. A 
new  communications  law  is  planned  for  the  end  of  1997  which  will  allow  a  more 
effective  separation  of  the  regulatory  and  policy  body  from  any  operating  company 
and  will  enable  the  Government  to  administer  a pro-competitive  policy  successfully 
law. The Government plans to comply with the acquis  by the year 2000. On the basis 
of progress  to  date,  Estonia has the administrative  capacity  as  long  as it  continues  to 
use technical assistance programmes to meet its objectives. 

Infrastructure 

The  principal  policy  objective  of  the  Government  has  been  to  boost  investment  in 
the  expansion  and  modernisation  of  the  public  telecommunications  networks  and  to 
improve  the quality  of  services  available 

Like  the  two  other  Baltic  States,  the  Estonian  telecommunications  network  was  an 
extension  of  the  USSR  network.  The  original  network  equipment  was  obsolete  and 
modernisation  was  necessary.  Between  1991  and  1996  the  telephone  network  grew 
from  22.1  to  30.0  lines per  100  inhabitants  (compared  to  an  average  of  43.9  lines  / 
100  inhabitants  in  Greece,  Portugal  and  Ireland).  Modernisation  is  under  way  and 
at  the  end  of  1995,  20%  of  the  network  was  digitised  (compared  to  a  current 
average  of  62.4%  for  Greece,  Portugal  and  Ireland).  The  objective  is  to  reach 48% 
by 2000  and  to cut  waiting  times  to a few  weeks. 

54 

The  number of  cellular users  at the end of  1996  was  about 4.1  per  100  inhabitants 
which  is  well  above the  average  for  CEECs.  Growth in mobiles  is  very  fast  since 
the  new  operators  commenced  operations  during  1995.  There  is  competition  in 
both data services  and satellite  services.  There were  22  cable  TV  subscriptions  per 
100 households  in 1995. 

Competitiveness of the Sector 

With  10  employees  /  1000  lines  in  1995,  the  productivity  of  the  public  network 
operator  is  low  compared  to  an  average  for  Greece,  Portugal  and  Ireland  of  6.2 
employees/1000  lines but high relative to  other applicant countries  (12.1).  Although 
the GDP/capita is sixth among the applicant countries the ratio in terms of purchasing 
power is second. The current revenue per line, perhaps just sufficient  to maintain the 
service, has to be significantly  increased to allow for the required investment. 

The current waiting time for a new connection is about three years and at today's rate 
"of network  expansion  it  will  take  a  few  more  years  before  even  basic  telephone 
service will be universally available. 

Conclusion 

Estonia has moved quickly to liberalise the telecommunications field and has a good 
chance  of  complying  with  the  acquis  communautaire  in the  medium  term  provided 
that the current efforts  to transpose laws are continued and measures to liberalise are 
reinforced.  Greater competitiveness  of  the public  operator  must  be  achieved  if  the 
sector is to attract investment and face up to competition. 

Audio-visual 

The audio-visual acquis aims, in the context of the Internal Market, for the provision 
and free movement of audio-visual services within the EU as well as the promotion of 
the European programme industry. The Television Without Frontiers Directive, which 
is  applicable  to  all  broadcasters  regardless  of the modes  of  transmission  (terrestrial, 
satellite,  cable)  or their private  or public  nature,  contains  this  acquis,  setting  down 
basic  rules concerning transfrontier  broadcasting.  The main points  are: to  ensure the 
free  movement  of  television  broadcasts  throughout  member  states;  to  promote  the 
production  and  distribution  of  European  audio-visual  works  (by  laying  down  a 
minimum  proportion  of  broadcasting  time  for  European  works  and  those  by 
independent producers); to set basic standards in the field of television advertising; to 
provide for the protection of minors and to allow for the right of reply. 

The Europe Agreement provides for co-operation in the promotion and modernisation 
of  the  audio-visual  industry,  and the  harmonisation  of  regulatory  aspects  of  audio 
visual policy. 

The Television Without Frontiers Directives is a Stage I measure in the White Paper. 

55 

Descriptive  Summary 

The  legal  framework  for  the  audio-visual  sector  is  determined  by  the  1994  Law  on 
Broadcasting. 

There  are  currently  two  national  television  broadcasters  and  three  local  television 
stations.  Private  broadcasters  need  a  licence  to  operate,  issued  by  the  Ministry  of 
Culture. 

Current and Prospective Assessment 

The  audio-visual  sector  in  Estonia  is  attempting  to  re-establish  itself  after  major 
upheavals  in recent  years, and  is characterised  by  rapid  growth  and  constant  change. 
Its ability properly to adhere to the acquis presupposes an upgrading of the capacity of 
the  programme-making  industry  to  meet  the  important  challenges  of  an  adapted 
regulatory  framework. 

Analysis  of  the  existing  legislation  reveals  a  number  of  deficiencies,  including 
questions  of  freedom  of  reception,  promotion  of  European  works,  advertising  rules 
and the protection of minors. Legislation is being prepared to amend the  Broadcasting 
Law. The draft  represents useful  progress toward alignment with the acquis. 

Conclusion 

Provided  that  the  necessary  legislative  measures  are pursued  with  sufficient  urgency 
and that they are accompanied  by the necessary  structural  adaptations  of the  industry, 
Estonia should be able to meet EU requirements in the medium term. 

56 

3.3.  Economie and Fiscal  Affairs 

Economic and Monetary  Union 

By  the  time  of  Estonia's  accession,  the  third  stage  of  EMU  will  have  commenced. 
This  will  mark  important  changes  for  all  Member  states, including  those  that  dp  not 
participate  in  the  euro  area.  All  Member  states,  including  the  new  ones,  will 
participate fully  in the economic and monetary union. Their economic policies will be 
a  matter  of  common  concern  and  they  will  be  involved  in  the 'coordination  of 
economic  policies  (national  convergence  programmes,  broad  economic  guidelines, 
multilateral surveillance, excessive deficit procedure). They will be required to respect 
the  stability  and  growth  pact,  to  renounce  any  direct  central  bank  financing  of  the 
public  sector  deficit  and  privileged  access  of  public  authorities 
to.  financial 
institutions, and to have completed the liberalisation of capital movements. 

Accession  means  closer  monetary  and exchange  rate co-operation  with  the  European 
Union.  This  will  require  strengthening  structural  reforms  in the area of monetary  and 
exchange rate policies. Member states not participating in the euro area will be able to 
conduct  an  autonomous  monetary  policy  and  participate  in  the  European  System  of 
Central  Banks  (ESCB)  on  a  restricted  basis.  Their  central  banks  have  to  be 
independent  and  have price  stability  as primary  objective.  Monetary  policy  has to  be 
conducted  with  market-based  instruments  and has to be "efficient"  in transmitting  its 
impulses to the real economy. Therefore, reforms  need to be pursued to tackle  factors 
that  hinder  the  efficiency  of  monetary  policy,  such  as the  lack  of  competition  in  the 
banking  sector, the lack of development of financial  markets and the problem  of "bad 
loans" in the  banking  sector.  Finally  all Member  states  shall treat their  exchange  rate 
policy  as a matter  of common  interest and be in a position to  stabilise their  exchange 
rates in a mechanism yet to be decided. 

As  membership  of  the  European  Union  implies  acceptance  of  the  goal  of  EMU,  the 
convergence  criteria  will  have to be  fulfilled  by  Estonia,  although  not  necessarily  on 
accession.  While  the  fulfilment  of  the  convergence  criteria  is  not  a  precondition  for 
EU  membership, 
they  remain  key  points  of  reference  for  stability  oriented 
macroeconomic  policies,  and  must  in  time  be  fulfilled  by  new  member  states  on  a 
permanent  basis.  Hence  the  successful  conclusion  of  systematic  transformation  and 
market  oriented  structural  reforms  is  essential.  Estonia's  economic  situation  and 
progress has already been analysed in preceding chapters of this Opinion. 

Current and Prospective  Assessment 

The  Estonian  Central  Bank  enjoys  a  high  degree  of  independence.  Its  Governor  is 
appointed  with  the  participation  of  the  Central  Bank  Board  and  the  government  is 
excluded  from 
the  appointment  procedure.  In  addition,  the  Central  Bank  is 
independent  from  the  government  in  conducting  its  monetary  policy.  The  formal 
objective  of  the  Bank  is  the  stability  of  the  national  currency  and  the  Law  on  the 
Central  Bank  is  already  compatible  with  the  Treaty  provisions  of  explicit  full 
prohibition  of  central  bank  budget  deficit  financing.  In  practice,  since  1992  Estonia 

57 

has  operated  under  a  currency  board.  Under  the  currency  board  arrangement,  the 
central  bank  has  a  very  limited  scope  for  discretionary  monetary  policy  and  budget 
deficit  financing. 

Monetary  policy  in  Estonia  has  been  successful  in  bringing  inflation  down  to  single 
digit levels. It has been strictly followed  the rules of the currency board. Open market 
operations  (using  Central  Bank  bills)  have  not  been  used  for  monetary  policy 
purposes  but  rather  to  encourage  the  development  of  a  secondary  market  and  the 
deepening  of  the  interbank  market.  Similarly,  reserve  requirements  are  not  used  as 
monetary  policy  instruments  but  with the aim to  assist the banks  in  case  of  liquidity 
shortages.  The  degree  of  privatisation  of  the  banking  sector  is  relatively  high  and 
further  bank privatisation  is envisaged  for  the future.  The competition  in the sector  is 
satisfactory  and  the  bankruptcy  laws  play  the  role  of  enforcing  a  hard  budget 
constraint  on  financial  firms.  Concluding,  the  Estonian  banking  system  is  certainly 
one  of the more  developed  and  sounder  of the area,  and bad  loans  in the  sector  have 
almost completely  disappeared. 

The  exchange  rate  is  fixed  (against  the  DM)  as  the  rules  of  the  currency  board 
prescribe. There have been no major tensions on the foreign exchange market to date. 

Conclusion 

It  is  premature  to  judge  whether  Estonia  will  be  in  a  position,  by  the  time  of  its 
accession,  to  participate  in  the  euro  area;  that  will  depend  on  the  success  of  its 
structural  transformation  permitting  to  attain  and  to  adhere  permanently  to  the 
convergence criteria, which are not however a condition of accession. 

Estonia's  participation  in the third  stage of EMU as a non-participant  in the euro  area 
should  pose  few  problems  in the  medium  term. Its central bank  legislation  is  already 
fully  compatible  with  EC  rules  in  terms  of  explicit  prohibition  of  budget  deficit 
financing.  The  successful  implementation  of  the  currency  board  to  date  and  the 
relative development  of the banking sector are encouraging  indicators of the ability of 
Estonia to complete the restructuring of its financial  sector in the next few years. 

Taxation 

The acquis in the area of direct taxation mainly  concerns  some aspects of  corporation 
taxes  and  capital  duty.  The  four  freedoms  of the  EC  Treaty  have  a wider  impact  on 
national tax systems. 

The  indirect  taxation  acquis  consists  primarily  of  harmonised  legislation  in  the  field 
of  Value  Added  Tax  and  excise  duties.  This  includes  the  application  of  a  non-
cumulative  general  tax  on  consumption  (VAT)  which  is  levied  on  all  stages  of 
production  and distribution  of goods and services. This implies an equal tax  treatment 
of  domestic  and  non-domestic  (import)  transactions.  The  VAT  acquis  also  contains 
transitional  arrangements  for  the  taxation  of transactions  within  the  European  Union 
between  taxable persons.  In the  field  of excise  duties the acquis  contains  harmonised 
tax structures  and  minimum  rates of duty together  with common  rules  on the  holding 

58 

the  use  of  fiscal 
and  movement  of  harmonised  excisable  goods  (including 
warehouses). As a result of the introduction of the Single Market, all fiscal controls at 
the Community's internal frontiers were abolished in January  1993. 

The mutual assistance between Member State tax authorities is an important feature  of 
administrative cooperation in the Internal Market; the respective Directive covers both 
direct and indirect taxation. 

The Europe Agreement contains provisions on approximation of legislation in the area 
of indirect taxation. 

The  White  Paper  contains  as  Stage  I  measures  those  which  make  up  the  main 
requirements of the indirect taxation acquis (essentially, those measures applied in the 
Community  up  to  1993),  and  as  Stage  II  measures  those  which  are  in  addition 
necessary to implement the full  indirect taxation acquis. 

Descriptive  Summary 

Direct  Taxation 

The  two  company  taxation  Directives  and  the  Arbitration  Convention  provide  for  a 
mechanism  which  applies  on  the  basis  of  reciprocity.  Respective  provisions  can 
therefore  by definition  not be expected to exist before  accession. 

Indirect  Taxation 

The overall contribution of VAT and excise duty revenue to the Estonian  state budget 
was  about  42%  and  11%  respectively  in  1995.  This  is  expected  to  continue  on  an 
upward trend. 

Value Added  Tax 

The  current  Estonian  VAT  system  was  introduced  in  January  1991  with  major 
revisions  entering  into  force  in  January  1994.  Estonia  applies  a  single  VAT  rate  of 
18%  which  is  applicable  to  all  taxable  transactions,  including  imported  goods.  In 
contrast,  "imported"  services  are  not  liable  to  any  VAT.  In  addition  to  the  standard 
VAT rate Estonia applies zero-rating to a limited ranges of supplies. 

Certain  activities  are exempt  from  VAT without the right to claim the input credit  on 
such  supplies.  These  exemptions  relate  mainly  to  activities  in  the  public  interest, 
financial  and  insurance  services,  property  and  lotteries  and  similar  games.  Taxable 
persons  are  in  principle  entitled  to  deduct  VAT  incurred  on  their  purchases  for 
business  purposes  of  goods  and  services.  However,  the  Estonian  VAT  Act  does  not 
contain  any  provisions  enabling  tax to be refunded  to taxable persons  not  established 
within the country. 

Excise 

59 

The  current  system  of  excise  duty  in  Estonia  was  introduced  in  1995. Excise  duties 
are  applicable  to  mineral  oils,  alcohol  and  alcoholic  beverages  and  manufactured 
tobacco. For each product category, the duty is specific  in nature. 

Mutual Assistance 

The  tax  administration  has  not  yet  had  to  develop  its  capacity  for  mutual  assistance 
with the tax  authorities  of Member  States, since mutual  assistance  is a feature  which 
would only become applicable on accession. 

Current and Prospective  Assessment 

Value Added  Tax 

The current VAT system in Estonia has been based on the main principles of the VAT 
legislation  of  the  Community  and  thus  represents  a  starting  point  in  its  future 
alignment on the Community VAT acquis. However, it is characterised  by being very 
general and inconsistent  in its application. 

In order to register for VAT in Estonia the entrepreneur must be listed in the Business 
Code  which  requires  the  establishment  of  a  branch  in  the  country.  This  means  that 
foreign  entrepreneurs  (without  a branch in the country)  cannot  be registered  for  VAT 
purposes  in Estonia.  Estonia's  approach  regarding  exempt  transactions  deviates  from 
that  of the  Community  both  in terms  of scope and  substance.  Since Estonia  does  not 
operate  any  arrangements  for  the  refund  of  VAT  to  non-registered  foreign  taxable 
persons, VAT represents an increased cost to such traders. 

Estonia's  membership  of the European Union would require substantial  adjustment  to 
bring  the  VAT  legislation  into  line with  the  requirements  of the  Community  acquis, 
both  in  respect  to  the  general  provisions  of  the  Community  VAT  legislation  and  as 
regards  the  system  of  taxation  necessary  in  a  Community  with  no  internal  frontier 
controls. 

The  Estonian  national  strategy  plan  for  implementing  the  recommendations  of  the 
White Paper regarding VAT does not provide a clear and detailed timetable for  future 
adjustments.  In  the  short  term  it  is planned  to  concentrate  on  changing  zero-rates  to 
exemptions  without  the  option  for  credit  of  the  input  VAT.  The  medium  term 
objectives  envisage  the  full  alignment  of  the  Estonian  VAT  system  on  that  of  the 
Community by  1  January 2000. 

Excise 

There  exists  no  effective  excise  suspension  system  where  goods  can  move  between 
authorised tax warehouses without payment of duty. 

In  order  to  ensure  a  correct  application  of  the  Community  excise  legislation  it  is 
essential  that  Estonia  sets  up  a warehousing  system  based  on the  Community  model 
as soon as possible. 

60 

The  Estonian  national  strategy  plan  for  implementing  the  provisions  of  the  White 
Paper  does  not  provide  a  clear  and  detailed  timetable  for  future  adjustments  of  the 
Estonian  excise  legislation.  A  short  term  objective  consists  of  enhancing  controls  at 
local  level.  The  long  term  objective  is  the  approximation  of  the  scope  and  rates  of 
duty  towards  the  Community  legislation.  However  no  full  harmonisation  of  the 
legislation is planned. 

Mutual Assistance 

There would also be a need, on accession, to implement the appropriate  arrangements 
for  administrative  cooperation  and  mutual  assistance  between  Member  States.  These 
requirements are essential for the functioning  of the Internal Market. 

Conclusion 

The acquis in respect of direct taxation should present no significant  difficulties. 

As regards indirect taxation, although a start has been made a considerable  effort  will 
be required if Estonia is to comply with the acquis concerning VAT and excise  duties 
in the medium term. 

It  should  be  possible  to  start  participating 
administration  develops its expertise in this respect. 

in  mutual  assistance  as  the  tax 

Statistics 

The  main  principles  of  the  Community  acquis  relate  to  the  impartiality,  reliability, 
transparency,  confidentiality  (of individual  information)  and dissemination  of  official 
statistics.  In  addition  there  exists  an  important  body  of  principles  and  practices 
concerning  the  use  of  European  and  international  classifications,  systems  of  national 
accounts, business registers, and various categories of statistics. 

The  Europe  Agreement  provides  for  co-operation  to  develop  effective  and  reliable 
statistics, in harmony with international standards and  classifications. 

The White Paper includes no provisions in this field. 

Descriptive  Summary 

The  State  Statistical  Office  (SSO), under the Ministry  of Finance, is the  central  body 
charged with producing and disseminating official  statistics in Estonia. 

The  legal  basis  for  Estonian  official  statistics  consists  of  the  1990  Statistics  Act.  A 
new  Statistics  Act,  which  takes  EU  and  other  international  statistical  standards  into 
account,  was  approved  by  the  Government  in  December  1996  and  is  now  in  the 
Parliament. 

61 

Current and Prospective Assessment 

Estonian official  statistics meet basic Community requirements. Important progress is 
still required. 

There  are  deficiencies  in  sectors, such as business  statistics, the  establishment  of  a 
business  register,  short-term  economic  indicators,  and  input/output  statistics.  The 
reorganisation of agricultural" statistics is still a major task. 

Conclusion 

Estonia  will  require  a  sustained  effort  if  it  is to  comply  with  EU requirements  for 
official  statistics in the medium term. 

62 

3.4 Sectoral  Policies 

Industry 

EU  industrial  policy  seeks  to  enhance  competitiveness,  thus  achieving  rising  living 
standards  and  high  rates  of  employment.  It  aims  at  speeding  up  adjustment  to 
structural  change,  encouraging  an  environment  favourable  to  initiative,  to  the 
development  of  undertakings  throughout  the  Community,  and  to  industrial  co 
operation,  and  fostering  better  exploitation  of  the  industrial  potential  of  policies  of 
is 
innovation,  research  and 
horizontal by nature. Sectoral communications  aim at transposing horizontal  concepts 
into  specific  sectors.  EU  industrial  policy  results  from  an  articulation  of  instruments 
from  a  number  of  Community  policies;  it  includes  both  instruments  related  to  the 
operation  of markets  (product  specification  and market access, trade policy, state  aids 
and  competitions  policy)  and  measures  related  to  industry's  capacity  to  adapt  to 
change (stable macro-economic environment, technology, training, etc.). 

technological  development.  EU 

industrial  policy 

to  have  achieved  a  certain 

In  order  to  cope  with  competitive  pressure  and  market  forces  within  the  Union,  the 
industry  of  applicant  countries  needs 
level  of 
competitiveness  by the  time  of accession.  The applicant  countries  need  to  be  seen  as 
pursuing  policies  aimed  at  open  and  competitive  markets  along  the  lines  set  out  in 
Article  130  ("Industry")  of  the  Treaty.  Co-operation  between  the  EC  and  the 
candidate  countries  in  the  fields  of  industrial  co-operation,  investment,  industrial 
standardisation  and  conformity  assessment  as provided  for  in the  Europe  Agreement 
is also an important indicator of development in the right direction. 

Descriptive  Summary 

Industrial  output of Estonia stood at around 0.8 bn Ecu in  1995, or less than a third of 
the industrial output of Luxembourg and it has a 23% share in GDP. Industry  accounts 
for  185 thousand jobs (28% of total employment). The food processing industry (20% 
of the  industrial  work  force),  light  industry  (19%), engineering  and metal  processing 
(19%), engineering  and metal processing  (19%) and wood processing  industry  (11%) 
are  the  main  employers.  The  total  number  of  industrial  enterprises  is  estimated  at 
around 4600, nearly all are SMEs. 

