Recommendation for a COUNCIL RECOMMENDATION on the National Reform Programme 2011 of Estoniaand delivering a Council opinionon the Stability Programme of Estonia, 2011-2015
Date: 2011-06-07
Institutions: European Commission
Subjects: Estonia, budget deficit, economic policy, employment policy, pension scheme, social rights, transport policy, vocational training

EUROPEAN COMMISSION 

Brussels, 7.6.2011 
SEC(2011) 804 final 

Recommendation for a 

COUNCIL RECOMMENDATION 

on the National Reform Programme 2011 of Estonia 

and delivering a Council opinion 

on the Stability Programme of Estonia, 2011-2015 

{SEC(2011) 715 final} 

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Recommendation for a 

COUNCIL RECOMMENDATION 

on the National Reform Programme 2011 of Estonia 

and delivering a Council opinion 

on the Stability Programme of Estonia, 2011-2015 

THE COUNCIL OF THE EUROPEAN UNION, 

Having  regard  to  the  Treaty  on  the  Functioning  of  the  European  Union,  and  in  particular 
Article 121(2) and 148(4) thereof, 

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of 
the  surveillance  of  budgetary  positions  and  the  surveillance  and  coordination  of  economic 
policies1, and in particular Article 5(3) thereof, 

Having regard to the recommendation of the European Commission2, 

Having regard to the conclusions of the European Council, 

Having regard to the opinion of the Employment Committee, 

After consulting the Economic and Financial Committee, 

Whereas: 

(1) 

(2) 

On  26  March  2010,  the  European  Council  agreed  to  the  European  Commission's 
proposal  to  launch  a  new  strategy  for  jobs  and  growth,  Europe  2020,  based  on 
enhanced coordination of economic policies, which will focus on the key areas where 
action 
to  boost  Europe’s  potential  for  sustainable  growth  and 
competitiveness. 

is  needed 

On 13 July 2010, the Council adopted a recommendation on the broad guidelines for 
the economic policies of the Member States and the Union (2010 to 2014) and, on 21 
October  2010,  adopted  a  decision  on  Guidelines  for  the  employment  policies  of  the 
Member States,3 which together form the “integrated guidelines”. Member States were 
invited  to  take  the  integrated  guidelines  into  account  in  their  national  economic  and 
employment policies. 

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2 
3  

OJ L 209, 2.8.1997, p.1. 
OJ C , , p. . 
Maintained for 2011 by Council Decision 2011/308/EU of 19 May 2011. 

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(3) 

(4) 

(5) 

(6) 

(7) 

(8) 

On  12  January  2011,  the  Commission  adopted  the  first  Annual  Growth  Survey, 
marking  the  start  of  a  new  cycle  of  economic  governance  in  the  EU  and  the  first 
European semester of ex-ante and integrated policy coordination, which is anchored in 
the Europe 2020 strategy.  

On  25  March  2011,  the  European  Council  endorsed  the  priorities  for  fiscal 
consolidation  and  structural  reform  (in  line  with  the  Council’s  conclusions  of  15 
February and 7 March 2011 and further to the Commission’s Annual Growth Survey). 
It  underscored  the  need  to  give  priority  to  restoring  sound  budgets  and  fiscal 
sustainability,  reducing  unemployment  through  labour  market  reforms  and  making 
new efforts to enhance growth. It requested Member States to translate these priorities 
into  concrete measures to be included  in their Stability or Convergence Programmes 
and National Reform Programmes. 

On 25 March 2011, the European Council also invited the Member States participating 
in the Euro Plus Pact to present their commitments on time for their inclusion in their 
Stability or Convergence Programmes and their National Reform Programmes. 

On 29 April 2011, Estonia submitted its 2011 Stability Programme covering the period 
2011-2015 and its 2011 National Reform Programme. In order to take account of the 
interlinkages, the two programmes have been assessed at the same time.  

Estonia  was  particularly  hard-hit  by  the  global  financial  crisis,  which  amplified  the 
reversal  of  the  domestic  real  estate  and  consumption  boom.  The  cumulative  loss  of 
GDP reached 19% in 2008-09 and the unemployment rate increase almost four fold to 
16.8% by 2010. However, the economy has bounced back quickly and the real GDP 
growth  is  expected  to  accelerate  in  the  coming  years.  The  recovery  has  been  driven 
mainly  by  exports,  but  domestic  demand  is  gaining  ground  mostly  through  strong 
investment.  The  improved  growth  outlook  has  provided  a  positive  impetus  to  the 
labour  market.  Employment  rate  has  risen  markedly  recently,  although  long-term 
unemployment  remains  high.  While  inflation  accelerated  compared  to  last  year,  it  is 
expected to moderate in line with developments in the global commodity prices.  