Estonia's  economic  structure  to a large extent has overcome the inefficient  system  of 
inter-regional  labour  division  under  Soviet  occupation  regardless  of  its  natural 
resources  and  limited  national  market.  Yet  with  the  beginning  of  the  transition  in 
Estonia radical  changes took place  in its industry. The recovery  in GDP growth  since 
1994  can  be  primarily  attributed  to  an expansion  in  industrial  production,  a  sizeable 
increase  in  the  number  of  new  private  businesses  and  a  rise  in  foreign  direct 
investment  (FDI). In  1990 heavy  industry  accounted  for  half of  industrial  production 
and it is currently being forced  to improve product quality and production  technology. 
A  special  feature  of  recovery  of  the  Estonian  industry  is  its  strong  involvement  in 
outward  processing trade (OPT, covering  12% of all imports), practised  mostly  in the 
textile  industry  with  Finland  and  Sweden.  While EU companies  want to benefit  from 

63 

the  low  labour  costs  in  Estonia,  Russia  has  its  semi-finished  products  processed  in 
Estonia  because  of 
its  higher  production  quality.  The  ongoing  process  of 
modernisation  of  the  Estonian  economy  is  reflected  in  the  high  share  of  machinery 
and  technical  equipment 
in  imports.  Conversely  the  composition  of  exports 
increasingly reflects  the country's current comparative advantages  in low value added 
sectors, such as wood processing, the paper industry, textiles and food  stuffs.  Estonia 
has been very successful  at reorienting its exports to western markets. 

Estonian Industry, main production sectors in 1995 

Sector 

Food Industry 
Textile and Clothing 
Forest Industry and furniture 
Mechanical and electrical engineering 
Chemical Industry and pharmaceuticals 
Transport Equipment 
Other non-metallic mineral products 
Construction 
Total 

% share industrial 
employment 
15 
14 
11 
12 
7 
3 
3 
20 
100 

% share industrial output1 

'

40 

11 
15 
11 
12 
5 
6 
n.a. 
100 

pm:  Share  industry (excl, construction) in 
total GDP 

. 

23 

The  food  industry  is  the  most  important  sector  in  Estonian  industry.  Production 
capacity  was  designed  to  meet  the  requirements  of  Estonia  and  many  parts  of  the 
FSU. Market  collapse  led to sharp output reductions. Despite the recession,  however, 
the  food  industry  managed  to  retain  its  leading  position  in  Estonian  industry. 
Reorientation  of  the  industry  toward  EU  markets  proved  difficult  because  of  trade 
restrictions and quality and hygiene requirements. An important part of Estonia's  food 
exports  still  go  to  Russia  in  spite  of  the  high  import  tariffs  imposed  by  Russia  on 
Estonian  products.  The  food  industry  is  the  favourite  target  of  foreign  investors, 
which  has  led  to  restructuring  and  an  improvement  of  the  technological  level  of 
manufacture.  There are also steps taken on the legislative  side to improve  quality  and 
meet  EU  requirements.  It  is  possible  that  the  sector  will  be  sufficiently  advanced  at 
the time of accession. The long term outlook for especially fish products,  manufacture 
of beverages and dairy products is relatively good. 

The textiles and  clothing industry is the second most important sector in the Estonian 
industry  and  is  dominated  by  a  small  number  of  large,  privatised  companies.  Low 
labour  costs and  low capital  investment  needs have made  it Estonia's  most  important 
sector for subcontracting and outward processing trade. However, Estonian  companies 
have  started  to reduce the number  of subcontracts  and to concentrate  on the export of 
own collections.  With labour  costs expected  to rise  in the future,  there will  be  further 
adjustment needs. 

64 

The wood  industry  is also  a major  branch  of industry  and, given that  a large part  of 
Estonia's  territory  is  forest,  the  industry  has  the  domestic  resources  for 
its 
development.  The  mechanical  forest 
industry,  especially  furniture,  has  strong 
competitive advantages due to inexpensive wood, a very skilled  low-cost  labour  force 
and  a  low  capital  investment  need  due  to  the  high  share  of  manual  work.  Furniture 
accounts for more than half of total output in the forest  sector, which has strong trade 
links  with  the  EU.  This  sector  should  develop  well  and  accession  should  not  pose  a 
problem.  The  chemical  forest  industry  will  have  to  compete  on  both  domestic  and 
export  markets  with  technologically  more  advanced  manufacturers.  Especially  the 
pulp  industry  is  technologically  obsolete  and  causes  great  environmental  damage. 
Given the backwardness of this sector considerable investments have to be carried out 
to  improve  its  competitive..  In  its  present  state  this  industry  is  not  sufficiently 
competitive.. 

Mechanical  and  electrical  engineering:  Privatisation  is  largely  completed.  Due  to 
low-labour costs the sectors attracted subcontracting and now accounts for a quarter of 
total  OPT imports and exports. Overall, however, most production is still destined  for 
the  former  Soviet  Union  and  CEECs.  The  chemical  industry  is  very  small,  mostly 
producing  fertilisers.  Production  facilities  strongly  need  modernisation  and  large 
investments to protect  the environment.  The pharmaceutical  industry  has  completed 
impressive 
regulatory 
authorities,  and  a  harmonised  legislative  framework.  Most  mining  activities  are 
connected with oil-shale-mining which has devastated large parts of the countryside  in 
the North East. 

including  privatisation, 

the  establishment  of 

reforms, 

Estonia has followed  a rapid and determined privatisation policy.  With the creation of 
the  Estonian  Privatisation  Agency  (EPA)  the  earlier  organisational  problems  of  the 
privatisation  process  have  been  overcome.  The  privatisation  of  small  businesses  is 
now  practically  complete.  By  May  1996  virtually  all  of  the  450  large  and  medium-
scale-enterprises  that  were  included  in  the  government's  original  programme  for 
assets  sales  have  been privatised.  According  to  EBRD  estimates  by  1996 the  private 
sector  already  contributed  around  70% to  GDP,  and  this  is  expected  to  rise  further. 
The  focus  is  now  on  the  restructuring  and  privatisation  of  monopoly  infrastructure 
companies (in particular utilities). 

Current  and  Prospective  Assessment 

Industry is only a small part of the Estonian economy, smaller than in any other of the 
applicant  countries.  It  is  heavily  concentrated  in  only  a  few  key  sectors:  food 
products,  wood  and  paper,  furniture,  textiles  and  clothing,  which  together  represent 
more than half of total  industrial  output. These sectors have a sound basis in terms of 
the  raw  materials  available,  the  topography  of  the  country,  and  prevailing  low  wage 
levels. Nonetheless, considerable  modernisation  is necessary  in some  subsectors  such 
as the pulp industry  in particular.  Other sectors which have been developed  as part  of 
the  planned  economy  of  the  Soviet  Union,  such  as  mechanical  and  electrical 

65 

engineering,  appear  also  to  be  vulnerable.  The  pharmaceuticals  sector,  on  the  other 
hand, can be considered as an example of impressive  reform. 

the  favourable  macroeconomic 
industry  are 
The  strong  points  of  Estonian 
environment  and  the  high  investment  rate.  Moreover,  as  a  result  of  their  sound 
financial  policies  and  the  consolidation  of  the  banking  sector  industry  can  already 
obtain medium to long term credits. 

Privatisation  of  industry  is  largely  completed.  While  some  sectors  of  Estonia's 
industry  such  as  textiles  and  clothing,  pharmaceuticals  and  the  construction  sector) 
have largely been privatised  and modernised-  often  with the help of FDI - and hence 
perform  well on export markets, other sectors (like the food industry, wood processing 
and  paper  production,  mechanical  and  electrical  engineering,  chemicals  and 
construction  materials)  are  still  in  the process  of restructuring  and  in  need  of  further 
capital investments for modernisation to gain competitiveness. 

Conclusion on Industrial  Competitiveness 

Estonia has made  good progress  in industrial  restructuring  and in the adoption  of EU 
industrial  legislation.  Provided  that  current  efforts  and  foreign  capital  inflows  are 
continued,  in  the  mid  term  one  can  expect  that  only  very  limited  problems  for 
industrial  competitiveness  will  remain,  which  should  not  develop  into  obstacles  for 
full participation  in the enlarged EU market. 

An evaluation  of the acquis specific  to the free  circulation of industrial  goods is to be 
found  in the separate section on the internal market. 

Agriculture 

The Common Agricultural  Policy aims to maintain and develop a modern  agricultural 
system  ensuring  a  fair  standard  of  living  for  the  agricultural  community  and  the 
supply of food  at a reasonable price for consumers, and ensuring the free movement of 
goods  within  the  EC.  Special  attention  is  given  to  the  environment  and  rural 
development.  Common  market  organisations  exist  to  administer  the  CAP.  These  are 
complemented  by  regulations  on  veterinary  health, plant  health  and  animal  nutrition 
and  by  regulations  concerning  food  hygiene.  Legislation  also  exists  in  the  area  of 
structural policy, originally  developed primarily to modernise and enlarge agriculture, 
but  more  recently  with  an  increasing  emphasis  on the  environment  and  the  regional 
differentiation  of  the policy.  Since  reforms  in  1992, increasing  contributions  to  farm 
support  have  come  from  direct  aid  payments  increasingly  compensating  for  reduced 
market support prices. 

The  Europe  Agreement  provides  the basis  for  agricultural  trade  between  Estonia  and 
the Community  and aims to promote co-operation on the modernisation,  restructuring 
and privatisation of Estonia's agriculture sector as well as on the agro-industrial  sector 
and  phyto-sanitary  standards.  The  White  Paper  covers  the  fields  of  veterinary,  plant 
health and animal  nutrition  controls, as well as marketing  requirements  for  individual 

66 

commodities.  The  purpose  of  such  legislation  is  to protect  consumers,  public  health 
and the health of animals and plants. 

Descriptive  Summary 

Agricultural Situation 

The value of the agricultural "production  in  1995 was approximately  0.13 % of that of 
the Union. 

Agriculture's  share of GDP declined  after  independence  from  around  20 % to  7 %  in 
1995.  Employment  in  agriculture  contracted  to  7%.  Until  1994  the  economy 
contracted  and  consumption  shifted  from  dairy  and  meat  products  to  bread  and 
cereals. Around 46 % of the total land area is covered by forest  (2 million ha) whereas 
32 % serves as agricultural  land (1.5 Mio ha). 

The  Estonian  farm  sector  is  currently  in  the  process  of  privatisation.  Large  scale 
farming  enterprises  (former  state farms)  with different  legal  structures  (co-operatives, 
limited  liability  and joint  stock  companies)  still  manage  about  30  %  of  agricultural 
land  (average  size:  520  ha),  whilst  the  remaining  70  %  of  the  agricultural  land  is 
equally shared between  14,500 family  farms (average size: 23 ha) and household  plots 
(average size: less than 2 ha). 

The return to legal owners of  1.2 million hectares of land has been requested. By May 
1997 500,.000 hectares  (42 %) have been returned  and registered  in the  land  register. 
Completion is planned for the year 2000. 

850,.000 hectares  of  land  has  not  been claimed  back  and  will,  for  the time  being,  be 
left  in state ownership and leased. 

In  1995,  Estonia  produced  514,000t  cereals,  539,000t  potatoes,  2,000t  oilseeds, 
812,000t  milk  (self-sufficiency:  148%), 25,000t  beef  meat  (92%),  46,000t  pig  meat 
(109%). 

The  food  processing  industry  currently  represents  34% of  total  industrial  output  and 
its  employment  has  remained  fairly  constant  at  about  4%  since  1986.  The  food 
processing  industry  has  faced  two  main problems, falling  domestic  demand  although 
this now seems to be stabilising, and increasing imports due to the absence of customs 
protection.  Meat  (22%), dairy  (20%)  and  fish  (17%)  processing  dominate  agro-food 
activity.  Nearly  all  food  processing  enterprises  have  been  privatised.  None  of  the 
Estonian meat processing facilities have been certified  for export to the EU. 

Trade  in agriculture  and  fishery  products has traditionally  been  an important  element 
of  the  Estonian  economy.  In  1995, agricultural  products  represented  16.6%  of  total 
exports  and  14.3% of  imports.  The  majority  (65%)  of  Estonian  agricultural  exports 
(mainly fish, meat  and dairy  products)  go to New Independent  States  and  29% to the 
EU. Estonia  is a net  importer  of agricultural  products  and the EU has a positive  trade 

67 

balance  of  157  MECU  (1995)  with  Estonia.  Sugar,  beverages,  fats  and  oils  are 
predominant on imports. 

Agricultural  Policy 

The  PSE  (producer  subsidy  equivalent)  calculated  by  the  OECD  was  3%  in  1995, 
compared to 49% for the EU. 

Estonia  has  until  now  followed  a very  liberal  policy  towards  agriculture.  Despite  the 
fact  that  several  laws  foreseeing  increased  support  for  farmers  have been  adopted  by 
the  Parliament,  they  have  so  far  only  been  implemented  to  a very  limited  extent  and 
total  budgetary  spending  on agriculture rernains relatively  low (16.4 MECU)  or  3.4% 
of the total budget in 1993. 

Few  product-specific  support  policies  exist.  Programmes  are  mainly  aimed  at 
improving  seed  and  breeding  quality,  registration  and  training.  The  main  instrument 
used  to  provide  support  to  the  agricultural  sector  is  the  Agricultural  and  Rural  Life 
Credit Fund (ARLCF), which provides credits for farms and the processing  industry. 

The  only  public  intervention  is  the  state  procurement  for  the  national  grain  reserve; 
this  is  equivalent  to  six  months  of  human  consumption  (50,000t).  However,  in 
practice this policy objective has not been met. 

Agricultural  prices  are  not  regulated  and  are  significantly  lower  than  EC  prices 
although  increasing  since  1992; (in  1995 e.g.  wheat:  73% of average  EC price;  beef 
meat:  38%; pig  meat:  88.6%; milk:  47%). Rural  development  policies  are  still  at  the 
debating stage and no single ministry is responsible for policy  formulation. 

Estonia  pursues  a free  trade policy  and has no  customs  protection  in place.  The  Free 
Trade  Agreement  between  Estonia  and  the  European  Community  entered  into  force 
on  1 January  1995.  Estonia  has  completely  liberalised  its  market  access,  while  the 
Community  has  granted concessions either with unlimited  access or in the  framework 
of tariff  quotas. 

At  this  stage  the  impact  of  the  Free  Trade  Agreement  on  animal  products  has  been 
limited  to the dairy  sector, the only  sector where  some products  (e.g. powdered  milk) 
meet the minimum hygiene standards of the EU. 

During  1996, the Baltic Free Trade Agreement  was extended  to agricultural  products. 
The  Agreement  entered  into  force  by  1 January  1997  and  is  intended  to  be  the  first 
step  in  the  formation  of  a  customs  union.  In  May  1995, Estonia  ratified  a  free  trade 
agreement  with  the  Ukraine.  Estonia  is  currently  negotiating  membership  of  the 
WTO. 

Estonia has started the process of adapting legislation identified  in the White Paper. 

Current  and  Prospective  Assessment 

68 

Cereal production  and yields might recover to reach near self-sufficiency  levels in the 
medium  term,  and  Estonia  has  the  potential  for  increasing  in  livestock  products. 
However Estonia's potential for exporting their dairy and livestock produce to the EU 
can only be realised once  EC quality and hygiene standards are achieved. Due to over 
capacity  and  outdated  technology  this  sector  is  still  lagging  behind  the  general 
recovery. 

The  main  market  policy  instruments  applied  in  the  EC  are  not  applied  in  Estonia. 
This  includes  key  instruments  such  as  dairy  quotas,  key  features  of  the  arable  crop 
scheme  (base  area,  set-aside, compensatory  payments, and premiums  in the  livestock 
sector), as well as certain rural and structural development programmes. 

Management  and  control  of  these  measures  would  require  relatively  sophisticated 
administrative  systems, including an appropriate  land register and cattle  identification 
and  registration  systems.  As  a  general  observation,  it  is clear  that  the  administrative 
capacity  would  need  to be further  developed  in these  areas if these  measures  were to 
be applied in Estonia; the State grain board would need to be dismantled. 

It  is  difficult  to  foresee  at  this  stage  what  will  be  the  development  of  agricultural 
support prices in Estonia in the period before  accession; this will depend on a number 
of  factors  including  the  domestic  economy,  the  situation  on  export  markets,  and  the 
development of price support levels in the Union. 

Estonia is introducing the legislation identified  in the White Paper. 

In  the  veterinary  field,  considerable  work  remains  to  be  done  in  adapting  Estonian 
national  legislation  to  EC  requirements.  This  includes  approximation  of  legislation 
(the aim is to complete  it by  1998) as well  laboratories  facilities  and establishment  of 
a  fully  resourced  official  veterinary  service,  including  the  imposition  of  effective 
controls at border inspection points, and on goods transiting the country.  Certification 
procedures,  introduction  of  an  effective  animal  identification  system  need  to  be 
further  developed. Legislation on animal welfare will be required. 

There will  be a need to upgrade certain food  processing  establishments  both  for  trade 
and for the internal market. 

In  the  field  of  animal  nutrition  current  legislation  appears  to  be  inconsistent  with 
Community  rules. Approximation  of legislation  is in an initial  stage, and no timetable 
is given for the completion of the work. 

As  regards  plant  protection  products  and  organic  farming, 
is  not 
harmonised  with  EC  legislation  but  work  on  adoption  of  the  legislation  has  been 
initiated.  It  appears  that  pesticide  residue  monitoring  is not  carried  out  in  Estonia  at 
present. 

legislation 

As regards  seeds and propagation material  legislation  is stated to be harmonised  with 
that  of  the  EC.  Estonia  does  not  enjoy  equivalence  for  any  EC  species  and  it  seems 

69 

that  considerable  amount  of  work  still  needed  to  truly  approximate  and  establish 
necessary developed  infrastructure. 

Adoption  of  legislation  approximating  to  EC  legislation  on  plant  health  was 
anticipated for the end of 1996. 

Conclusion 

Substantial efforts  of alignment to the acquis are still necessary, although progress has 
been made in adopting the measures mentioned in the White Paper. 

Particular efforts  are needed in relation to : -

- 

implementation  and enforcement  of veterinary  and phytosanitary  requirements  and 
upgrading  of  establishments  to  meet  EC  standards;  this  is  particularly  important 
with  regard  to  the  inspection  and  control  arrangements  for  protecting  the  EU 
external borders; 

-  strengthening  of  the  administrative  structures  to  ensure  the  necessary  capacity  to 
implement?  and  enforce  policy  instruments  of  the  CAP  including  the  import 
arrangements; 

-  further  restructuring of the agro-food  sector to improve its competitive capacity. 

Since  only  a  limited  number  of  the  mechanisms  of  the  common  agricultural  policy 
presently  exist,  fundamental  reform  of  the  agricultural  policy  will  be  needed,  and  a 
substantial effort  will be necessary to prepare for accession in the medium term. 

Fisheries 

The  Common  Fisheries  Policy  includes  common  market  organisations,  structural 
policy,  agreements  with  third  countries,  management  and  conservation  of  fish 
resources, and scientific research in support of these activities. 

The  Europe  Agreement  includes  provisions  concerning  trade  in  fisheries  products 
with  the  Community  and  provides  for  cooperation.  The  White  Paper  includes  no 
measures in this field. 

Descriptive  Summary 

In  1995, Estonia's  fisheries  provided  2.6% of  GDP.  Fisheries  employ  approximately 
20,000 workers. Estonia has privatised the entire fishing  sector. 

The  distant  water  fleet  (North  West  Atlantic)  has  been  reduced  from  75  vessels  in 
1991  to  31  vessels  at  1  January  1996  with  a  corresponding  catch  reduction  from 
230,000  t  to  70,000  t  all  of  which  is  exported.  Main  species  caught  are  horse 
mackerel, redfish  and blue whiting (mainly NAFO area). In the Baltic,  161 vessels are 

70 

deployed  by small private companies and a further  500 boats under  12m length  make 
up the  coastal  fleet.  The  total  catch  was  60,000  t  in  1995  (mainly  herring,  sprat  and 
cod - all under quota). Over half of the fleet is more than 20 years old. 

Fisheries  comprise  a sizeable branch  of the Estonian  food  industry,  but  it operates  at 
only  40-50% of  its  capacity.  120 enterprises  in  1994 produced  102,000t  (down  from 
233 OOOt in  1990) of which 30,000t was canned produce. Shore-based production  was 
34,000t and relies on imports for variety  and to maintain capacity. Total  employment 
in this sector is 8,000. 

The aquaculture production (mainly trout and carp) has fallen from a peak of  l,700t  in 
1989 to 317t (value: 0.4 million ECU). Total employment in this sector is 2,000. 

As a trading partner of the Community, Estonia represents 0.15% of EU total  imports 
(independently  of  origin)  of  fisheries  products  and  6%  of  EU  imports  of  fisheries 
products from the candidate countries. As regards EU exports, Estonia receives 0.13% 
of the total EU exports of fisheries products and  1,5% of our exports of these products 
to the applicant countries (in terms of value). 

Management of the resources in the Baltic Sea is currently  accomplished  between EU 
and Estonia in the framework  of a common body - the International Baltic Sea Fishery 
Commission. 

No protectionist import measures or national subventions are applied. 

Current  and  Prospective  Assessment 

Estonia's  production  and  foreign  trade data, when compared  to the  corresponding  EU 
figures,  are  low  and  unlikely  to  have  any  significant  impact  upon  the  whole 
Community. 

Capacity  adjustment  of  the  fleet,  the  modernisation  of  the  whole  sector,  and  the 
determination of the necessary structural aid will become the main issues. 

According  to  the  data  available  as  regards  fisheries  agreements  concluded  and 
Estonia's  membership  to  international  or  regional  fisheries  organisations,  no  major 
problems should be expected. 

It will be necessary  for Estonia to establish a fisheries  administration which is capable 
of  implementing  the  Common  Fisheries  Policy  -  in  particular,  the  management  of 
resources,  the  keeping  of  a  fishing  fleet  register,  the  application  of  structural  policy 
for  the  sector,  the  management  of  the  market  scheme  and. the  collection  of  all 
statistical  data  -  as  well  as  the  EU's  policies  on  health,  hygiene  and  environmental 
matters. 

Conclusion 

71 

The  process  of  modernisation  and  acquis  implementation  will  require  significant 
efforts.  The entry  of Estonia into the Community fisheries policies does not appear to 
pose any major  problems. 

Energy 

Main  EU  energy  policy  objectives,  as reflected  in the  Commission  White  Paper  "An 
energy policy for the EU" include enhancement of competitiveness, security of energy 
supplies  and  protection  of  the  environment.  Key  elements  of  the  energy  acquis 
comprise  of  Treaty  provisions  and  secondary  legislation  particularly  concerning 
competition  and  state aids, internal energy market  (including directives  on  electricity, 
price  transparency,  gas  and  electricity  transit,  hydrocarbons  licensing,  emergency 
response  including  security  stock obligations, etc.), nuclear energy, as well  as energy 
efficiency  and  environmental  rules.  Development  of  Trans-European  Energy 
Networks and support for energy R&D are other important elements of energy policy. 
Ongoing  developments  include  liberalisation  of  the  gas  sector,  energy  efficiency 
acquis and the Auto-oil programme. 

In the  field  of  nuclear  energy,  the  Community  acquis has  evolved  substantially  from 
the original EAEC Treaty to a framework  of legal and political instruments, including 
international  agreements. At present, it addresses issues of health and safety,  including 
radiation  protection,  safety  of nuclear installations, management  of radioactive  waste, 
investment  including  EURATOM  financial  instruments,  promotion  of  research, 
nuclear common market, supplies, safeguards, and international relations. 

The  Europe  Agreement  provides  for  co-operation  to  develop  the  progressive 
integration  of  the  energy  markets  in  Europe  and  includes  provisions  on  assistance 
within  the  related  policy  areas.  The  White  Paper  preparing  CEECs  for  the  internal 
energy  market  underlines  the  need  for  full  application  of  key  internal  market 
directives  in  combination  with  EC  competition  law.  As  to  the  nuclear  sector,  the 
White Paper refers to nuclear supply safeguards  and shipments of nuclear waste 

Descriptive  Summary 

Estonia's  energy  sector  and  particularly  electricity  production  is  dominated  by 
indigenous  oil  shale  (a  solid  fuel  geologically  not  related  to  coal).  Use  of  domestic 
peat, wood and wind  is increasing  and represents 5% of the country's energy balance. 
For  the  remaining  35% of  its  needs,  particularly  for  oil  and  gas,  but  also  coal  the 
country  is  dependent  on  Russia.  Electricity  of  nuclear  origin  is  not  generated  in 
Estonia. 

The energy  sector is inefficient  with an intensity 2-4 times higher than EU levels, due 
to its heritage of low prices, inadequate policies and obsolete technologies. 

Estonia  is presently  looking  into a better connection  of its energy network  to the EU. 
Although  a  possible  future  Baltic  electricity  ring  could  contribute  to  such  a 
connection,  it  is  expected  that  in the medium  term  Estonia  will  remain  linked  to  the 
Russian power  system. 

72 

Current and Prospective Assessment 

Estonia's  energy  policy  objectives  are  in  line  with  those  of  the  ËU  and  include 
security  of  energy  supplies,  including  diversification;  introduction  of  more  market 
principles;  environmental  protection,  increase  of  efficiency;  and  enhanced  Baltic 
energy  co-operation.  Particularly  in  the  energy  sector  such  Baltic  co-operation  is 
beneficial due to complementarities among the countries concerned. 

The  competition  framework  in the  energy  sector  does  not  yet  fulfil 'the  directives  of 
the  internal  energy  market  in  combination  with  the  application  of  EC  competition 
law. Although the Estonian Competition Law of  1993 is applicable to energy utilities, 
there  is no  specific  legal  and  regulatory  framework  for  the energy  sector  which  may 
ensure  compliance  with  EU  legislation  including  the  rules  of  the  internal  energy 
market.  The  current  efforts  to  adopt  the  Energy  Act,  including  the  necessary 
secondary  legislation,  should therefore  be pursued. Implementation  of this Act  would 
bring Estonia nearer to EUacquis. 

The energy  sector  is generally  characterised, with the exception  of oil  and  coal trade, 
by  state  dominated  monopolies.  Privatisation  has  however  started  and  is  likely  to 
include  certain  large  energy  companies.  Energy  prices  have  been  considerably 
increased  but  particular  household  prices  need  to  be  further  adapted  in  order  to 
recover costs. 

Emergency  preparedness  in the energy  sector  including the obligation  to  hold  ninety 
days of oil  stocks  does not comply with acquis. Although work has  started  internally 
there is not yet a time table or investment funds to comply with this part of the  acquis. 

Oil  shale  mining  and  burning  are  inefficient  and  present  considerable  environmental 
problems.  They  represent  two  thirds  of  Estonia's  S02  emissions.  Reducing  the 
dependency  on  oil  shale  will  involve  a  major  restructuring  programme  and  Estonia 
will have to address its socio-regional consequences. 

The country  will  have to step up efforts  to adopt Community norms and  standards  on 
energy efficiency  (e.g. labelling appliances and minimum efficiency  standards) and on 
environmental  protection (e.g. on fuel  quality). 

Although Estonia has no nuclear programme, it will need to comply with the Euratom 
Treaty  and related  policies  in such fields  as radioactive  waste management,  radiation 
protection,  supply  of  nuclear  materials,  safeguards  and  accession  to  international 
agreements  concluded  by Euratom. As there is no nuclear programme,  Estonia  is not 
yet party to the international agreements and other regimes in the nuclear field nor has 
it  implemented  those  conventions  to  which  it  is  party  (Convention  on  the  Physical 
Protection of Nuclear Materials and the Vienna Convention on civil liability). 

Furthermore, no full-scope  safeguards  agreement  is yet in force with the IAEA, but it 
is party to the Treaty  for the non-proliferation  of nuclear weapons and is preparing  for 
future  full-scope  safeguards. 

73 

As  it  has  no  nuclear  reactors  nor  indeed  any  other  nuclear  industry,  no  particular 
problems  are  expected  in applying  Community  legislation  relating  to  supply  and  the 
nuclear  common  market  or  in  implementing  the  Euratom  safeguards  system  in 
Estonia. 

Conclusion 

The  nuclear  waste  situation  of  the  former  Soviet  Paldiski  naval  sub-marine  base 
should be followed  closely. 

Provided  that  current  efforts  are  intensified,  no  major  problerns  are  foreseen  to 
approximate the energy related acquis in the medium term. Of specific  importance  in 
the  pre-accession  period  will  be  the  adjustment  of  monopolies  including  import  and 
export  issues, access to network,  energy pricing,  state interventions  and  restructuring 
of  the  oil  shale  sector,  emergency  preparedness  including  the  building  up  of 
mandatory oil stocks, energy efficiency  and environmental norms. 

No major difficulties  are foreseen  for compliance with Euratom provisions. 

Transport 

Community  transport  policy  consist  of  policies  and  initiatives  in  three  fundamental 
areas: 

•  Improving  quality  by  developing  integrated  and  competitive  transport  systems 
based on advanced  technologies which also contribute to environmental  and  safety 
objectives. 

•  Improving  the  functioning  of  the  single  market  in  order  to  promote  efficiency, 
choice  and  user-friendly  provision  of transport  services  while  safeguarding  social 
standards; 

•  Broadening  the  external  dimension  by  improving  transport  links  with  third 
countries  and  fostering  the access of EU operators to  other transport  markets(  The 
Common Transport Policy Action programme,  1995-2000). 

The Europe Agreement provides for approximation of the legislation with  Community 
law and co-operation  aiming to restructure and modernise transport, the  improvement 
of  access  to  the  transport  market,  the  facilitation  of  transit  and  the  achievement  of 
operating  standards  comparable to those in the Community. The White Paper  focuses 
on  measures  for  the  accomplishment  of  Internal  Market  conditions  in  the  transport 
sector, including such aspects as competition, legislative harmonisation and standards. 

Descriptive  Summary 

Estonia's  virtually  ice-free  Baltic  ports meant  that  it was  a  significant  transit  route  for 
trade  between  the  former  Soviet  Union  and  the  West.  As  a  result,  its  ports  developed 
capacities for particular trades which are no longer fully  exploited. The country's role as 
a transit  corridor  between  Western  Europe  and  Russia  and  the  Central  Asian  States  is 

74 

however  dependent  on  the  state  of  relations  with  Russia,  which  have  not  always 
facilitated  this  traffic.  The  establishment  of  new  frontiers  with  Russia  and  Latvia  has 
also affected  the competitiveness of Estonia as a transit route. Estonia needs therefore to 
invest  in  improvements  to  its  East-West  rail  network  and  to  improve  border  crossing 
infrastructures  at all the new borders, as well as in its ports. Estonia territory  is crossed 
by  one  Pan-European  Transport  Corridor,  as  identified  at  the  Pan-European  Transport 
Conference  in Crete. 

Although the general improvement in the Estonian economy has led to transport taking 
an increasing  share of GDP, the changes  in the Estonian  economic  situation  induced  a 
sharp  decrease  in  absolute  transport  demand  following  the  opening  of  the  country. 
Nonetheless demand is rising again, without recovering to its former  level. At the same 
time  there  is  an  accelerating  change  in  the  modal  split,  with  road  transport  of  goods 
increasing  its  share, and  railways  and  inland  waterways  declining. Use  of private  cars 
has grown very rapidly and it is now dominant in passenger transport, partly as a result 
of  relatively  low  petrol  prices, resulting  in  an  increase  in  congestion  in  the  cities  and 
around them, as well as at certain border crossings. 

Current and Prospective Assessment 

In terms of implementing  the internal market, Estonia has made great efforts  to  adapt 
its  legislation  to  the  Community  acquis.  The  international  transport  sector  in  Estonia 
to  a  large  extent  already  applies  rules  similar  to  those  applied  in  the  Community, 
particularly  in  inland  waterways  and  combined  transport.  Estonia* should  have  no 
problems  with  road  passenger  transport,  provided  that Community  rules  on  access to 
the profession  are rapidly  adopted.  In the railway  sector, the actual  application  of the 
acquis  as  regards  public  service  provision  and  the  standardisation  of  accounting 
systems will have to be monitored over the coming years. 

Road haulage should not pose major  difficulties  for the accession of Estonia,  provided 
that,  during  the  pre-accession  period,  the  Estonian  authorities  adapt  their  legislation 
on weights  and  dimensions  and  access to the  occupation  of  road  haulage  operator  to 
Community  legislation.  Roadworthiness  tests  will  also  have  to  be  brought  into  line 
with Community rules. 

As regards maritime traffic,  Estonia still has some way to go in adopting the acquis  in 
its safety  legislation.  Considerable  progress has been made in the air transport  sector, 
particularly  as  regards  reorganisation  and,  provided  progress  continues,  the  sector 
should  not  pose  any  major  problem  for  accession  as  long  as  the  majority  of  the 
planned legislation actually enters into force in 1998/99. 

The development  of an integrated  and competitive transport  system is a goal  accepted 
by  the  Estonian  authorities.  The  main  difficulties  will  probably  be  achieving 
satisfactory  levels of safety  and efficient  use of the transport system. Estonia has made 
satisfactory  progress  on  safety.  However,  achieving  a  coherent  transport  system 
appears to be more difficult.  The share taken by road transport  is likely to  continue to 
grow and Estonia will have to put effort  into promoting the use of the rail  network. 

75 

In  order  to  improve  links  with  the  Member  States  of  the  Community  and  with  its 
neighbours,  between  1995  and  1999  Estonia 
invest  around 
ECU  100 million  from  the  national  budget  in  transport  infrastructures  used  by 
international traffic,  particularly the pan-European corridors. At around 0.7% of GNP, 
this will be  insufficient. 

is  planning 

to 

Conclusion 

Estonia  has  made  significant  progress  in  adapting  its  transport  legislation  to  the 
acquis.  Provided  efforts  are  made,  and  legislation  is  actually  implemented,  in  road 
haulage  (access  to  the  sector,  weights  and  dimensions),  the  maritime  sector  (safety) 
and, to a lesser  extent,  air transport,  and provided  financial  transparency  is  improved 
in the rail  sector, transport  should  not pose major  difficulties  as regards  the  adoption 
of the internal market  acquis. 

However,  steps  should be taken to ensure that the means required  to lay the basis  for 
the  future  extension  to  the  accession  countries  of  the  trans-European  transport 
network  are  provided,  which  does  not  seem  to  be  the  case  at  the  present  time. 
Furthermore,  Estonian  administrative  structures,  including  inspection  bodies  such as, 
for example, those in the area of safety, should be rapidly  strengthened. 

Small and Medium  Enterprises 

EU  enterprise  policy  aims  at  encouraging  a  favourable  environment  for  the 
development  of  SMEs  throughout  the  EU,  at  improving  their  competitiveness  and 
encouraging  their  Europeanisation  and  internationalisation.  It  is  characterised  by  a 
high degree of subsidiarity. The complementary  role of the Community is defined  and 
implemented 
through  a  Multiannual  Programme  for  SMEs  in  the  EU.  This 
programme provides the legal and budgetary basis for the Community's  specific  SME 
policy  actions.  The  acquis  has  so  far  been  limited  to  recommendations  on  specific 
areas,  although  legislation  in  other  sectors  also  affects  SMEs  (e.g.  competition, 
environment, company law). 

The Europe Agreement provides  for co-operation to develop and strengthen  SMEs, in 
particular  in  the  private  sector,  inter  alia  through  provision  of  information  and 
assistance  on  legal,  administrative  and  tax  conditions.  The  White  Paper  contains  no 
specific  measures. 

Descriptive  Summary 

As  a  result  of  the  reform  policy  creating  a  market  economy  and  supported  by  the 
privatisation  process,  the  number  of  private  companies  grew  rapidly  since  the  late 
1980s.  In  1995  10,000  new  companies  were  established.  Small  and  medium  sized 
enterprises  (SMEs)  dominate  in  construction,  wholesale  and  retail  trade  and  in  other 
services.  Their  contribution  to  employment  has  increased  annually.  By  the  end  of 
1995  it accounted  for  more  than  54%. Although  the  share  of  large  enterprises  of  the 
economy has declined  considerably, large companies still dominate  in industry  and in 
energy  production. 

76 

The Estonian enterprise policy is quite general as it aims at stimulating the business 
climate for all enterprises regardless of size. However, the Law of State Support  for 
Entrepreneurship of 1994 establishes a Small Business Loan and Guarantee Fund and 
a  Rural  Life  and  Agricultural  Credit  Fund.  There  are  no  specific  accounting  rules 
applicable for  SMEs, except  for  an exemption from audit in the case of very small 
enterprises. Support for SMEs is available through the SME Office  at the Ministry of 
Economy and the Department of Local Government and Regional Development at the 
Ministry of Internal Affairs, as well as through non-governmental intermediaries such 
as the Estonian Small Business Association, the Chamber of Commerce and Business 
Advisory Service Centres. 

Current and Prospective Assessment 

The basic structures for  SMEs are in place, but there is a need for further  refinement 
and increased coherence of policy, simplification  of legislation to make it more SME 
friendly, strengthening of support infrastructures, improvement of the tax environment 
and development of SMEs' access to financing. 

Due to the liberal trade regime of Estonia, the SMEs are already, also on the domestic 
market,  exposed  to  considerable  pressures  from  international  competition.  It  is 
however  likely  that the  competitive  pressures  on Estonian  SMEs will  become even 
stronger by participation in the internal market. The on-going efforts to strengthen the 
SMEs during the pre-accession period will therefore need to be continued. 

Conclusion 

No specific  problem areas are expected identified  regarding Estonia's integration into 
the Community's SME Programmes. 

77 

3.5 Economie and Social Cohesion 

Employment  and  Social  Affairs 

Community  social policy has been developed through a variety of instruments  such as 
legal  provisions,  the  European  Social  Fund  and  actions  focused  on  specific  issues, 
including  public health, poverty  and  the disabled.  The  legal  acquis  covers  health  and 
safety  at  work,  labour  law  and  working  conditions,  equal  opportunities  for  men  and 
women, social security co-ordination for migrant workers and tobacco products. Social 
legislation in the Union has been characterised  by laying down minimum  standards. In 
addition,  the  social  dialogue  at  European  level  is  enshrined  in  the  Treaty  (Article 
118B),  and  the  Protocol  on  social  policy  refers  to  the  consultation  of  the  social 
partners and measures to facilitate the social dialogue. 

The Europe Agreement provides for approximation of legislation with Community  law 
and  co-operation  on  improving  standards  of health  and  safety  at work,  labour  market 
policies  and  the  modernisation  of  the  social  security  system.  It  also  provides  for 
Community  workers  legally  employed  in Estonia to be treated  without  discrimination 
on  grounds  of  nationality  as  regards  their  working  conditions.  The  White  Paper 
provides for measures for approximation in all the areas of the acquis. 

Descriptive  Summary 

Social  dialogue  takes place both  on bipartite  and tripartite  levels  and mainly  involves 
two  unions,  with  regular  contacts  to  the  European  Trade  Union  Confederation 
(ETUC),  and  two  employers'  organisations  which  are  not  members  of  the  Union  of 
Industrial  and  Employers'  Conference  of  Europe  (UNICE).  The  social  dialogue 
appears to be developing well. 

According  to  ILO  methodology,  the  unemployment  rate  was  about  7.6%  in  1994 
(latest  figures).  However,  a  labour  market  survey  carried  out  by  the  Labour  Market 
Board  in  1995 according to EU standards shows unemployment  at approximately  9%. 
The regional disparities are considerable. 

On  labour  market  policy.  Estonia  has  developed  a  regionalised  employment  service 
structure  to  deliver  active  labour  market  policy.  This  is  one  precondition  for 
functioning  labour  markets,  which  has  to  be  supplemented  with  a  range  of  labour 
market  policy  measures  to  ensure  an  efficient  allocation  of  labour  and  a  capacity  for 
continuous adaptation to structural change. 

Estonia  is  in  the  process  of  preparing  a  number  of  social  reforms  replacing  earlier 
laws. There is a draft  law on social security on the way which will form the  framework 
for  social  legislation  and  provide  the  basis  for  discussions  on  new  financing 
arrangements  and  the pension  reform.  At the present,  social  contributions  are paid  by 
employers  as a special tax while employers and employees might  share the cost  under 
a new  system. New  laws are under preparation  on social benefits  for  disabled  persons 

78 

and  pensions.  Continued  efforts  are  required  to  ensure  that  measures  of  social 
protection are developed. 

The health system in Estonia will need to be significantly  improved. 

Current and Prospective Assessment 

Estonia adopted  in December  1996 a new Occupational  Health  and  Safety  Act  laying 
down  the  basic principles  for  the protection  of  health  and  safety  at work,  which  was 
modelled on the EU framework  directive. But many of the specific  measures, have still 
not been  introduced. 

Some  are apparently  under  preparation.  Estonia  has  set  up  a plan  which  provides  for 
the  conclusion  of  approximation  in  the  social  field  by  1999.  Independent  inspection 
structures, in accordance with the ILO rules, are not yet in place but are expected to be 
operational in 1998. 

Estonia has already incorporated  some of the main principles of the Community  labour 
law  in  its  national  legislation.  But  new  laws  and  substantial  adjustments  to  existing 
laws  are  needed  to  ensure  conformity  with  the  acquis  on  collective  redundancies, 
transfer  of undertakings  and  the protection  of  employees  in case  of  insolvency  of the 
employer.  In  a  number  of  other  areas  such  as  information  applicable  to  the  work 
contract or employment relationship and working time, further  steps will be needed to 
ensure  compliance  with  the  acquis.  The  information  and  consultation  of  workers  on 
company level as requested by a number of  EC Directives needs to be strengthened. 

The  basic  provisions  of  EC  non  discrimination  law  between  women  and  men  are 
covered  by  the  Estonian  legislation.  The  non  discrimination  principle  is  not  always 
respected  in  practice,  particularly  in  the  field  of  equal  pay  for  equal  work  and  in 
gender  based  advertising.  The  difference 
in  pay  between  women  and  men  is 
considerable. Adaptation is necessary in the field of parental leave for  fathers. 

Concerning  the  right  to  the  free  movement  of  workers,  there  would  appear  to  be  no 
obstacles to prevent Estonia from  being able to implement the provisions of the acquis 
in  this  area.  The  introduction  of  the  right  to  free  movement  will  however  require 
changes  in  the  national  law,  particularly  as  regards  access  to  employment  and  a 
treatment free  from  discrimination on grounds of nationality. 

In the field of social security of migrant workers accession does not, in principle, pose 
major  problems,  although  some  technical  adaptations  will  be  necessary.  More 
important is the administrative capacity to apply the detailed co-ordination rules in co 
operation  with  other  countries.  Estonia  appears  to  have  many  of  the  administrative 
structures required to carry out these tasks, but further  preparation  and training will be 
necessary before  accession. 

The  two  Directives  on  the  warning  labelling  of  cigarettes  and  maximum  tar  content 
have  not  yet  been  transposed  into  the  national  legislation.  The  Estonian  authorities 

79 

have  announced  that  legislation  covering  the  Directives  is  under  preparation,  and 
approval is expected before the end of 1997. 

Conclusion 

Social  reform  should  be  pursued,  and  the  public  health  system  needs  to  be 
significantly  improved.  In  addition,  the  social  dialogue  should  be  further  developed. 
Estonia will need to make efforts  to ensure the realignment of its legislation with  EC 
requirements  in areas such as of health and safety,  labour law and equal  opportunities 
and  continue  to  develop  the  structures  to  ensure  effective 
implementation  of 
legislation.  If  Estonia  pursues  its  efforts,  it  should  be  possible  to  take  on  the 
obligations of EU membership in the medium term. 

Regional Policy and Cohesion 

In  accordance  with  Title  XIV  of  the  Treaty,  the  Community  supports 
the 
strengthening  of  cohesion,  mainly  through the  Structural  Funds. Estonia  will  have  to 
implement  these  instruments  effectively  whilst  respecting  the  principles,  objectives 
and procedures which will be in place at the time of its accession. 

The Europe Agreement provides for co-operation on regional development and  spatial 
planning,  notably  through  the  exchange  of  information  between  local,  regional  and 
national  authorities  and  the  exchange  of civil  servants  and  experts. The  White  Paper 
contains no specific  provisions. 

Descriptive  Summary 

Estonia was at some 23% of EU average GDP in  1995. In spite of the country's  small 
size,  there  are  considerable  differences  between  the  regions  as  with  regard  to 
economic development. These disparities can be generalised as a division between the 
eastern and the most prosperous western parts. 

Estonia is divided  into  15 regional  administrative  units, the "maakond",  and 254 self-
governing  municipalities  with  independent  budgets  and  the  right  to  impose  local 
taxes. 

Regional  Policy  Guidelines  were  approved  by  the  Government  in  1994  and  by  the 
Parliament  in  1995.  Special  efforts  are  targeted  at  areas  with  specific  economic 
problems: 

• 
• 
• 
• 

counties in eastern and southern Estonia, 
the small islands, 
the border areas, 
mono functional  industrial areas. 

Estonia's  regional  development  policy  constitutes  an  integral  part  of  its  national 
development  policy.  Indeed,  regional  development  initiatives  are 
implemented 
through  sectoral  policies, in accordance  with the « Regional  Policy  Guidelines ». The 

80 

Ministry  for  Internal  Affairs  assumes  overall  responsibility  for  regional  development 
actions.  The  National  Regional  Policy  Council,  composed  of  representatives  from 
concerned  ministries,  insures  proper  inter-ministerial  co-ordination.  Spatial  planning 
is under the responsibility of the Ministry of Environment. 

Government  programmes  have  been  launched  to  stimulate  the  development  in  such 
fields as  conversion  of  large  industrial  conglomerates,  conversion  of  former  military 
activities,  integration  of  the  non-Estonian  population  and  village  development.  A 
network of regional business promotion centres has been established. 

Estonia's  regional  policy  instruments  are  very  limited.  Moreover,  the  share  of  total 
development  related  expenditure  constituting  potential  counterpart  funds  to  EU 
structural policy cannot yet be determined. Therefore,  Estonia's co-financing  capacity 
cannot presently be evaluated with sufficient  reliability. 

Current and Prospective Assessment 

Within  the  framework  of  its  national  economic  policy,  Estonia  implements  certain 
regional  development  initiatives.  However,  the  financial  resources  at  the  disposal  of 
these  initiatives  are very  restricted  and need to  be  strengthened  in the perspective  of 
accession to match the EU's structural initiatives. 

Ministerial  responsibility  seems  well  entrenched  but  procedures  to  insure  proper 
interministerial  co-ordination  cannot  solely  rely  on  the  National  Regional  Policy 
Council. Moreover, administrative and budgetary  procedures  should  be established  in 
order for Estonia to be able to channel EU actions. 

Conclusion 

Estonia's  progress  in  establishing  a  regional  development  policy  is  limited.  A 
differentiated  policy  addressing  regional  disparities  should  be  introduced.  Moreover, 
given  Estonia's  size, its regional  policy  should  continue to constitute  an  integral  part 
of the  national  development  strategy.  Yet, Estonia's  administrative  capacity  suggests 
that, given the necessary political support, the administrative and budgetary  structures 
to manage the integrated  EC structural  actions  could be established.  Thus, subject  to 
the  necessary  reforms,  Estonia  should,  in  the  medium-term,  be  ready  to  apply  the 
Community rules and to channel effectively  the funds from the  EC structural policies. 

3.6 Quality of Life and Environment 

Environment 

The  Community's  environmental  policy,  derived  from  the  Treaty,  aims  towards 
sustainability  based  on  the  integration  of  environmental  protection  into  EU  sectoral 
policies, preventive action, the polluter pays principle, fighting environmental  damage 
at  the  source,  and  shared  responsibility.  The  acquis  comprises  approximately  200 
legal  acts  covering  a  wide  range  of  matters,  including  water  and  air  pollution, 
management  of  waste  and  chemicals, biotechnology,  radiation protection,  and  nature 
protection.  Member  states  are  required  to  ensure  that  an  environmental  impact 
assessment is carried out before  development consent is granted for certain public and 
private projects. 

the  principle  of  sustainable  development  and  should 

The Europe Agreement  stipulates that Estonian  development  policies  shall  be  guided 
by 
incorporate 
environmental  considerations.  It  also  identifies  environment  as  an  area  for  bilateral 
co-operation, as well as for approximation of legislation to that of the Community. 

fully 

The  White  Paper  covers  only  a  small  part  of  the  environmental  acquis,  namely 
product-related  legislation, which is directly related to the free circulation of goods. 

Descriptive  Summary 

The  environmental  situation  in  Estonia  is  comparatively  good  having  improved  in 
recent  years,  partly  as  a  result  of  the  rapid  decline  in  industrial  and  agricultural 
production  in recent years, and partly as a result of high levels of environment  related 
investment.  However,  there are still  important problems, a major  challenge  being  the 
highly  polluting  oil  shale  industry,  which  accounts  for  a  major  portion  of  energy 
production. 

Although  sulphur  emissions  from  the plants have halved  since  1990, due to  reduction 
in power generation,  Estonia  is still a net exporter of sulphur dioxide, and  substantial 
remediation  measures  such as flue  gas desulphurisation  and anti-particulate filters are 
necessary. Oil shale use also causes leaching from  toxic ash dumps and  contamination 
of agricultural  land. The  government  is currently  considering  plans to replace the old 
boilers with new technology, but no timetable has been fixed. 

Over  the  years,  Estonia  has  accumulated  significant  quantities  of  wastes  including 
military,  industrial  and  hazardous  waste.  A  programme  to  provide  technical  and 
financial  assistance  for  municipalities,  which  are  responsible  for  waste  water 
treatment  and  drinking  water  supply,  has  been  adopted.  Estonia  has  ratified  both  the 
1974 and  the  1992  Helsinki  Conventions  on the protection  of the  Baltic  Sea  and  has 
made a good  start  in reducing  untreated  waste water discharges  to the  Baltic  Sea. An 
international  working  group  has  been  set  up  to  assist  Estonia  with  the  radioactive 
waste aspects of the development  of a decommissioning  plan for  Paldiski  site  (former 
Soviet  Navy  training  centre).  The  country  contains  important  reserves  of  natural 
marine, lake and forest  biodiversity. 

82 

Public  environmental  expenditure  as  a  percentage  of  GDP  is  high  with  respect  to 
average  EC  levels,  and  there  is  government  commitment  to  fund  environmental 
investment,  especially  for  Baltic  Sea  'hot-spots'.  Estonia has been very  successful  in 
mobilising 
investments  financed  by 
international  loans. A  high  level  of public  awareness  exists on  environmental  issues, 
though  particular  attention  is  needed  to  problems  that  could  arise  from  uncontrolled 
economic  development. 

foreign  assistance,  with  some  40%  of 

Estonia  embarked  in  project  development  before  reforming  its  legislation.  However, 
some  important  environmental  legislation  was  passed  in  1994,  including  amongst 
others  a  water  act,  regulation  of  waste  water  discharge,  on  the  movements  of 
hazardous  waste  and the  setting  up of the Environmental  Fund.  In  1995 followed  the 
act  on  Sustainable  Development.  Recently  the National  Environmental  Strategy  was 
adopted,  and  a  detailed  National  Environment  Action  Plan  is  being  implemented. 
However,  although  sectoral  legislation  has  been  passed,  applicable  standards  and 
regulations are often  still those of the former  Soviet Union. The new legislation  tends 
to be of a framework nature, needing to be fleshed out with standards,  implementation 
measures and administrative  structures. 

Current and Prospective  Assessment 

Approximation  of Estonian  environment  legislation  to the  EC acquis  is under  way, 
and should be achievable in the medium term. The Government's objective  is to adopt 
by the end of  1998 all White Paper legislation. An approximation  strategy for the non-
White  Paper  legislation  should  be  ready  in  1998. Efforts  will  be  needed  in  order  to 
make  the  recent  waste,  water  and  nature  legislation  fully  compatible  with  EU 
legislation.  Radiation protection  and radioactive waste legislation are still  missing.  In 
this area there is generally a lack of safety  culture. Particular attention should be given 
to  the  quick  transposition  of  framework  directives  dealing  with  air,  waste,  water  and 
the  Integrated  Pollution  Prevention  and  Control  directive  (IPPC),  as  well  as  the 
establishment  of financing  strategies for  legislation  in the water, air and waste  sectors 
requiring major  investments. 

Effective  compliance  to the  EC acquis will be most difficult  to achieve  in the  large 
combustion  plant  area  and  in  the  water  sector  (especially  waste  water  treatment  for 
small  and  medium  size towns), because  of the  importance  of  investment  needs. High 
levels  of  investment  will  also  be  needed  in  industry.  Urban  air  pollution,  solid  and 
hazardous  waste  management,  and  management  of  municipal  waste  are  also  areas 
where  investment  together  with  greater public  awareness  is required.  The  radioactive 
waste situation of the former  Soviet Paldiski naval submarine base should be  followed 
closely.  Adequate  implementation  and  enforcement  structures  will  have  to  be 
developed. An important bottleneck which needs to be addressed is the lack of human 
resources  with  expertise  to  conduct  the  approximation  process.  The  country's 
environmental  accession  strategy  should  include  implementation  timetables  for 
meeting  the  EC  environmental  acquis  starting  amongst  others  with  implementation 
of the framework  and IPPC directives mentioned above. 

83 

Conclusion 

Given the prevailing trends in innovative policy reform and relatively high  investment 
levels,  and  with  a  major  effort  towards  development  of  legislation  enforcement 
structures,  Estonia  should  be  able  to  fully  transpose  the  environmental  acquis  and 
make  substantial  progress  in  effective  compliance  in  the  medium  term.  However, 
effective  compliance with a number of pieces of legislation requiring a sustained  high 
level  of  investment  and  considerable  administrative  effort  (e.g.  urban  waste  water 
treatment,  drinking  water,  aspects of waste management  and air pollution  legislation) 
could be achieved only in the long term. 

Consumer  Protection 

The  Community  acquis  covers  protection  of  the  economic  interests  of  consumers 
(including  control  of misleading  advertisement,  indication  of prices, consumer  credit, 
unfair  contract  terms,  distance  selling,  package  travel,  sales  away  from  business 
premises  and  timeshare  property)  as  well  as  the  general  safety  of  goods  and  the 
specific  sectors of cosmetics, textile names and toys. 

The  Europe  Agreement  provides  for  approximation  of  legislation  with  Community 
law and co-operation with a view to achieving full  compatibility  between the  systems 
of consumer protection  in Estonia and the Community.  Stage I measures of the  White 
Paper focus  on improving product safety,  including cosmetics, textile names and toys, 
and on the protection  of the economic interests of the consumer, notably  measures  on 
misleading  advertising,  consumer  credit,  unfair  contract  terms  and  indication  of 
prices.  Stage II measures  relate to package  travel, sales away  from  business  premises 
and  time-share  property.  New 
EC  legislation  which  has  been  adopted  recently 
(distance  selling)  or will  be  adopted  soon  (comparative  advertising,  price  indication) 
will also need to be taken into account. 

Descriptive  Summary 

The  Ministry  of  Economy  has  overall  responsibility  for  consumer  policy.  The 
Ministry  supervises  the  Consumer  Protection  Board  which  is a public  body  with  the 
authority to protect and pursue consumer complaints. The Consumer Protection Act of 
1993  defines  the  rights  of  consumers  in  transactions  with  merchants,  producers  and 
intermediaries  and  establishes  an  institutional  framework  for  consumer  protection. 
Several other legal acts and rules regulate specific  aspects of consumer  protection. 

The  Estonian  Consumer  Protection  Union  is  a  voluntary,  independent  organisation 
which  aims  at protecting  the  interests  of consumers, to educate  and  inform  them  and 
to  co-operate  with  State  and  local  bodies.  The  organisation  is  represented  in  the 
Consumer Consultative Council, which advises the Consumer Protection  Board, but is 
relatively weak due to a shortage of resources. 

Current  and  Prospective  Assessment 

84 

Although the Consumer  Protection Act provides considerable protection  of  consumer 
interests,  Estonia  needs  to  make  a  number  of  adjustments  before  her  legislation  is 
complies  with  the  requirements  of  EU  standards.  Concerning  the  protection  of 
economic  interests,  the  existing  rules  on  the  indication  of  prices  and  misleading 
the  Community  provisions,  although 
advertising  are  generally 
amendments  are  still  required  in fundamental  areas to  secure  a complete  realignment 
with  the  EC  acquis.  New  legislation  is  needed  in  areas  such  as  sales  away  from 
business  premises,  distance "selling, package  travel  and  timeshare  property.  In  some 
cases,  draft  laws  are  under  preparation.  Existing  rules  on  unfair  terms  of  consumer 
contracts  and  consumer  credit  need  to  be  amended  to  strengthen  the  protection  of 
consumers. 

line  with 

in 

The  provisions  of  The  Consumer  Protection  Act  on  general  product  safety  are 
insufficient  and  need  to  be  more  precise,  including  more  competence  to  the  public 
authorities. The elaboration  of new legislation has been announced.  Draft  laws  in  the 
specific  sectors of cosmetics and the safety of toys are under discussion. 

The  development  of  a  strong  and  independent  consumer  movement,  sustained  by 
public authorities will need to accompany the introduction of the  acquis. 

Conclusion 

Important progress  has been made in aligning the legislation  in the  field  of  consumer 
protection  with  the  acquis.  But  reform  of  the  Estonian  legislation  will  need  to  be 
continued  since the  existing  laws only to a limited  extent  comply  with the acquis.  At 
the  institutional  level,  Estonia  appears  to  have  the  structures  and  bodies  required  to 
implement  consumer  policies.  Taking  on  the  consumer  policy  is  unlikely  to  cause 
major problems for Estonia in the medium term. 

85 

3.7. Justice and Home Affairs 

The Present Provisions 

The  Justice  and  Home  Affairs  (JHA)  acquis  principally  derives  from  the  framework 
for  co-operation  set  out  in  Title  VI  (Article  K)  of  the  Treaty  on  European  Union 
(TEU),  "the  third  pillar",  although  certain  "first  pillar"  (EC  Treaty)  provisions  and 
legislative measures are also closely linked. 

The  EU  JHA  framework  primarily  covers:  asylum;  control  of  external  borders  and 
immigration;  customs  co-operation  and  police  co-operation  against  serious  crime, 
including  drug  trafficking;  and  judicial  co'-operation  on  criminal  and  civil  matters. 
The TEU stipulates key principles upon which such co-operation is based, notably the 
European  Convention  on  Human  Rights  and  the  1951  Geneva  Convention  on  the 
Status of Refugees.  It is also based  implicitly  on a range of international  conventions 
concerning  its  fields  of  interest,  notably  those  of  the  Council  of  Europe,  the  United 
Nations  and  the  Hague  Conference.  The  legislative  content  of  third  pillar  acquis  is 
different  from  the first pillar;  it  consists  of conventions, joint  actions, joint  positions 
and  resolutions,  (including  the  agreed  elements  of  draft  instruments  which  are  in 
negotiation).  A  number  of  EU  conventions  (including  the  1990  Dublin  Convention, 
and  conventions  relating  to  extradition,  fraud  and  EUROPOL)  have  been  agreed  by 
the Council and are now in the process of ratification  by national Parliaments; several 
other  conventions,  including  one  on  external  frontiers  are  in  various  stages  of 
negotiation  in  the  Council.  The  JHA  acquis  involves  a  high  degree  of  practical  co 
operation, as well as legislation and its effective  implementation. 

The New Treaty 

For  many  of the  above  matters, the  entry  into  force  of  the  Treaty  resulting  from  the 
Amsterdam  Inter-Governmental  Conference  will  mark  the  end  of  the  current 
cooperation  framework. 

Reiterating  the  objective  of developing  the Union  into  an "area  of  freedom,  security 
and  justice",  the  new  Treaty  brings  these  matters,  including  the  free  movement  of 
persons, asylum and immigration, into the Community's sphere of competence. 

On  the  free  movement  of  persons  in  particular,  the  new  Treaty  provides  for  the 
incorporation  of the  Schengen  acquis  into the framework  of the European  Union  and 
binds any candidate for EU membership to accept that acquis in  full. 

With regard to matters remaining  within the cooperation  framework,  i.e. policing  and 
criminal  justice,  the  new  Treaty  provides  for  the  reinforcement  of  the  cooperation 
system. 

The Europe Agreement and the  White Paper 

The  Europe  Agreement  includes  provision  for  co-operation  in  the  fight  against  drug 
abuse and money  laundering. 

86 

The  White  Paper  does  not  deal  directly  with  third  pillar  subjects,  but  reference  is 
made  to  first  pillar  matters  such  as money  laundering  and  freedom  of  movement  of 
persons  which  are  closely  related  to  Justice  and  Home  Affairs  considerations. 
Reference  is also made to the Brussels and Rome conventions. 

Descriptive  Summary 

General Preconditions for JHA Co-operation 

Estonia  joined  the  Council  of  Europe  in  1993  and  has  signed  or  ratified  the  most 
important  instruments  concerning  human  rights.  The  Constitution  provides  for  an 
independent  judiciary  according  to  the  rule  of  law.  Reform  in  JHA  institutions  is 
underway,  and  progress  has been  made concerning  the protection  of the  border.  The 
Government  has prepared  a strategy  for  the JHA  sector,  and in February  1997 set  up 
an  inter-ministerial  working  group.  Estonia  has  not  yet  ratified  the  1990  data 
protection  convention,  but  a  law  on  Personal  Data  Protection  was  passed  by  the 
'Estonian Parliament in June  1996. (See also separate section on Single Market). 

Asylum 

Estonia  ratified  the  Geneva  Convention  and  the  1967 Protocol  in  February  1997. At 
the  same  time  the  Estonian  Parliament  adopted  the  Law  of  Refugees  which 
implements  the  Convention.  The  Estonian authorities  are  currently  making  provision 
to  bring  the  law  into  effect  and  to  appoint  and  train  a  competent  authority  (the 
Citizenship  and  Migration  Board).  The  law  is  based  on  the  Geneva  Convention  and 
incorporates a number of EU provisions such as the "safe country concept". 

Immigration/Border  Control 

Estonia  has  visa-free  agreements  with  the  UK,  Ireland,  Denmark,  Finland,  Sweden, 
Norway,  Iceland  and  several  central  European  countries,  including  Latvia  and 
Lithuania with which it operates a common visa space. 

Further  visa-free  regimes  are being negotiated  with other  EU member  states.  Estonia 
has  adopted  the  EU  third  country  list  for  which  visas  are  required.  The  Estonian 
immigration  administration  has  been  streamlined  and  a register  has  been  created  for 
the  issuance  of  permanent  and  temporary  residence  permits  to  persons  without 
Estonian citizenship. 

A readmission agreement  is in place with Finland, Sweden, Denmark, Norway, Latvia 
and  Lithuania. Negotiations  are underway  with other  EU countries  Progress has  been 
made  on  border  management,  including  significant  reform  of  the  border  guard;  and 
further  improvements  are  underway.  A border  control  system  is  being  developed  in 
cooperation  with  Nordic  countries.  Estonia  has 
introduced  machine-readable 
passports. Estonia and Russia work together on the management of the mutual  border, 
although  difficulties  persist  due  to  the  absence  of  agreement  with  Russia  on 
readmission. 

87 

Police Co-operation 

Organised  crime exists  in Estonia in the fields of drug trafficking,  money  laundering, 
car  theft,  security  services,  and  fraud.  To  tackle  organised  crime  (and  drugs-related 
crime)  more  effectively,  specialist  units  have  been  established  in  the  police  service 
and co-operation has been strengthened  between the law enforcement  bodies.  Reform 
in the police service is on the way. Training in specific  areas such as the fight against 
drugs, economic  crime and money  laundering  is being  intensified  with the  assistance 
of  several  EU  countries  and  through  bilateral  training  programmes.  Estonia  is 
preparing to ratify  the  1990 money  laundering  convention.  (See also  separate  section 
on  Single  Market).  Estonia  experiences  no  domestic  or  international  terrorism. 
Estonia  has  ratified  the  key  international  conventions  on  terrorism,  and  domestic 
legislation in place. 

Drugs 

Estonia is used as a transit country for drug trafficking,  between East and West. There 
is  a  small  domestic  market  and  a  modest  production  of  amphetamines.  Estonia  has 
ratified,  or  is  preparing  to  ratify,  the  main  international  drugs  conventions,  and  is 
active  in  the  anti-drugs  programmes  of the  UNDCP  and  Phare.  Domestic  anti-drugs 
legislation and systems are currently being developed, and a law on narcotic drugs and 
psychotropic substances is under preparation. 

Judicial  Co-operation 

Estonia has made considerable progress in preparing the judiciary  for EU accession in 
the JHA sector. Estonia has ratified  four Hague Conventions (evidence abroad,  service 
of  documents,  access  to  justice,  and  maintenance)  and  will  apply  for  the  Lugano 
Convention.  Estonia  also  ratified  several  key  Council  of  Europe  Conventions  on 
criminal matters, in April  1997, and the additional protocols. 

Current  and  Prospective  Assessment 

There are some important gaps still to be filled in Estonia's legislation but some  useful 
progress  has  been  made.  An  important  priority  for  the  near  future  will  be  the 
ratification  and  application  of  the  necessary  international  legal  instruments,  and 
improvements in the levels of education and experience of the legal  profession. 

The  main  institutional  challenge  lies  in  the  field  of  resource  constraints,  both  of 
personnel  and  finance.  The Government  is taking  steps to prepare  the  institutions  for 
participation  in the JHA process, for  example  by  familiarising  officials  with  practical 
co-operation  with  EU  counterparts,  through  targeted  education  and  on-the-job 
training. 

Efforts  still have to be made to improve the administration  to deal with  issues  related 
to  refugees  and  asylum  seekers,  as  well  as  further  to  develop  systems  to  deal  with 
organised crime and money laundering. 

88 

Conclusion 

Estonia  is  starting from a  very  low  base  in  terms  of  the  JHA  acquis (present  and 
future).  There are some encouraging  signs of progress, notably  in respect  of border 
control, but Estonia will need to sustain a major effort  if it is to meet the justice and 
home affairs acquis in the medium term. 

89 

3.8  External Policies 

Trade and International Economic Relations 

The  acquis  in  this  field  is  made  up  principally  of  the  Community's  multilateral  and 
bilateral  commercial  policy  commitments,  and  its  autonomous  commercial  defence 
instruments. 

The Europe Agreement  includes provisions  in several  areas requiring parties to act in 
accordance with WTO/ GATT principles, or other relevant international obligations. 

The White Paper includes no provisions in this field. 

Descriptive  Summary 

Estonia has developed an open, trading economy and is expected to become a member 
of  the  World  Trade  Organization  (WTO)  by  the  end  of  1997.  Estonia  has  observer 
status in the Government  Procurement Agreement and, upon accession would have to 
comply  with  the  obligations  of  the  plurilateral  WTO  agreements  to  which  the 
Community  is a party. 

At  present  Estonia  does  not  maintain  quantitative  restrictions  on  any  textile  or 
clothing products.  On accession the Community textiles policy would  be extended  to 
Estonia;  any  Community  restrictions  still  maintained  at  the  date  of  accession  would 
require adjustment  by an appropriate amount to take account of Estonian accession. 

Current  and  Prospective  Assessment 

At present, Estonia does not apply import duties. On accession Estonia would have to 
apply the Community's  Common Customs Tariff,  and the external trade provisions  of 
the Common Agricultural  Policy. The post Uruguay Round weighted  average level of 
most favoured  nation duties for industrial products will be 3.6% for the Community. 

In  its relations  with  international  organisations  Estonia  should  ensure  that  its  actions 
and commitments respect the Europe Agreement and ensure a harmonious adoption of 
its future  obligations as a member of the Community. 

On  accession  Estonia  would  become  party  to  the  Community's  various  preferential 
agreements.  Preferential  agreements  between  Estonia  and  third  countries  would,  in 
general, have to be terminated on accession. 

In  the  area  of  trade  in  services  and  establishment,  Estonia  is  expected  soon  to  join 
GATS  on  terms  largely  consistent  with  those  of  the  Community,  and  it  should  be 
the 
remaining,  significant 
possible 
commitments of Estonia and those of the Community. 

inconsistencies  between 

resolve  any 

to 

On  accession  Estonia  would  have  to  repeal  national  legislation  in  the  field  of 
commercial defence  instruments, and EC legislation would become applicable there. 

90 

Experience  from  previous  accessions  has  shown  that  the  automatic  extension  of 
existing anti-dumping measures to new member states prompts third countries to raise 
problems  in  terms  of  the  compatibility  of  this  approach  with  relevant  WTO 
provisions.  It  has  also  shown  that  accession  creates  a  potential  for  circumventing 
measures adopted by the Community under the commercial defence  instruments. This 
happens  when,  prior  to  accession,  substantial  quantities  of  the  products  subject  to 
measures  are  exported  to  the  territory  of the  future  member  state  and,  on  accession, 
are automatically released  for free circulation in the enlarged customs territory. These 
two problems would have to be addressed during Estonia's pre-accession phase. 

Estonia  is  not  a member  of  any  non-proliferation  regime,  although  it  has  expressed 
interest  in  membership.  The  Estonian  control  list  of  dual-use  items  resembles  the 
Community  control  list.  Arms  export  is  also  controlled.  There  appears  to  be  no 
obstacle in principle to Estonia applying EC legislation in this field. 

Conclusion 

Estonia is well placed to be able to meet Community requirements in this field within 
the next few years. 

Development 

The acquis in the development  sector is made up principally .of the Lomé  Convention, 
which runs until early 2000. 

Neither the Europe Agreement or the White Paper include provisions in this field. 

Descriptive  Summary 

Estonia  has  no  preferential  trade  agreements  with  ACP  countries,  and  no  GSP 
schemes apply. However, access to the Estonian market is very liberal. 

Estonia has no  budget  for  development  aid, although  it has contributed  financially  to 
the reconstruction of Bosnia and Herzegovina. 

Current and Prospective  Assessment 

On accession, Estonia should apply its preferential  trade regime to the ACP States and 
participate,  together  with  the  other  member  states,  in  financing  the  European 
Development  Fund (EDF), which provides financial  aid under the Lomé Convention. 

Applying  the  Lomé  trade  regime  should  not  generally  be  a  source  of  difficulties  for 
Estonia. 

Normally, new member  states accede to the Lomé Convention by means of a protocol 
on the date of their accession to the EU. 

Conclusion 

91 

Estonia should be able to meet EU requirements in this field in the next few years. 

Customs 

The  acquis  in  this  sector  is  the  Community  Customs  Code  and  its  implementing 
provisions;  the 
EC's  Combined  Nomenclature;  the  Common  Customs  Tariff 
including  trade  preferences,  tariff  quotas  and  tariff  suspensions;  and  other  customs-
related legislation outside the scope of the customs code. 

The  Europe  Agreement  covers  the  establishment  of  a  free  trade  area  with  the 
Community  and  the  progressive  removal  of  customs  duties  on  a  wide  range  of 
products, according to clear timetables starting from the date of entry into force  of the 
agreement. 

The  White Paper  includes  in  Stage I, measures to consolidate  and  streamline  the  free 
trade  established  under the  Europe Agreement,  including  legislation  compatible  with 
the  Customs  Code,  Combined  Nomenclature,  etc.  Stage  II  concerns  the  adoption  of 
the  full  Community  legislation,  with  a  view  to  joining  the  customs  union  upon 
accession. 

Descriptive  Summary 

On  accession  the  Estonian  customs  authorities  would  be  required  to  assume  all  the 
responsibilities  necessary  for  the  protection  and  control  of  their  part  of  the  EU's 
external border. Besides the provisions on indirect taxation, they would be responsible 
for  the  implementation  and  enforcement  at  the  external  border  of  the  Community's 
common  commercial  policy,  the  common  agricultural  policy,  the  common  fisheries 
policy etc. 

Estonia's  capacity  fully  to  apply  the  acquis presupposes  the  possibility  to  adopt  and 
implement  the  Community  legislation;  and  the  existence  of  an  adequate  level  of 
infrastructure  and  equipment, 
in  terms  of  computerisation  and 
investigation  means and the establishment  of an efficient  customs organisation  with a 
sufficient  number of qualified  and motivated staff showing a high degree of integrity. 

in  particular 

With  the  support  of  the  technical  assistance  provided  by  customs  programmes, 
Estonia is currently in the process of amending its present customs code and preparing 
38  implementation  acts.  At  present,  the  legislation  in  force  is  not  EC  compatible. 
Furthermore,  no  legislation  concerning  customs  reliefs  on  counterfeit  and  pirated 
goods exists at this stage. 

Estonia  has  almost  aligned  its  national  goods  nomenclature  to  the  Community's 
Combined  Nomenclature.  In  addition,  Estonia  will  have  to  be  familiarised  with  the 
methodology of the Binding Tariff  information  system used in the EC. 

Estonia  adopted  on  1 April  1997  the  new  system  of  cumulation  of  origin  between 
European countries. 

92 

Estonia  has  applied  to  become  a contracting  party to the  EC/EFTA  Common  Transit 
Convention  and  the  Single  Administrative  Document  Convention.  A  Community 
Task Force is assisting Estonia in this field. 

Current and Prospective  Assessment 

Estonia  would  need  to  adapt  its  national  procedures  to  the  Community  legislation 
regarding  suspensive arrangements and customs procedures with economic impact. At 
the moment  of accession,  some technical transitional  arrangements would  be  needed, 
notably for operations beginning before the date of accession but which are concluded 
after that date. 

Estonia  will  have  to  align  its  tariff  structure  to  meet  the  Common  Customs  Tariff 
rates.  Estonia  is  not  familiar  with  the  operation  of  a  system  of  tariff  suspensions  or 
with the management  of tariff  quotas and ceilings which are fundamental  mechanisms 
to  apply  the  Community  Commercial  policy.  This  raises  significant  concern  in 
relation  to  Estonia's  capacity  to  cope  with  the  complexity  of  the  Community 
mechanism  in these domains. 

It will be important that the Estonian customs authorities can participate  appropriately 
in  the  various  computerised  systems  necessary  for  the  management,  in  the  customs 
union/internal  market,  of  the  customs  and  indirect  tax  provisions,  as  well  as  the 
computerised  systems  for  mutual  administrative  assistance  in  customs,  agricultural 
and  indirect  tax  matters.  Computerisation 
is  at  a  very  preliminary  stage  of 
development  in Estonia. 

Estonia  would  need  on  accession  to  dismantle  customs  controls  at  the  borders  with 
EU  member  states  and  with  other  acceding  countries.  The  resources  needed  for  the 
reinforcement  of  the  border  posts  along  its  frontiers  with  non-EU  member  states 
should be taken it into account in its strategic planning. 

Conclusion 

Estonia  will  need  to continue  major  efforts  to draft  customs  legislation  compatible  to 
that of the Community  and to align its organisation and staff to the duties that have to 
be carried out by a modern customs administration. If it does so it may be able to meet 
EU requirements  in the medium term. 

Common  Foreign  and Security  Policy 

Since  regaining  its  independence  in  1991,  Estonia  has  orientated  its  foreign  and 
towards  the  EU  and  NATO.  Improvement  of  relations  with 
security  policy 
neighbouring  countries has also been a priority for Estonia. Estonia has been an active 
participant  in  the  dialogue  arrangements  provided  for  under  the  Union's-Common 
Foreign  and  Security  Policy  and  whenever  invited  has  supported  EU  policies  within 
that  framework. 

93 

Estonia  is  a  member  of  the  UN,  OSCE,  Council  of  Europe  and  many  other 
international  organisations.  It  is  an  associate  partner  of  WEU,  participates  in  the 
NACC, the  PfP  and  has made  clear  its desire to  become  a member  of the  WEU  and 
NATO  as  soon  as  possible.  It  has  sent  troops  to  participate  in  IFOR/SFOR  and 
provided  assistance  to the post-war  reconstruction  of Bosnia.  It also participates  in  a 
number of regional organisations including the Council of Baltic Sea States. 

There are no territorial  disputes between Estonia and any member  state of the  Union, 
although  a  formal  delineation  of  the  maritime  border  with  Finland  and  Sweden 
remains  to  be  undertaken.  Neither  does  Estonia  have  any  major  disputes  with 
neighbouring  associated  countries.  Negotiations  concerning  the  delineation  of  sea 
borders with Latvia have been completed and await  ratification. 

The development  of  good relations with Russia  is a key  element of  Estonian  foreign 
policy.  Important  positive  developments  include the  agreement  on the withdrawal  of 
Russian  troops  from  Estonia  and  the  accompanying  agreement  on  the  treatment  of 
(Russian)  military  pensioners.  An  important  remaining  issue  between  Estonia  and 
Russia  is  the  absence  of  a  border  agreement.  Important  progress  was  made  in  the 
border  negotiations  in the  last  quarter  of  1996 when  Estonia  renounced  its  demands 
that  Russia  recognise  the  validity  of  the  1920  Tartu  Peace  Treaty.  The  draft  border 
agreement  includes  a  full  description  of  the  frontier  following,  with  only  minor 
amendments,  the  existing  control  line.  The  Estonian  government  has  expressed  its 
readiness to sign the agreement as soon as Russia is ready to do so. 

Estonia has a new and small diplomatic service with limited experience and resources. 
In  due  course  it  should  nevertheless  be  able  to  play  a  full  role  as  a  member  of  the 
Union. It maintains 23 representations abroad and employs some 220 diplomatic  staff. 

Estonia supports non-proliferation  of nuclear, biological and chemical weapons and is 
a  signatory  to  all  relevant  international  arms  control  agreements  Estonia  itself  does 
not  manufacture  or  export  weapons.  The  small  Estonian  armed  forces,  which  are 
under democratic control, are being reorganised to meet NATO requirements. Estonia 
is  a  member  of  the  Baltic  peacekeeping  battalion  (BALTBAT)  and  participated  in  a 
major  PfP exercise (Baltic Challenge) in 1996. 

In  the  statement  accompanying  its  application  for  membership  of  the  Union,  the 
Estonian  government  confirmed  that  it  was  ready  and  able  to  participate  fully  and 
actively in the CFSP of the Union. 

The  assessment  of  Estonian  foreign  and  security  policy  to  date  leads  to  the 
expectation that as a member it could fulfil  its obligations in this field. 

94 

3.9. 

Financial  Questions 

Financial  Control 

The  implementation  of  Community  policies,  especially  for  agriculture  and  the 
Structural  Funds,  requires  efficient  management  and  control  systems  for  public 
expenditure, with provisions to fight fraud. Approximation  of legislation  is  moreover 
needed  to  allow  the  system  of  "own  resources"  to  be  introduced,  with  satisfactory 
provision for  accounting. 

The  Europe  Agreement  provides  for  cooperation  in  audit  and  financial  control, 
including technical  assistance provided  by the Community  as appropriate. The  White 
Paper includes no measures in this field. 

Descriptive  Summary 

The  State Audit  Office,  which was established  in  1990, is the principal,  independent, 
external financial  control authority in Estonia. In  1992 the Office  became a member of 
the  International  Organisation  of  Supreme Audit  Institutions,  the  standards  of  which 
were taken into account in drawing up the Law on the State Audit Office  of  1995. 

The  State  Audit  Office  reports  to  the  Parliament  its  observations  of  how  ministries, 
agencies and state-owned  enterprises account for and use State funds  and other assets. 
The  Office  further  controls  the use and repayment  of  foreign  loans  contracted  by  the 
State as well as the use of foreign  assistance. The controls are a posteriori. 

Internal audit of tax collection is assured by the National Tax Board along the lines of 
international  audit  standards.  The  National  Customs  Board  is  responsible  for 
collecting import duties. 

The economic  activities  of local  governments  are controlled  by an Audit  Committee, 
appointed by the Council of each local government.  Within Ministries, State agencies, 
State  enterprises,  and  similar  organisations  independent  internal  control  mechanisms 
will  be  established.  Several  laws  form  the  system  for  penalising  fraud  against 
financial  and  economic  interests,  but  there  is  no  central  authority  responsible  for 
fighting  fraud. 

Current  and  Prospective  Assessment 

The required  instruments  for  a successful  implementation  of EU policies will need to 
be established, including the necessary internal financial  control mechanisms. 

The  Estonian  authorities  will  have to ensure the efficient  administration  of the  "own 
resources"  system,  and  this  would  need  to  include  amendments  of  the  existing 
accounting  system. Further cooperation with the Commission will be desirable in this 
field. 

95 

Conclusion 

The field of financial  control does not appear to present major  obstacles  for  accession 
in the medium  term,  although  considerable  preparations  will  be required  to  establish 
the  necessary  management  and  control  mechanisms 
satisfactory 
implementation of the Community policies. 

the 

for 

Budgetary  Implications 

The  communication  entitled  "Agenda2000"  sets  out  the  overall  financial  framework 
which  should  accommodate  the  budget  impact  of  any  future  enlargements  in  the 
medium  term.  This  is  to  ensure  that  any  enlargement  is  compatible  with  proposed 
Community policy guidelines within reasonable budget limits. 

As things stand, it would be difficult,  not to say premature, to attempt precise country-
by-country  evaluations of the budgetary  implications of each of the applicants joining 
the Union.  Exactly  what  the impact would be may vary  considerably  depending  on a 
whole series of factors: 

the date on which the applicant country joins; 
developments  in Community  policies between now and then, in particular  the 
decisions to be taken on further  reform  of the common agricultural  policy  and 
new guidelines for structural measures; 
the  progress  made  by  the  applicant  countries  in  terms  of  growth,  increasing 
their competitiveness and productivity and their ability to absorb the acquis', 
the transitional measures that will come out of the negotiations. 

Only  a few  orders  of magnitude  for  certain budget  categories  and an overall  estimate 
can be given purely as a guide. 

Expenditure 

If the  common  agricultural  policy  were  to  be  reformed  along  the  lines  suggested  by 
the  Commission,  once  the  reforms  were  fully  up  and  running  and  in  terms  of  just 
market  intervention  measures,  Estonia's  accession  would  give  rise  to  only  marginal 
additional  expenditure  in relation to likely expenditure on the present  fifteen  Member 
States. 

After  a  gradual  phasing-in  period,  allocations  for  Estonia  for  structural  funds  would 
be likely to be around 4% of its GNP. 

Application  of  the  other  internal  Community  policies  in  the  new  member  countries 
would  be  likely  to  involve  additional  expenditure  probably  in excess  of their  relative 
proportion of Union GNP, since for certain policies the additional  implementing  costs 
also depend  on the target  population, the geographical  area covered  or the number  of 
Member  States involved  in the coordination and harmonisation measures. The GNP of 
Estonia is currently  less than 0.1% of total Union GNP. 

96 

By contrast, Estonia's  accession should not involve significant  additional  expenditure 
as far as Union external action is concerned. 

It  should  not  be  forgotten  that  when  an  applicant  country  joins,  the  Community 
budget  will  no  longer  have  to  bear  the  costs  of  grants  the  country  was  eligible  for 
under the various pre-accession programmes, such as PHARE. 

In  light  of  the  above,  the  estimated  costs  in  the  three  areas  mentioned  arising  from 
Estonia's  accession  should  fall  within the range of,  annually, ECU  0.3  to 0.4  billion 
in 2005-06 (at constant  1997 prices). 

Revenue 

Assuming  full  application  of  the  own  resources  system,  the  new  members' 
contributions  to  the  Community  budget  should,  in  terms  of  total  GNP  and  VAT 
resources  (taking  account  of  the  capping  rules  applying  to  VAT),  be  close  to  the 
proportion  of the Union's  GNP they account for,  which in Estonia's  case is less than 
0.1%. Estonia's portion of traditional own resources will depend on the structure of its 
trade flows at the time of accession. 

To  ensure  that  the  own  resources  are  established,  monitored  and  made  available  in 
line  with  Community  regulations,  Estonia  will  have  to  overhaul  its  current  customs 
system.  In  addition,  for  the  purposes  of  accurately  calculating  the  GNP  resource 
considerable  improvements  will  have  to  be  made  to  the  national  accounts  to  ensure 
that they are reliable, homogeneous and complete. Improving the statistics will also be 
essential  for  drawing  up  the  VAT  own  resources  base,  which  will  mean  bringing 
Estonia's VAT system fully  into line with the Community directives. 

97 

4.  Administrative  Capacity  to Apply  the  Acquis 

The  European  Council  in  Madrid  in  December  1995  concluded  that  the  harmonious 
integration  into the EU of the central and eastern European  applicant  states would,  in 
particular,  require  the  adjustment  of  their  administrative  structures.  This  chapter 
examines the  current  state of the public  administration  in Estonia,  including  relevant 
aspects of the judicial system, and assesses the current and prospective ability to carry 
out the functions  required of it in a modern, democratic  state, with a particular  focus 
on the need to administer matters related to the acquis. 

4.1  Administrative  Structures 

A  description  of  Estonian  constitutional  structures, their  powers  and  responsibilities, 
including those of regional and local government, is given in Chapter  1. 

The Estonian central administration consists of  14 Ministries and a number of Boards 
and  inspections  services.  The  State  Chancellery,  which  is  the  office  of  the  Prime 
Minister,  plays  an  important  role  in  evaluating  and  coordinating  the  work  of  all 
government  officials.  The  Office  of  European  Integration,  which  reports  directly  to 
the  Prime  Minister,  works  on  a  permanent  basis  and  is  responsible  for  technical 
support and co-ordination of matters related to EU accession. 

The Law on Government  and the Public Service Act, which both entered  into force  in 
January  1996, define  the relations among the ministries and between central and  local 
levels  of  government  as  well  as  the  role  and  conditions  for  officials  and  public 
servants. 

The  principle  of  political  independence  of the  civil  service  is recognised  in  Estonia, 
although senior positions are not always free of party political  influence. 

Since  1991 there  have  been  significant  reductions  in the  numbers  of  administrative 
staff.  Government ministries employ 2,150 staff,  government agencies 9,620, and the 
regional  councils  1,390; numbers  in local  government  are not  available.  Pay  in  the 
civil service is far lower than in the private sector. 

Training programmes to upgrade the staff  of  the public administration  on EU related 
issues and efficient  public management within a democratic society based on a market 
economy  have  been  implemented  by  the  government  with  international  assistance, 
resulting  in a substantial  upgrading of  staff  qualifications.  To co-ordinate the  reform 
process,  a  specific  administrative  structure  has  been  established  by  the  Government, 
consisting  of  a  Ministerial  Commission  which  formulates  the  policy  and  submits 
proposals  for  the  government,  as  well  as  a  Council  of  Senior  Civil  Servants  which 
represents the main involved ministries.  A national training institute for civil  servants 
operates under the authority of the Chancellery. 

98 

In  spite  of  its  limited  staff  resources  the  Office  of  European  Integration  has 
progressively  developed  its  coordinating  capacity. 
(See  also  the  section  of  the 
Introduction concerning relations between the European Union and Estonia). 

4.2  Administrative and Judicial Capacity 

Estonia  was  part  of  the  Soviet  Union  until  1991  and  administered  under  central 
planning until then. The communist system rejected the primacy of the rule of law and 
subjugated  the  law  and  the  administration  to  the  implementation  of  Party  policy. 
Against  this  background,  both  the  administration  and  the  rule  of  law  itself 
increasingly came to be seen by the public as instruments of political control. 

The  structures  and  systems  of  the  Estonian  public  administration  still  require 
significant  development.  The  extent  of  what  has  already  been  achieved  should  not, 
however, be underestimated.  Despite the problems, and perhaps in part because of the 
need  to  create  new  structures,  the  Estonian  civil  service  has  in  many  cases  shown  a 
considerable  flexibility. 

Most ministries are small, and heavily burdened with work.  The effective  functioning 
of  a ministry  is  often  dependent  more  on the quality  of  leading personalities  than  by 
the  structures  of  the  institution  itself.  Lack  of  funding  is  a constant  problem  for  all 
ministries.  But  the  1997  budget  favoured  defence  particularly  and  that  ministry  is 
improving  in  range  and  capacity.  The  State  Chancellery  is  still  developing  its  role, 
with  international  help.  Overall,  the  use  of  information  technology  is  already  at  a 
high level in the Estonian public service. 

The  legal  basis  for  the  civil  service  is adequate.  Political  pressures  on  civil  servants 
are  considerable,  especially  at  municipal  level,  but  also  in  central  ministries.  The 
trend  appears  nonetheless  to  be  in  the  direction  of  a  reinforcement  of  civil  service 
independence. 

the  Estonian 
The  civil  service  is  under-staffed.  Although  the  limited  size  of 
administration  in  some  respects  facilitates  staff  development  and  reforms  of  the 
administrative structure, the small number of staff also means that important  functions 
often  depend  on  a  quite  limited  number  of  people,  which  makes  the  ministries 
vulnerable  to  a  "brain  drain"  to  the  private  sector  (connected  to  pay  levels  in 
particular),  and  can  call  into  question  the  ability  of  ministries  fully  to  fulfil  their 
functions. 

Public  confidence 
in  the  civil  service  is  not  assured.  There  is  widespread 
dissatisfaction  at perceived  abuses in some parts of the administration,  including  local 
government.  Often,  detailed  evidence  to  back  up  such  perceptions  is  lacking, 
although confirmed  cases do exist. 

The Government's reform  initiatives, while pointing in the right direction, will need to 
be  better  targeted  and  much  intensified  as  a  part  of  the  pre-accession  process.  The 
level  of  professionalism  and  training  varies  widely.  Considerable  international 
assistance is being provided  in these areas. 

99 

The  most  serious  concern  in  this  area  in  the  context  of  EU  accession  is  the  very 
considerable  number  of  legislative  and  administrative  initiatives  which  need  to  be 
taken  at the same time, the co-ordination of which will be a difficult  challenge for the 
Estonian  administration.  The  Government's  approach  includes  a cohérent, though  not 
exhaustive, plan  for  the  implementation  measures  outlined  in the  Commission  White 
Paper.  The Office  of European Integration will need  reinforcement. 

Key Areas for  the Implementation of the Acquis 

The  uniform  application  of  EC  law:  The  effective  application  of  the  acquis 
presupposes  that  the  judicial  authorities" of  member  states  are  able  to  apply  the 
provisions of the Treaty dealing with ensuring the unity  and application  of the  acquis, 
and  are  able  to  ensure  the  proper  functioning  of  the  Single  Market  and  Community 
policies  in  general.  A  high  quality  and  well  trained  and  resourced  judiciary  is 
necessary  for the application by the courts of EC law, including cases of direct  effect, 
and  cases  of referral  to the European  Court  of Justice  under  the terms  of Article  177 
EC. 

The  judicial  system  in  Estonia  has  important  weaknesses,  particularly  concerning 
resources,  and  relevant  expertise.  Given  this  situation,  the  Commission  has 
significant  doubts about the ability of the system to ensure the effective  application of 
the acquis. 

Single market:  The ability of Estonia to ensure the correct application  of  Community 
requirements  in  the  Single  Market,  particularly  concerning  the  free  movement  of 
goods  and  services  presupposes  the  existence  of  highly  developed  and  effective 
regulatory,  standardisation,  certification  and  supervisory  authorities,  able  to  act  fully 
in  accordance  with  EC  rules.  An  analysis  of  these  points  is  made  in  Chapter  3.1 
(under  "The Four Freedoms"). 

Concerning  the  administrative  capacity  in  respect  of  free  movement  of  goods,  the 
situation in Estonia is not yet satisfactory,  due mainly to limitations on staff resources. 
Progress  towards  a  separation  of  functions  between  assessment  and  certification  is 
underway,  leading  to  improved  compatibility  with  the  EU  system.  Concerning  the 
free  movement  of services the situation  is in some respects satisfactory,  but while the 
Central  bank  and  private  bank  supervisions  function  well  (there are 28  staff  involved 
at  the  Bank  of  Estonia),  the  Insurance  Supervisory  authority,  which  employs  14 
supervisors,  and  the  Insurance  Inspectorate,  which  employs  only  12  staff,  are 
inadequately  resourced. 

In  order  to  meet  EU  requirements  in  this  area  a  considerable  reinforcement  of  staff 
resources will be required. 

Competition:  As  explained  in  Chapter  3.1  (under  "Competition")  enforcement  of 
competition  law  requires  the  establishment  of  anti-trust  and  state  aid  monitoring 
authorities,  and  that  the judicial  system,  the  public  administration  and  the  relevant 
economic operators have a sufficient  understanding of competition  law and policy. 

[00 

In  Estonia  the central  authority  is the Competition  Board  which  has 22 staff;  this is 
inadequate.  The  level  of  expertise  is  not high,  although  the  Competition  Board  is 
currently functioning  satisfactorily.  The ability to implement EU requirements in this 
field will require a reinforcement  of the human resources. 

Telecommunications:  In  order  to  formulate  and  implement  the  many  liberalisation 
regulations contained in the acquis in this field it is necessary to have a regulatory and 
policy making body that is effectively  separated from any operating company. 

In  Estonia  the  regulatory  competence  in the telecommunications  field  lies  with  the 
Ministry of Transport and Telecommunications  (60 staff, 4 on telecommunications) as 
well  as  with  the  Inspection  of  Telecommunications  (35  staff)  which  arranges  the 
usage of radio frequencies,  type approvals for radio equipment and surveillance of the 
usage  of  radio  equipment.  As a  whole  these  services  appear  to  have  the  potential 
capacity required to administer the telecommunications acquis. 

Indirect  taxation:  The  effective  administration  of  the  indirect  taxation  acquis 
presupposes  structures  capable  of  implementing  the  EC  legislation  concerning  the 
harmonisation  of  Valued  Added  Tax and excise  duties  in  an  environment  in  which 
fiscal  controls  at internal  EU frontiers  have been  abolished;  and the excise  system is 
based on the tax warehouses, duty being payable at the local rate in the member  state 
at the time the goods are consumed.  This requires a highly developed and well trained 
and resourced  service, with a high degree of integrity. 

In Estonia the relevant  authority  is the Ministry  of Finance  with  a total  of 800  staff. 
Due to a large turnover  of staff,  resulting partly  from  trained  staff  being  recruited by 
the private  sector,  it is difficult  to estimate the capacity  of existing  staff.  In order to 
ensure  the effective  administration  of the acquis  in this  area  it  will  be necessary  to 
consolidate  and  improve  the  overall  professional  standards  of  the  staff,  including 
training measures and improvements in pay. 

Agriculture:  The  administrative  requirements  in  the  agricultural  area  primarily 
concern  veterinary  and phytosanitary  control, to protect  public  health  and ensure the 
free  movement  of  agricultural  goods;  and the  ability  to  administer  the  mechanisms 
and  requirements  of  the  CAP,  including  high  standards  of  financial  control  and 
official  statistics.  These  points  are dealt  with  in  Chapter  3.4  (under  "Agriculture"); 
general  standards  in  the  statistical  field  are  examined  in  Chapter  3.3  (under 
"Statistics"). 

The  administrative  capacity  in  respect  of  veterinary  and  phytosanitary  controls  in 
Estonia  requires  considerable  development.  Concerning  numbers  of  staff,  the  State 
Veterinary  and  Food  Control  Inspection  has  571, and  the  three  main  plant  health 
institutions  have  106.  For  the  administration  of  general  CAP  requirements, 
appropriate  administrative  structures  need to be created.  The Ministry  of Agriculture 
has 115 staff. 

In  order  to  meet  EU  requirements  in  this  area  considerable  improvements  will  be 
required. 

Transport:  The application  of the EU Internal  Market  and competition  requirements 
to the transport  sector, the development  of relevant  infrastructure  products, and other 
aspects of the transport  acquis will present  administrative  challenges to new member 
states. 

The  responsible  government  authority  in  Estonia  is  the  Ministry  of  Transport  and 
Telecommunications  with  a  total  of  60  staff  (56 on  transport).  There  are  problems 
arising from  a lack of qualified  staff. This raises particular concerns with regard to the 
enforcement  of safety  controls. 

Employment  and social policy:  A central administrative requirement in respect of the 
acquis  in this area is adequate  inspection capacity, particularly  concerning  health and 
safety  at work. 

In Estonia the labour inspectorate  (77 inspectors) requires considerable  reinforcement 
of staff resources and expertise. 

Regional  policy  and cohesion:  The main administrative  requirements  in this area are 
the  existence  of appropriate  and effective  administrative  bodies  , and in particular  a 
high degree of competence and integrity in the administration of Community  funds. 

In  Estonia  the  Department  of  Local  Government  and Regional  Development  at the 
Ministry  of the Interior,  with  20 staff  in this  area,  coordinates  regional  development 
initiatives.  These  arrangements  are  not  yet  fully  adequate.  And  the  situation 
concerning  financial  control  is  not  yet  satisfactory  (see  the  section,  below,  on 
"Financial  control").  The  effective  administration  of  the  acquis  in  this  area  will 
require,  in  particular,  the  creation  of  the  necessary  administrative,  budgetary  and 
control  frameworks. 

Environment:  Because  EU  environmental  policy,  involves  the  integration  of 
environmental  protection  into  EU sectoral  policies  the administrative  requirement  is 
potentially  very  wide,  affecting  many  bodies  not  normally  associated  with 
environmental  protection.  However,  the  main  responsibility  lies  with  environment 
ministries and various subsidiary bodies. 

In Estonia, the Environment  Ministry  employs  105 staff.  Monitoring  is carried out by 
sectoral  authorities,  enforcement  by  the  State  Inspectorate  and  17  Country 
Environment Departments. These arrangements are not yet adequate since the services 
do  not  have  the  means  to  enforce  legislation.  The  effective  administration  of  the 
acquis  in this  area  will  require  improvements  in training,  upgrading  equipment, and 
greater investment in human resources. 

Consumer  protection:  In this area, the effective  administration  of the acquis  requires 
the  allocation  of  overall  responsibility  to  a  specific  State  body  through  which  the 

102 

formulation,  implementation  and  enforcement  of  consumer  policy  and  consumer 
protection legislation can be undertaken. 

In  Estonia  the  government  Domestic  Market  Division  within  the  Ministry  of 
Economy  shares  its  responsibility  for  consumer  affairs  with  the  semi-independent 
Consumer Protection Board (55 staff).  As regards non-governmental  consumer bodies 
these remain weak in the Estonia. There remains confusion  about the exact scope and 
objectives  of  consumer  policy.  This  in  part  explains  difficulties  in  the  effective 
enforcement  of  consumer  laws;  however,  other  factors  which  need  to  be  addressed 
include  a  lack  of  expert  staff,  organisational  deficits,  and  a  lack  of  sensitivity  to 
consumer questions among the judiciary. 

Justice  and  home  affairs:  Oversight  of justice  and  home  affairs  questions  falls  to 
justice  and interior  ministries.  The administrative  structures  need  to be able  to deal 
effectively  with  asylum  and  migration  questions,  border  management,  police 
cooperation  and judicial  cooperation.  There  is an overriding  need  for  sufficient  and 
properly trained staff with a high degree of integrity. 

In  Estonia  the justice  and interior  ministries  are adequately  staffed.  The capacity  to 
handle asylum and migration questions is not yet assured through the Citizenship and 
Migration  Board,  but  significant  progress  is  being  made.  Border  management  has 
been reformed,  and further  improvements are underway.  Similarly, the police is being 
reformed,  and  specialist  units  have  been  created.  Considerable  progress  has  been 
made  to  improve judicial  cooperation.  The effective  administration  of the acquis  in 
this  area will  require  greater  financial  and human  resources  and an intensification  of 
the current reform  efforts. 

Customs:  Applying the acquis in this area requires  an adequate level of  infrastructure 
and  equipment,  including  computerisation  and  investigation  resources,  and  the 
establishment  of  an  efficient  customs  organisation  with  a  sufficient  number  of 
qualified  and motivated staff  showing a high degree of integrity. 

In Estonia the customs  service employs  1,100 staff.  Due to a high turnover of staff, it 
is  difficult  to  estimate  their  efficiency,  and therefore  the adequacy  of staffing  levels. 
The  effective  administration  of the acquis  in  this  area  will  require  the  retention  of 
qualified  and experienced  staff,  and greater  resources  directed  at  customs  control  at 
the borders. 

Financial  control:  The protection  of the Community's  financial  interests requires the 
development  of  anti-fraud  services,  training  of  specialised  staff  (investigators, 
magistrates)  and  the  reinforcement  of  systems  of  specific  cooperation.  The 
implementation  of Community  policies,  especially  for  agriculture  and the  Structural 
Funds,  requires  efficient  management  and  control  systems  for  public  expenditure, 
with  provisions  to  fight  fraud.  Administratively  it  is  essential  to  have  a  clear 
separation  between external and internal control.  Police and judicial  authorities need 
to  be  able  effectively  to  handle  complex  transnational  financial  crime  (including 
fraud,  corruption  and  money  laundering)  which  could  affect  the  Community's 
financial interests. 

103 

In Estonia the main external control body is the State Audit Office employing 80 staff. 
This is a modest level given the scale of the tasks. The effective  administration of the 
acquis  in  this  area  will  require  considerable  efforts  to  establish  the  necessary 
management and control mechanisms. 

4.3  General  Evaluation 

Estonia's administrative structures will require a major effort of reform if there is to be 
adequate capacity in the medium term effectively  to administer the acquis. 

Concerning  the  judicial  capacity  effectively  to  apply  Community  law,  a  definite 
evaluation at this stage is difficult. 

104 

C.  SUMMARY AND CONCLUSIONS 

Estonia  submitted  its  application  for  membership  of  the  European  Union  on  24 
November  1995.  Its  request  is  part  of  a  historic  process  of  ending  the  division  of 
Europe and consolidating the establishment of democracy across the continent. 

In accordance with the provisions  of Article O of the Treaty, the Commission  has, at 
the request of the Council, prepared an Opinion on Estonia's request for membership. 

Estonia's  preparation  for  membership  is  going  forward  notably  on  the  basis  of  the 
Free Trade Agreement  which  entered  into  force  on  1 January  1995.  The  European 
Union  and  Estonia  signed  a  Europe  Agreement  on  12  June  1995.  Once  the 
ratification  procedures are complete and it enters into force, it will  supersede the Free 
Trade  Agreement.  Implementation  of the White Paper of May  1995 on the  Internal 
Market,  another essential element of the pre-accession strategy, is going ahead on the 
basis of  an Action Plan drawn up by the government in June  1996.  The  government 
has  put  in  place  the  necessary  mechanisms  to  coordinate  its  policies  for  European 
integration. 

In preparing  its Opinion, the Commission  has applied the criteria  established  at the 
Copenhagen  European  Council  of  June  1993.  The  Conclusions  of  this  Council 
stated  that those candidate countries of Central and Eastern Europe who wish to do so 
shall become members of the Union if they meet the following  conditions: 

- stability of institutions guaranteeing democracy, the rule of law, human rights and 

respect for and protection of minorities; 

- the existence of a functioning  market economy, as well as the ability to cope with 

competitive pressures and market forces within the Union; 

- the ability to take on the obligations of membership, including adherence to the 

aims of political, economic and monetary union. 

A judgment  on these  three  groups  of  criteria  - political,  economic,  and  the  ability  to 
take  on the  acquis  - depends  also  on the  capacity  of  a country's  administrative  and 
legal  systems  to  put  into  effect  the principles  of  democracy  and the  market  economy 
and to apply and enforce the acquis in practice. 

The method followed  in preparing these Opinions has been to analyse the situation in 
each  candidate  country,  looking  forward  to. the  medium  term  prospects,  and  taking 
into account progress accomplished  and reforms  already  under way.  For the political 
criteria,  the  Commission  has  analysed  the  current  situation,  going  beyond  a  formal 
account  of the  institutions  to examine  how democracy  and  the rule  of  law  operate  in 
practice. 

1.  Political  Criteria 

105 

Estonia's  political  institutions  function  properly  and  in  conditions  of  stability.  They 
respect  the  limits  on their  competences  and  cooperate  with  each  other.  Elections  in 
1992 and  1995 were free and fair,  and in the latter case led to an alternation of power. 
The  Opposition  plays  a  normal  part  in  the  operation  of  the  institutions.  Efforts  to 
improve  the  operation  of  the  judicial  system  and  to  intensify  the  fight  against 
corruption need to be sustained. 

There are no major  problems  over respect  for  fundamental  rights.  But Estonia  needs 
to  take  measures  to  accelerate  naturalisation  procedures  to  enable  the  Russian-
speaking non-citizens to become better integrated into Estonian society. 

Estonia  presents 
guaranteeing the rule of law and human rights. 

the  characteristics  of  a  democracy,  with  stable 

institutions 

2.  Economic  Criteria 

After  a sharp contraction of output immediately following  independence, the economy 
has been growing  since the second half of  1993 (4.0% in  1996).  The government  has 
more or  less maintained  a principle  of balanced  budgets  in public  finances.  External 
debt  is  low,  though  Estonia  runs  a  high  trade  deficit.  Inflation  rates  have  declined 
over recent years, but still stood at 23.1% in  1996.  GDP per head is about 23% of the 
EU  average,  for  a population  of  L5  million.  The  agricultural  sector  employs  8%  of 
the  labour  force,  and  accounts  for  7%  of  Gross  Value  Added.  54%  of  Estonia's 
exports are directed to the EU, and 66% of its imports originate in the EU. 

On  the  basis  of  its  analysis,  the  Commission's  judgment  as  to  Estonia's  ability  to 
meet the economic criteria established at Copenhagen is as follows: 

Estonia can be regarded  as a functioning  market economy.  It has liberalised  foreign 
trade  and  privatised  the  public  sector.  Prices  have  been  liberalised  to  a  very  large 
extent.  The currency board system and the prudent fiscal  stance have helped to reduce 
inflation.  The  legislative  framework  is  largely  in  place.  But  land  reform  has  been 
slow, and reform  of the pension system has not yet started. 

Estonia  should  be  able  to  make  the  progress  necessary  to  cope  with  competitive 
pressures  and  market  forces  within  the  Union  in  the  medium  term,  provided  in 
particular  that  the  export  base  is broadened.  The  setting  of  a  low exchange  rate  and 
low  unit  labour  cost  have  facilitated  the  switch  to  light  manufacturing  industry  as  a 
source  of  foreign  reserves.  The  banking  sector  is  healthy  and  expanding  strongly. 
Estonia  has  been  a major  recipient  of  foreign  direct  investment,  although  the  inflow 
has decreased  recently.  But the export  base is rather narrow,  and the need  to  finance 
rising trade and current account deficits  is a matter for concern. 

3.  Capacity to take on the obligations  of membership 

106 

Estonia's  ability  to  take  on  the  acquis  has  been  evaluated  according  to  several 
indicators: 

-  the  obligations  set  out  in  the  Europe  Agreement  (even  though  this  has  not  yet 
entered  into  force),  particularly  those  relating  to  the  right  of  establishment,  national 
treatment, free circulation of goods, intellectual property and public procurement; 

-  implementation  of  the  measures  set  out  in  the  White  Paper  as  essential  for 

establishing the single market; 

- progressive transposition of the other parts of the acquis. 

Estonia  has  already  made  serious efforts  to  apply  some of the obligations  which  will 
come  into effect  with the Europe Agreement,  even before  this has entered into  force. 
It  is  meeting  its  obligations  under  the  Free  Trade  Agreement,  and  according  to  the 
timetable  for  implementation  set out in it.  No serious bilateral problems have  arisen. 
Estonia  has  also  adopted  significant  elements  of  the  acquis  relating  to  the  single 
market,  and  has  made  a good  start  in transposing  the rules  and  directives  set  out  in 
the White Paper.  In the fields of company law, accounting, data protection and capital 
liberalisation,  it  is  well  on  the  way  to  putting  in  place  the  necessary  legislative 
foundation.  There  is  still  substantial  work  to  be  done  on  public  procurement, 
intellectual  property,  financial  services,  taxation  and  competition  (especially  the 
transparency of state aids). 

„ 

Despite  the  progress  achieved  in  the  field  of  legislation,  there  are  doubts  about  the 
capacity  of  the  Estonian  administration  to  implement  this  legal  framework.  But  the 
present significant  weaknesses should be temporary, given the high quality of existing 
staff. 

As for the other aspects  of the acquis, Estonia should not have difficulty  in applying 
it in the medium term in the following  fields:  education, training and youth;  research 
and  technological  development;  audio-visual;  small  and  medium  enterprises;  trade 
and international  economic relations;  and development. 

By  contrast,  substantial  efforts  will  be  needed  in  the  fields  of  statistics;  fisheries; 
consumer protection;  and customs. 

Estonia  has  made  good  progress  in  industrial  restructuring.  Provided  that  current 
efforts  are  maintained,  its  industry  should  be  able  to  cope  with  integration  into  the 
single market in the medium term. 

Estonia  has  moved  quickly  to  liberalise  its  telecommunications.  Provided  that 
current  efforts  at  liberalisation  and transposition  of  laws  are maintained,  it  should  be 
able to apply the acquis in the medium term. 

For  the  environment,  very  substantial  efforts  will  be  needed,  including  massive 
investment  and  strengthening  of administrative capacity to enforce  legislation.  Partial 

107 

compliance  with  the acquis could  be achieved  in the medium  term.  Full  compliance 
could be achieved only in the long term. 

Estonia has made progress  in taking  on the acquis in the transport  sector,  but  needs 
to  make  improvements  in  the  road  freight  and  maritime  sectors,  and  pay  particular 
attention  to  safety  issues.  Provided  this  is  achieved,  accession  in  the  medium  term 
should  not  pose  major  problems.  But  investment  will  be  needed  to  extend  the 
European transport network so as to ensure that the single market functions  well. 

It should  be possible  for  Estonia to apply the employment  and  social  affairs  acquis 
in the medium  term, provided  that it works to align  its legislation  with  EU  standards 
eg for health and safety and labour law. 

In  the  field  of  regional  policy  and  cohesion,  provided  that  Estonia  creates  the 
necessary  administrative  and  budgetary  framework,  and  takes  the  steps  necessary  to 
create adequate structures of financial  control, it should be able in the medium term to 
use regional and structural funds to support its development  effectively. 

The  agriculture  sector  needs  restructuring,  and  only  a  limited  number  of  the 
mechanisms  of  the  common  agricultural  policy  presently  exist.  A  substantial  effort 
will be needed to prepare for accession in the medium term. 

In the field of energy, Estonia has no nuclear energy programme, so no difficulties  are 
foreseen  for  Estonia  to  comply  with  Euratom  provisions.  Estonia  should  be  able  to 
comply  with  most  of  the  energy  acquis  in  the  medium  term,  provided  that  work  is 
maintained on monopolies, access to networks, energy pricing and restructuring  of the 
oil shale industry. 

On  the  basis  of  the  analysis  of  Estonia's  capacity  to  apply  the  acquis,  it  is  not  yet 
possible  to  be  sure  when  it  could  become  able  to  take  and  implement  the  measures 
necessary  to  remove  the  controls  at  borders  between  Estonia  and  member  states  of 
the Union. 

Estonia's  participation  in  the  third  stage  of  economic  and  monetary  union,  which 
implies  coordination  of  economic  policy  and  complete  liberalisation  of  capital 
movements,  should  pose  few  problems  in the medium term.  It is premature  to judge 
whether Estonia will be in a position, by the time of its accession, to participate  in the 
Euro  area.  That  will  depend  on  how  far  the  success  of  its  structural  transformation 
enables  it  to  achieve  and  sustain  permanently  the  convergence  criteria.  These  are, 
however, not a condition for membership. 

In  justice  and  home  affairs,  Estonia  has  started  from  a  low  base  and  made 
encouraging  progress, notably  in the  field  of  border  control.  But  a major,  sustained 
effort  will be needed if it is to meet the acquis in the medium term. 

Estonia should  be able to fulfil  its obligations  in respect  of the common  foreign  and 
security  policy. 

108 

In  addition,  Estonia  has  no  territorial  disputes  with  Member  States  or  neighbouring 
candidate  countries.  Estonia  gives  high  priority  to  its  relationship  with  Russia,  and 
has  achieved  important  progress,  though  there  is  still  no  border  agreement  between 
them. 

4.  Administrative  and  Legal  Capacity 

For Estonia to have in the medium term the administrative structures necessary for the 
essential work of applying and enforcing  the acquis effectively,  there will need to be a 
major  effort  of reform. 

It  is  not  yet  possible  to judge  when  Estonia's judicial  system,  which  has  an  equally 
important  role  to  play,  will  acquire  the  capacity  to  play  it  effectively,  even  though 
Estonia  has  recently  undertaken  an  extensive  programme  of  recruitment  of  new 
judges. 

CONCLUSION 

In the light of these considerations, the Commission concludes that: 

-  Estonia  presents  the  characteristics  of  a  democracy,  with  stable  institutions, 
guaranteeing  the  rule  of  law,  human  rights  and  respect  for  and  protection  of 
minorities.  But  measures  need  to  be  taken  to  accelerate  naturalisation  of  Russian-
speaking  non-citizens,  to  enable  them  to  become  better  integrated  into  Estonian 
society; 

- Estonia can be regarded  as a functioning  market  economy, and  it should  be  able 
to  make  the  progress  necessary  to  cope  with  competitive  pressure  and  market  forces 
within the Union in the medium term; 

-  Estonia  has  made  considerable  progress  in  transposing  and  implementing  the 
acquis  relating particularly  to the single market.  With further  effort  it should  become 
able  to  participate  fully  in  the  single  market  in  the  medium  term.  Particular  efforts, 
including  investment,  will  be  needed  to  apply  the  acquis  fully  in  sectors  such  as 
environment.  Strengthening  of  the  administrative  structure  will  be  indispensable  if 
Estonia is to have the structures to apply and enforce the acquis  effectively. 

In the light of these considerations, the Commission recommends that negotiations  for 
accession  should be opened with Estonia. 

The reinforced  pre-accession  strategy will help Estonia to prepare itself better to meet 
the obligations of membership, and to take action to improve the  shortcomings 
identified  in this Opinion.  The Commission will present a report no later than the end 
of  1998 on the progress Estonia has achieved. 

109 

ANNEX 

COMPOSITION OF PARLIAMENT 

Political parties 

Number of seats 

Coalition and Rural Union Party 

Reform Party 

Centre Party 

"Motherland" (Isamaa) 

Moderates 

"Our House is Estonia" 

Right 

41 

19 

16 

8 

6 

6 

5 

i \o 

SINGLE MARKET:  WHITE PAPER MEASURES 

This table is based on information  provided by the Estonian authorities and confirmed  by them as correct as at the end of June 1997. It does not 
indicate the Commission's agreement with their analysis.  The table includes directives and regulations cited in the White Paper which total 899. 
These have been listed in accordance with the categorization used in the White Paper and in relation to the policy areas covered.  The table 
shows the number of measures for which the Estonian authorities have notified the existence of adopted legislation having some degree of 
compatibility with the corresponding White Paper measures. 

White Paper  chapters 

l.Free Movement  of Capital 

Estonia 

2.FM  and  Safety  of Industrial  Products 

3.Competition 

4.Social  policy  a nd  action 

5.AgricuIture 

6.Transport 

7.Audiovisual 

8.Environment 

^ T e l e c o m m u n i c a t i on 

lO.Direct Taxation 

1 l . F r ee  movement  of  goods 

H.Public Procurement 

13.Financial  services 

14.Protection  of personal  data 

15.Company  Law 

16.Accountancy 

17.Civil  law 

18.Mutual  rec. of prof. Quai. 

19.1ntellectual  property 

20.Energy 

H.Customs  law 

22.1ndirect Taxation 

23.Consumer  Protection 

Total 

Number of White Paper measures 
Estonia 

Number of White Paper measures 
Estonia 

Number of White Paper measures 
Estonia 
Number of White Paper measures 
Estonia 

Number of White Paper measures 
Estoni!i 

Number of White Paper measures 
Estonia 

Number of White Paper measures 
Estonia 

Number of White Paper measures 
Estonia 
Number of White Paper measures 
Estonia 

Number of White Paper measures 
Estonia 
Number of White Paper measures 
Estonia 

Number of White Paper measures 
Estonia 
Number of White Paper measures 
Estonia 

Number of White Paper measures 
Estonia 

Number of White Paper measures 
Estonia 

Number of White Paper measures 
Estonia 

Number of White Paper measures 
Estonia 

Number of White Paper measures 
Estonia 

Number of White Paper measures 
Estonia 

Number of White Paper measures 
Estonia 

Number of White Paper measures 
Estonia 

Number of White Paper measures 
Estonia 

Number of White Paper measures 
Estonia 

Number of White Paper measures 

\\\ 

Direc 

tives 

Regul 

ations 

Total 

Stage 
I 

3 
3 
16 
56 
0 
3 
9 
12 
10 
93 
3 
19 
1 
1 
4 
31 
0 
9 
1 
2 
0 
0 
2 
5 
8 
13 
0 
0 
2 
2 
2 
3 
0 
1 
0 
2 
1 
5 
5 
10 
0 
2 
15 
15 
5 
8 
87 
295. 

Stage 
II/III 
1 
l 
3 
104 
0 
0 
5 
15 
t) 
46 
6 
15 
0 
0 
0 
7 
0 
7 
2 
2 
0 
0 
0 
î 
6 
8 
2 
2 
3 
3 
1 
2 
0 
1 
0 
16 
2 
3 
1 
2 
0 
1 
26 
54 
0 
3 
58 
293 

Stage 
I 

0 
0 
0 
4 
1 
1 
0 
0 
10 
62 
0 
8 
0 
0 
3 
7 
0 
0 
0 
0 
0 
0 
0 
0 
0 
0 
0 
0 
0 
0 
0 
0 
0 
0 
0 
0 
0 
0 
1 
3 
7 
14 
0 
0 
0 
0 
22 
99 

Stage 
II/III 
0 
0 
0 
î 
0 
0 
2 
2 
0 
2 
0 
13 
0 
0 
0 
0 
0 
0 
0 
0 
0 
.  0 
0 
0 
0 
0 
0 
0 
0 
1 
0 
0 
0 
0 
0 
0 
0 
3 
0 
0 
112 
184 
2 
6 
0 
0 
116 
212 

4 
4 
19 
165 
1 
4 
16 
29 
20 
203 
9 
55 
1 
1 
7 
45 
0 
16 
3 
4 
0 
0 
2 
6 
14 
21 
2 
2 
5 
6 
3 
5 
0 
2 
0 
18 
3 
n 
7 
15 
119 
201 
43 
75 
5 
n 
283 
899 

STATISTICAL DATA 

If not explicitly stated otherwise, data contained in this annex are collected from „ Statistical Office  of Estonia 
(EESTI  STATISTIKAAMET)"  with  whom  Eurostat  and  Member  States'  statistical  offices  are  co-operating 
since several years in the framework of the Phare programme. Regular data collection  and dissemination are 
part of this co-operation  process with the aim to enable the application of EU laws and practices in statistics. 
The data presented below have been compiled as far as possible using EU definitions  and standards which in 
some cases differ from national  practices.  This may occasionally  give rise to differences  between the data 
presented here and those shown elsewhere in the opinion, which are generally based on the individual applicant 
countries' updated replies to the questionnaire sent to them  in April  1996.  The exact compatibility  with EU 
standards on statistics and thus the comparability with EU figures can still not be guaranteed, particularly those 
statistics  that  have  not  been  supplied  through  Eurostat,  but  have  been  delivered  direcctly  by  the  countries 
concerned.  Wherever  available,  methodological  notes  are  given  describing  content  and  particularities  of 
statistical data presented in this annex. Data correspond to the informtion available as of May 1997. 

BASIC DATA 

Total  Area 

Population  ( end  of the  period) 

- Total 

- Females 

- Males 

Population  density 

Urban  Population 

Deaths  rate 

Births  rate 

Income  and  GDP  per  capita 

-Average  monthly  wage  and salary per employee 

-GDP per capita 

1990 

1993 

1994 

1995 

1996 

1000 hectares 

4522.7 

4522.7 

4522.7 

4522.7 

in  1000 

1506.9 

1491.6 

1476.3 

803.3 

703.6 

795.7 

695.9 

788.3 

688.0 

per  1  km 2 

34.7 

71.5 

in % of total  population 

per  1000 of population 

14.0 

10.0 

14.8 

9.5 

European  Currency  Unit 

32.6 

69.8 

14.1 

9.1 

150 

1854 

8.1 

22.9 

5.3 

63.7 

Structure  of production:  share  of branch  GVA 

in % of Total Gross Value Added 

-agriculture 

-industry 

-construction 

-services 

share  of branch  GVA in  1995 

22.9 

g 

-agriculture 

rj] 

-industry 

Q 

rj 

• 

-construction 

-services 

- Others 

,63.7 

Population  density:  Data  for  population  density  refer  to data on the end of period. 

Urban  population:  Data for urban population  refer to data on the end of period. 

U2_ 

NATIONAL  ACCOUNTS 

Gross Domestic Product  (Current  Prices) 

797.7 

1832.0 

13157.7 

22059.9 

30102.9 

41503.4 

1990 

1991 

1992 

1993 

1994 

1995 

in Millions of National Currency 

Gross  Domestic  Product  (Current  Prices) 

Gross  Domestic  Product 

Gross Domestic  Product 

Final  consumption  expenditure 

< 

-of households  and NPISH 

-of general  government 

Gross  fixed  capital  formation 

Exports  of goods  and  services 

Imports  of goods and  services 

Final  consumption  expenditure 

-of households  and NPISH 

-of general  government 

Gross  fixed  capital  formation 

Exports  of goods  and  services 

Imports  of goods  and  services 

in Billions of ECU 

in Purchasing Power Standard per capita 

1.4 

1.9 

2.8 

3508.9 

3592.8 

3917.2 

'/% change over the previous year 

-8.5 

-1.8 

4.3 

77.7 

64.4 

13.2 

in '/» of Gross Domestic Product 

67.8 

54.7 

13.1 

31.9 

27.0 

71.0 

55.2 

15.8 

60.0 

54.1 

77.8 

57.5 

20.3 

23.9 

68.9 

73.1 

81.8 

59.4 

22.4 

26.4 

78.6 

89.8 

81.8 

58.0 

23.8 

25.6 

75.8 

84.0 

GDP (% Change over the previous  year) 

6.0 
4.0 
2.0 
0.0 
-2.0 
-4.0 
-6.0 
-8.0 
10.0 

\mmr~  ^mm^W-M 

&tK 
Hrr%r 

V. 

"'•-Jr* 

u3 

MAIN ECONOMIC INDICATORS 

Inflation  rate 

1076 

89.8 

47.7 

29 

23.1 

1990 

1991 

1992 

1993 

1994 

1995 

1996 

percentage change over the previous year 

Industrial  production  volume  indices 

Gross agricultural  production  volume  indices 

Unemployment  rate  (ILO  methodology) 

- Total 

- less then  25 years 

- 25 years and  more 

Gross  Foreign  debt 

Balance  of  payments 

-Exports of goods 

-Imports of goods 

-Trade  balance 

-Services, net 

-Income, net 

-Current account  balance 

-Capital  and  fin.  acc.(excl.  reserves) 

-Reserve  assets 

101.9 

98.8 

previous year -  100 

81.3 

88.3 

in % labour force 

6.6 

11.3 

5.8 

97 

85.8 

7.6 

11.8 

6.9 

in Billions of USD 

0.022 

0.17 

0.212 

in millions of USD 

457 

-547 

-90 

42 

-13 

36 

52 

-82 

812 

-957 

-145 

75 

-13 

22 

219 

-195 

1329 

-1684 

-356 

105 

-30 

-165 

167 

-31 

1857 

-2531 

-674 

379 

3 

-166 

245 

-106 

2064 

-3122 

-1058 

512 

7 

-443 

565 

-101 

Inflation  rate:  Percentage  change of yearly average over the previous  year - all  items  index  (data are based  on  national  CPIs which  are 

not strictly  comparable) 

Industrial  production  volume  indices: 

supply  (according  to  the NACE  Classification  Sections  C,D,E). 
including estimates for enterprises up to  19 employees. 

Industrial  production  covers  mining  and  quarrying, manufacturing  and  electricity,  gas  and  water 
Index  of  Industrial  Production  covers  total  industrial  production 

Gross agricultural  production  volume indices:  The gross agricultural  output has been calculated  in  1993 prices. 

Unemployment  rate (by  ILO  methodology): Percentage  of the unemployed  in labor  force. This rate is derived  from  LFSS (Labor  Force 

Survey) observing the following ILO definitions  and recommendations: 
Labor force  employed and unemployed persons in the sense of the ILO definitions  stated below. 
all  persons  aged  15+,  who  during  the  reference  period  worked  at  least  one  hour  for  wage  or  salary  or  other 
The  employed 
remuneration  as employees, entrepreneurs, members of cooperatives or contributing  family  workers. Members of armed  forces  and 
women on child-care leave are included. 
The unemployed  all persons aged  15+, who concurrently  meet all three conditions of the ILO definition  for being classified  as the 
unemployed: (i) have no work, (ii) are actively seeking a job and (iii) are ready to take up a job within a fortnight. 
Data refer  to the  Estonian  Labour Force Survey  1995 (ELFS 95). ELFS 95 was carried  out  in January-April  1995. The  questions 
were asked  about the years  1989-1995. The next survey will  take place  in April-June  1997 and will collect  information  since  the 
beginning  of  1995.  According  to  this  for  the  time  being,  annual  average  numbers  about  1993  and  1994  can  be  given.  The 
object  of ELFS 95 were people who in  1995 were  16-75 years old. In  1989 the same people were  10-69 and  in  1994  15-74 years 
old.  In  order  to  guarantee  the  comparability  of  the  data  between  years  1989-1995,  data  presented  in  the  tables  are  about 
population  aged  16-69. 

Gross foreign debt:  Debt is extracted form the OECD's External Debt Statistics. 

Balance  of payments:  Data  is derived  from  IMF database, their comparability  with  respective  EU statistics  can  not be guaranteed,  but 
balance of payments  is compiled  mainly  in accordance  to IMF standards.  Balance  in trade of goods  in accordance  with  balance 
of  payments  principles.  Exports  and  imports  are  both  in  f.o.b.  values.  Net  income  includes  direct,  portfolio  and  other 
investment  income, compensation  of employees.  Current account balance by definition  of IMF 5th Manual, capital  transfers  are 
excluded.  Reserve assets: it means changes  in reserve assets during  the year; (+) signifies  an  increase, (-) a decrease  in  reserve 
assets. 

i»H-

FOREIGN TRADE 

Imports and exports (current prices) 
- Imports 
- Exports 
-Balance of trade 
External trade volume indices 

- Imports 
- Exports 

1993 

1994 

1995 

1996 

in millions of USD 

894.7 

804.4 

-90.4 

1655.7 

1302.7 

-353 

2539 

1836.7 

-702.3 

3204.1 
2077.9 
-1126.3 

previous year- 100 

Structure of Import by SITC (current prices) 

in */. of total Import 

- (0+1) food and live animals, beverage and tobacco 
-  2 crude materials, inedible 
-  3 mineral fuels and lubricants 
-  4 animal and vegetable oils etc. 
-  5 chemicals and related products 
-  6 manufactured  goods classified chiefly by material 
-  7 machinery and transport equipment 
-  8 miscellaneous manufactured articles 

Structure of export by SITC (current prices) 

- (0+1) food and live animals, beverage and tobacco 
-  2 crude materials, inedible 
-  3 mineral fuels and lubricants 
-  4 animal and vegetable oils etc. 
-  5 chemicals and related products 
-  6 manufactured  goods classified  chiefly by material 
-  7 machinery and transport equipment 
-  8 miscellaneous manufactured  articles 

External trade price indices 

- Imports 
- Exports 

13.7 

3.2 

15.2 

0.6 

7.7 

15.5 

32.3 

11.8 

22.8 

10.3 

7 

0.2 

5.3 

18.8 

18.5 

17 

14.8 

3 
13.7 
0.7 
9.1 
18.1 
28.8 
11.8 

in % of total Export 

21.3 
10.8 
7.1 
0.2 
7.1 
18.5 
16.8 
18.2 

previous year -  100 

141.3 

13.1 
3.7 
11 
0.7 
9.6 
20 
29.8 
12 

15.7 
11.9 
7.1 
0.2 
8.3 
18.8 
19.9 
18.1 

137.4 
124.7 

14.7 
3.5 
9.3 
0.5 
10.8 
19.9 
29.6 
11.7 

15.2 
10.1 
6.4 
0.1 
9.7 
20.6 
19.8 
18.1 

Imports  and  exports (current  prices); Structure  of external  trade  by SITC (current  prices):  Trade data exclude direct  re-exports, 
trade in services and trade with customs free zones as well as licenses, know-how and patents. The data are based upon the special 
trade system  and  are regularly  updated.  Trade  aassifications:  Estonia  is using the commodity  classification  according  to the 
Combined Nomenclature. Imports are recorded on CI F basis and are captured with the date'of acception of the customs declaration 
by customs authorities.  Exports are recorded on FOB  basis and are captured with the date of acceptation of the customs declaration 
by customs authorities.  The customs statistics are utilised for monitoring of foreign trade data.  Eurostat has  converted National 
Currencies to the US dollar by applying the International Monetary Fund annual average exchange rates. 

External trade price indices:  The price indices have been calculated by "unit value" method. 

Wb 

FOREIGN TRADE 

Structure of imports by main countries (current prices) 

1st partner  -
2nd partner 
3rd partner 
4th partner 
5th partner 
others 

Structure of exports by main countries (current prices) 

1st partner 
2nd partner 
3rd partner 
4th partner 
5th partner 
others 

1993 

1994 

1995 

1996 

FI 
RU 
DE 
SE 
NL 

RU 
FI 
SE 
LV 
DE 

FI 
RU 
DE 
SE 
NL 

RU 
FI 
SE 
LV 
DE 

27.9 
17.2 
10.8 
8.9 
3.6 
31.6 

22.6 
20.7 
9.5 
8.6 
8 
30.6 

in V. of total imports 

FI 
RU 
DE 
SE 
NL 

29.9 
16.8 
10 
8.9 
3.1 
31.3 

in % of total exports 

FI 
RU 
SE 
LV 
DE 

23.1 
17.8 
10.8 
8.2 
6.8 
33.3 

FI 
RU 
DE 
SE 
GB 

FI 
RU 
SE 
LV 
DE 

32.6 
16.1 
9.6 
8.5 
3.1 
30.1 

21.5 
17.6 
10.8 
7.5 
7.2 
35.4 

29.2 
13.5 
10 
8.2 
3.3 
35.8 

18.4 
16.5 
11.6 
8.3 
7.1 
38.1 

Structure of export by main partners 
in 1996 

FI 
18.4% 

38.1% 

Structure of import by main partners 
in 1996 

35.8 

DE 

FI 

GB 

LV 

Germany 

Finland 

United Kingdom 

Latvia 

NL 

RU 

SE 

Netherlands 

Russian Federation 

Sweden 

Ufe 

SOCIAL INDICATORS 

Population  on  1 January 

1991 

1992 

1993 
thousand 

1994 

1995 

1570.45 

1562.22 

1526.53 

1506.93 

1491.6 

Proportion  of population  by age (1 January  1995) 

in */• of total population 

y0_14 
yl5_24 
y25_44 
y45_64 
y65_max 

Live  births 
Deaths 
Infant  deaths 

- Less than  1 year 
-Stillbirth 

Marriages 
Divorces 

Crude  marriage  rate 
Crude  divorce  rate 
Natural  growth  rate 
Net migration  rate 
Total  population  growth  rate 
Total  fertility  rate 
Infant  mortality  rate 
Late  foetal  mortality  rate 
Life  expectancy 

- Males 
- Females 
Life  expectancy 

- Males 
-  Females 

19320 
19705 

258 
148 
10292 
5738 

6.57 

3.66 

-0.3 
-5.13 
-5.37 
1.77 
13.35 
7.6 

14178 
22150 

205 
126 
7378 
5606 

4.90 
3.70 
-5.30 
-5.10 
•10.40 

14.50 
8.81 

total/lumber 

18006 
20115 

15170 
21267 

285 
175 
8878 
6651 

239 
121 
7745 
5757 

per  1000 of population 

5.75 

4.31 

-1.37 
-21.9 
-23.27 
1.69 
15.83 
9.63 

5.11 
3.8 
-4.02 
-9.08 
-13.1 
1.45 
15.75 
7.91 

at 65 years 

20.7 
14.2 
28.5 
23.5 
13.1 

4.7 

5.0 

14.8 

61.7 
74.3 

12.0 
16.1 

iVV 

LABOUR  MARKET 

Economic Activity Rate (ILO methodology) 

Average employment 

Unemployment rate (ILO methodology) 

- Total 
- less then 25 years 
- 25 years and more 

Registered  unemployment (end of period) 

Average paid employment indices by NACE classes 

- Agriculture, hunting, forestry  and fishing 
- Mining and quarrying 
-  Manufacturing 
- Production and distribution of electricity, gas and water 
- Construction 
- Transport, storage and communication 

Monthly wages and salaries indices 

-real 
- nominal 

1993 

1994 

1995 
in % of population age +15 

1996 

70.5 

703 

6.6 
11.3 
5.8 

70.4 
in thousand 

687 

in % of labour force 

7.6 
11.8 
6.9 

in */• of economically active population 

4 

4.1 

4 

4.3 

1993 

1994 

1995 

1996 

previous year -  100 

74.7 
96.3 
86.4 
105 
88.6 
98.8 

83.3 
101.5 
95.2 
109.6 
95.6 
100 

Economic  activity  rate  (ILO Methodology)  - Percentage  of labor  force  in the total  population  aged  15+. This  rate  is derived  of LFSS 

(Labor Force Survey) observing the following  ILO definitions  and  recommendations: 
Labor force  employed and unemployed persons in the sense of the ILO definitions stated below. 
The  employed 
all  persons  aged  15+, who during  the reference  period  worked  at  least  one hour  for  wage  or  salary  or  other 
remuneration  as employees, entrepreneurs, members of cooperatives or contributing  family  workers. Members of armed  forces and 
women on child-care leave are included. 
The unemployed  all persons  aged  15+, who concurrently  meet all three conditions of the ILO definition  for being classified  as the 
unemployed: (i) have no work, (ii) are actively seeking a job and (iii) are ready to take up ajob  within a fortnight. 

Unemployment  rate (by ILO  methodology): - Percentage of the unemployed  in labor  force. 

Average  employment  and  Average  paid  employment  indices  by  NACE  classes:.  The data  cover  also  all  budgetary,  subsidised 
organisations and persons with secondary job are included. Armed forces, apprentices, employees on child-care and additional  child-
care leaves are excluded. 

Unemployment  rate (by ILO methodology, Average  employment  and  Average  paid  employment  indices by NACE  classes: 

Data refer to the Estonian  Labour Force Survey  1995 (ELFS 95). ELFS 95 was carried out in January-April  1995. The  questions 
were asked  about the years  1989-1995. The next survey will take place in April-June  1997 and will  collect  information  since the 
beginning  of  1995. According  to this  for the time  being,  annual  average  numbers  about  1993 and  1994 can be given.  The 
object  of ELFS 95 were  people who in 1995 were  16-75 years old. In 1989 the same people were  10-69 and in 1994 15-74 years 
old.  In order to guarantee  the comparability  of the data between  years  1989-1995, data  presented  in tables  are about  population 
aged  16-69. 

Registered  unemployment  (end  of  period):  Registered  unemployment  in  per cent  -  percentage  of  unemployed  registered  in  civil 
economically  active  population,  based on Labour force sample survey (LFSS).  Data of the  State  Labour  Market  Board.  Registered 
unemployment  covers  unemployed  job  seekers  registered  in state  employment  offices.  The unemployment  rate  is the share  of the 
registered unemployed job seekers from  the population between  16 and pension age. 

usr 

PUBLIC FINANCE 

Government  budget 

-Consolidated  central  government  revenue 
-Grants 
-Consolidated  central  government  expenditure 
-Consolidated general government  expenditure 
-Consolidated  central  government  deficit/surplus 
-General government  deficit/surplus 

Government  budget 

-Consolidated  central  government  expenditure 
-Consolidated  general  government  expenditure 
-Consolidated  central  government  deficit/surplus 
-General government  deficit/surplus 

1990 

1991 

1992 

1993 

1994 

1995 

in million* of national currency 

448.1 
14.9 
404.7 
539.9 
58.3 
73 

2994.8 
219.9 
3024 
3917 
190.7 
272.4 

6320.3 
243.7 
6088.5 
7805.7 
475.5 
539.2 

10566.8 

9590.3 
11282 
976.5 
973.4 

in */• of Uross Domestic Product 

22.1 
29.5 
3.2 
4.0 

21.2 
27.5 
1.3 
1.9 

27.5 
35.3 
2.2 
2.4 

31.9 
37.5 
3.2 
3.2 

Government  budget:  These data relate to central and general government as published  in the IMF's Government Finance  Statistics 

Yearbook (1996)  (GFSY); included also is the country's presentation in the GFSY. 

Because the GFSY docs  not present statistics for general government, but for individual  levels of government separately, the 
consolidated series presented here were obtained from central and local government data and adjusted in consolidation  for the 
identified  intergovernmental  transfers. 

Even though the statistics cover the central and local government published  in GFSY, the coverage may  not be exhaustive  if 

some central or local government units are not included in that coverage.  A measure of the exhaustiveness of the coverage can 
be obtained by comparing in the GFSY the note on the coverage of data for individual  countries with the list of central and local 
government units provided. 

It should be noted that the deficit/surplus used here is equal to revenue and grants minus expenditure, and does not take 

lending minus repayments into account (sec  further below). 

The netting of inter-government transfers carried-out in the attached tables is limited to the current and capital  transfers 

consisting of the identified grants and current and capital subsidies between the levels of government.  Other types of 
transactions occurring between government levels, such as the payments of taxes and employers' social security contributions, 
and the reciprocal purchases of goods and services are not normally classified  as inter-governmental  transfers have not been 
eliminated  in the consolidation  process.  Finally, whether the absence of data for current and capital transfers should be 
attributed to the absence of transfer or to lack of data is unclear; in all cases absence of information on transfers have been 
deemed to represent zero-transfers. 

a. Government  expenditure  consists of general government cash expenditures on current and capital goods and 

services, interest payments and current and capital transfers but excludes non-cash transactions. 

b. Deficit/surplus  equals cash revenue and cash grants minus cash expenditure.  This measure of the deficit/surplus 
differs  from  that  used  in  GFS  which  equals  cash  revenue  and  cash  grants,  minus  cash  expenditure,  minus  net  lending.  This 
exclusion  of  net  lending(consisting,  in  the  GFS  methodology,  of  operations  in  financial  assets  and  liabilities  carried  out  for 
specific  policy  purposes, rather than for liquidity purposes) brings the measure of the deficit/surplus  presented here closer to the 
national  accounts concept of net borrowing/net lending.  Also, as a result of this exclusion, receipts from privatisation  (classified 
as repayments in the GFS methodology)  do not enter in the determination of the deficit/surplus  presented  in the  attached  tables 
(and therefore  do not reduce the deficit). 

Ut 

FINANCIAL SECTOR 

Monetary  aggregates 

- Monetary  aggregate M1 
- Quasi  money 

1990 

1991 

1992 

1993 
Billions (10*9) of US Dollars 

1994 

1995 

1996 

0.38 
0.06 

0.51 
0.13 

0.72 
0.19 

0.87 
0.27 

Total  reserves  ( gold  excluded, end  of  period) 

Millions (10*6) of US Dollars 

Average short  term  interest  rates 

- lending rate 
- deposit rate 

Official  discount  rate  (end  of  period) 
USD exchange  rates 

Average of period 

End of period 

ECU  exchange  rates 

Average of period 

End of period 

• 

386.12 

443.35 

579.91 

636.82 

*/. per annum 

27.3 

6.3 
IUSD-...EEK 

23.1 
11.5 
5.4 

16 
8.7 
4.3 

13.7 
6.1 
3.6 

13.223 

13.878 

12.991 

12.39 

11.465 

11.462 

12.034 

12.44 

1 ECU=  EEK 

15.484 

15.483 

15.453 

15.240 

14.996 

15.064 

15.758 

15.587 

12.912 

15.635 

Monetary  aggregates  (end  of  period):  Money  (Ml) 

Include 
time, savings  and  foreign  currency  deposits.  Monetary  aggregates  are  calculated  on  a monthly  basis; according  to the  monetary 
survey  Ml  comprises  currency  outside  banks  and  demand  deposits  (excluding  government  deposits), Quasi-money  comprises  time 
deposits, savings deposits and foreign  convertible and non-convertible currency deposits (excluding government deposits).  Eurostat 
has  converted  National  Currencies  to  the  US  dollar  by  applying  the  International  Monetary  Fund  annual  end  of  period  exchange 
rates. 

Includes  demand  deposits  and  currency  outside  banks.  Quasi money 

Official  discount  rate  (end  of  period): 

No  official  discount  rate,  no  official  central  bank  base  or  primary  rate  either;  all  the  rates  are 

market-determined. 

Average  short  term  interest  rates:  Data are extracted from the IMF's monthly  International  Financial  Statistics (IFS). Average short-term 
lending  and  deposit  rates  relate  to  period  averages. Lending  rates  generally  consist  of  the  average  interest  rate  charged  on  loans 
granted  by reporting banks. Deposit rates relate to average demand  and time deposit rates or average time deposit rates. These  rates 
may  not  be  strictly  comparable  across  countries  to  the  extent  the  representative  value  of  the  reporting  banks  and  the  weighting 
schemes vary. 

Total  reserves  (gold  excluded,  end  of  period): 

The  statistics  on  official  foreign  reserves  are  extracted  from  the  IMF's  mondily 
International  Financial  Statistics  (IFS). Total  reserves  (gold  excluded)  are  defined  as  the  sum  of  central  bank  holdings  of  foreign 
currencies  and  other  (gross)  claims  on  non-residents; this definition  excludes  claims on  residents  denominated  in  foreign  currency. 
According  to  the  definition;  official  foreign  reserves  are calculated  at  market  exchange  rates  and  prices  in  force  at  the  end  of  the 
period  under  consideration.  Total  reserves (gold  excluded)  published  in  IFS may  differ  from  the  figures  published  by  the  national 
authorities.  Some  factors  contributing  to  possible  differences  are the  valuation  of  the  reserve  position  in  the  Fund,  and  a  different 
treatment of claims in non-convertible currencies. 

USD  exchange  rates: 

Internationales". 

International  Monetary  Fund  exchange  rates  as  present  in  the  publication:  "Statistiques  Financières 

lo 

INFLATION (12 months changes) 
Percentage change of the CPIs with  the current month compared  with the corresponding month of the previous year (t/t-12) 

Jan 

Feb 

Mar 

Apr 

May 

Jun 

Jul 

Aug 

Sep 

Oct 

Nov 

Dec 

1993 

1994 

1995 

1996 

39.0 

28.7 

35.9 

29.5 

27.8 

28.4 

25.2 

29.3 

27.2 

26.7 

29.2 

24.7 

27.8 

23.1 

27.4 

21.8 

25.9 

20.1 

28.4 

17.3 

28.2 

16.4 

28.8 

14.9 

Inflation  (%  change  of CPI) 

lafll 

•* 

\~4z,  i 

mm 

Infiation  (12  months  changes): 

Inflation  rates  (12  months  changes)  are  percentage  changes  of  the  CPIs  with  the  current  month 
compared  with  the  corresponding  month  of  the  previous  year.  Inflation  rates  are  based  on  national  CPIs  which  are  not  strictly 
comparable  between  candidate  countries  or  with  those  based  on  EU  HICPs  (different  methods,  concepts,  practices  in  the 
calculation  of CPIs). 

i a 

INDUSTRY 

Structure  of GDP by economic activities (NACE, current  prices) 

- Mining and  quarrying 
-  Manufacturing 
- Production  and distribution of electricity, gas and water 

Industrial  production  volume  indices by NACE  classes 

-Total 
- Mining and  quarrying 
-  Manufacturing 
- Production  and distribution of electricity, gas and water 

1993 

| 

1994 

1995 
in % of Grow Domestic Product 

1996 

1.7 
17.1 
3.2 

81.3 
72.8 
81.4 
83.7 

1.6 
16.6 
2.9 

previous  year-100 

97 
98.9 
96.9 
97.6 

1.5 
15.2 
3.5 

101.9 
95.6 
102.9 
98 

Industrial  production  volume  indices  by  NACE  classes: 

Industrial  production  covers  mining  and  quarrying,  manufacturing  and 
electricity, gas and water supply (according to the NACE Classification Sections C,D,E).  Index of Industrial Production covers total 
industrial  production including estimates for enterprises up to  19 employees.  Electricity, gas and water supply covers only energy 
production (NACE Rev.  I.: 40101,40301). 

INFRASTRUCTURE 

Railway  network 

22.3 

22.7 

22.6 

22.6 

1985 

1990 

1995 

1996 

in Km per  1000 Km2 

Length  of  motorways 

Kilometre 

60 

64 

66 

inhabitants 

Number  of inhabitants  per  passenger  car 

6.6 

6.5 

3.9 

3.6 

tZ2_ 

AGRICULTURE 

Land  area  by land-use  categories 

- total 
- agricultural  land 
-  forest 
- arable land 

- permanent meadows  and  pastures 

Agricultural  land  by legal  status 

- state  enterprise 

-  Cooperatives 
-others 

Share  of  GDP 

- Agriculture, hunting, forestry  and fishing  (Nace A+B) 

Gross  agricultural  production  volume  indices 

Main  crops  by  area 

- Cereals 
-of  which: wheat 
-  Potatoes 
- Sugar beet 
- Fodder beet 
Main  crops  by yield 
- Cereals 
- of which; wheat 
-  Potatoes 
- Sugar  beet 
- Fodder  beet 

Sales or  procurement  of animal  for  slaughter 

-  Pigs 
-  cattle 
- poultry 

Livestock  breeding  intensity  (end  of  period) 

-  cattle 
-  of which: cows 
-  sheep 

-  pigs 

1992 

1993 

1994 
in 1000 Hectares 

1995 

1996 

V 

4522.7 
1455 
2021.8 
1127.6 
312.5 

4522.7 
1454.1 
2016.6 
1128.9 
310.3 

4522.7 
1449.5 
2016.2 
1127.8 
306.9 

4522.7 
1449.5 
2016.2 
1127.8 
306.9 

1127.6 
306.9 

in % of agricultural land 

1.9 
36.4 
61.7 

1.9 
33.7 
64.4 

1.3 
29.2 
69.5 

1992 

1993 

1994 

1995 

1996 

in % of Gross Domestic Product 

9.8 

8.9 

7.1 

Previous year -  100 

88.3 

85.8 

98.8 

in  1000 Hectares 

423.1 
43.5 
46 
1 

375.1 
50.3 
43 
0 

319.5 
34.2 
40 
1 

304.3 
38.6 
37 
0 

14.1 

20.6 
144.5 

in  100 kg/Hectares 

21.6 
21.0 
126.4 
250 

16.0 
16.7 
141.1 
212 

16.9 
20.0 
145.6 
317 

290.2 
46.9 
36 
0 
8.7 

1992 

1993 

1994 

1995 

1996 

in  1000 tons of live weight 

52.5 
90.8 
7.5 

45.9 
64.2 
9.9 

52.2 
54.8 
8.5 

heads per 1000 Ha of agricultural land 

318 
156 
57 

288 
145 
42 

256 
128 
34 

heads per 1000 Ha of arable land 

48.1 
52.4 
8.3 

240 
119 
29 

376:8 

407 

398.4 

278.9 

Gross agricultural  production volume  indices:  The gross agricultural output has been calculated  in  1993 prices. 

Sales  or  procurement  of  animals  for  slaughter:  Sales  of  animals  for  slaughter,  killed  animals  in  enterprises  and  private  farms, 

household  plots for  sales, own consumption  meat. 

\Z2> 

Estonia 
1995 

Legend: 

A/  Country boundary 

A/  Region boundary 

COUNTRY  NAME 

REGION NAME 
CTTYNAME 

Selected major settlements: 
(1 000 inhabitants) 

o 

• 

• 

• 

200-250 

250 -  500 

5 0 0 - 1 0 00 

> 1  000 

General information about the country: 
Age groups (in years): 

^ ^_ 

wm 

<15 

15-  65 

>65 

Living standard (in 1993): ECU 1  003 
(aOPparoaprta) 

Area: 45 277 km2 
Administrative regions: 15 counties 

Population: 1 483 900 

Saura*: Statistical Offlo* of  Estonia 
Cartography and geographic Information managamant:  Q I 8 0O 

25 

75 km 

eurostat 

ISSN 0254-1475 

COM(97) 2006 final 

DOCUMENTS 

EN 

11  01  06 

Catalogue  number  :  CB-CO-97-374-EN-C 

ISBN  92-78-22862-1 

Office  for  Official  Publications of the European  Communities 

L-2985  Luxembourg