Based on the assessment of the Stability Programme pursuant to Council Regulation 
(EC)  No  1466/97,  the  Council  is  of  the  opinion  that  the  macroeconomic  scenario 
underpinning  the  budgetary  projections  is  plausible.  The  medium-term  budgetary 
strategy  of  the  programme  is  to  achieve  the  medium-term  objective,  defined  as 
structural  balance, by  2013, and to maintain it throughout the rest of the programme 
period,  by  aiming  at  structural  surpluses  in  2013  and  beyond.  The  headline  general 
government  budgetary  position  is  projected  to  reach  surplus  by  2013,  while  in  the 
short term the headline deficit is expected to deteriorate somewhat due to the one-off 
impact of environmental investments on carbon credits. The budgetary adjustment of 
the  programme  relies  on  holding  back  growth 
in  government  consumption 
expenditure. The programme provides some information regarding measures to reach 
the  targeted  position  and  the  previous  track  record  of  meeting  the  fiscal  targets 
mitigates  the  risk  of  missing  them  in  the  coming  years.  In  particular,  the  envisaged 
reforms  seek  efficiency  gains  in  several  areas,  such  as  education  and  active  labour 
market  policies.  Risks  to  the  budgetary  targets  thus  appear  to  be  broadly  balanced. 
Nevertheless, it will be important for the upcoming budgets to provide the key details 
of  measures  to  further  enhance  the  efficiency  of  public  spending,  thus  underpinning 
the implementation of the Stability Programme.  

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(9) 

Long-term unemployment remains high and unemployment rates across regions have 
been  rather  diverging  and  persistent.  Despite  considerable  increases  since  2009, 
financing  of  active  labour  market  policies  remains  one  of  the  lowest  in  the  EU,  and 
results in a low share of the unemployed receiving active support. The Estonian labour 
market  is  relatively  flexible,  reinforced  by  the  decision  to  postpone  increases  in  the 
unemployment  insurance  benefit  coverage  in  the  Labour  Law  package  to  2013. 
Despite  this  flexibility,  Estonia  has  a  relatively  high  labour  tax  wedge,  which  could 
have  negative  consequences  for  labour  supply  and  demand.  This  problem  is 
particularly  acute  in  view  of  the  high  unemployment  rate  of  the  young  and  the  low-
skilled,  who  are  exposed  to  a  risk  of  poverty.  Reforms  envisaged  to  reduce  social 
insurance  contributions  address  the  right  issues,  but  need  to  take  place  while 
strengthening the budgetary position. There is potential for efficiency gains through a 
stricter means testing to better target other benefits. 

(10)  Estonia’s resource intensity is among the highest in the EU. This is partly the result of 
a  production  structure  concentrated  on  energy-intensive  sectors  and  industries. 
Another determinant is the low energy efficiency performance at sectoral level. In its 
NRP,  Estonia  indicates  a  national  energy  savings  target  of  9%  in  2016  compared  to 
projections  (16%  by  2020  in  the  NRP).  However,  this  does  not  cover  major  sectors 
and areas of savings potential, such as buildings and transport. Besides, there is little 
information  on  how  and  when  measures  will  be  implemented  and  their  expected 
results.  Hence,  improving  energy  efficiency  has  further  potential.  Increasing  energy 
efficiency is likely to have a positive impact on the environment and on the security of 
improve  cost 
energy  supply,  but  also 
competitiveness. 

inflationary  pressures  and 

to  reduce 

(11)  Notwithstanding  the  overall  high  share  of  people  with  tertiary  education,  further 
reform  of  the  education  system  at  all  levels  could  help  address  skill  gaps,  a  large 
number  of  schools  and  tertiary  education  institutions,  and  a  lack  of  focus  in 
professional  education  resulting  in  the  high  share  of  people  with  no  professional 
qualification (32% in 2009). Given current demographic trends, improving the quality 
of  human  capital  is  important  for  raising  potential  growth  in  the  medium  term.  In 
particular, ensuring that tertiary education is aimed at fields of key importance to the 
economy  (e.g.  engineering)  could  support  the  ongoing  rebalancing  towards  tradable 
sectors. Implementing the education reform would also contribute to improving public 
sector efficiency, as the current system of managing education is too fragmented at the 
local level, leading to both inefficient subsidies and low-quality services.  

(12)  Estonia has made a number of commitments under the Euro Plus Pact4. These contain 
measures  to  address  public  finance  sustainability,  employment,  and  competitiveness. 
On the fiscal side, the Pact commits to achieve budget balance by 2013 and a surplus 
in 2014; to include a public sector budget balance requirement in the state budget base 
law;  as  well  as  first  steps  to  reform  special  pension  schemes.  In  order  to  promote 
employment, some tax incentives are envisaged. For competitiveness, measures focus 
on  innovation,  higher  education,  and  public  service  reform.  The  Pact  commitments 
reflect the agenda presented in the National Reform Programme. The objectives set out 
in the Pact would benefit from further measures to strengthen labour market policies, 

4 

More details on the commitments made under the Euro Plus Pact can be found in SEC(2011) 715. 

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as well as addressing resource efficiency and the energy market. The Euro Plus Pact 
commitments have been assessed and taken into account in the recommendations. 

(13)  The  Commission  has  assessed  the  Stability  Programme  and  National  Reform 
Programme, and the Euro Plus Pact commitments5. It has taken into account not only 
their  relevance  for  sustainable  fiscal  and  socio-economic  policy  in  Estonia  but  also 
their conformity with EU rules and guidance, given the need to reinforce the overall 
economic governance of the European Union by providing EU level input into future 
national  decisions.  It  considers  that  while  measures  to  reach  the  targeted  budgetary 
position  would  have  to  be  specified  in  forthcoming  budgets,  the  track  record  of  the 
Estonian  authorities  mitigates  the  risk  of  missing  the  fiscal  targets.  Further  steps 
should be taken to strengthen labour market policies and provide better incentives to 
work,  to  enhance  human  capital  through  a  large  scale  education  reform  as  well  as 
addressing resource efficiency and the energy market.  

(14) 

In light of this assessment, the Council has examined the 2011 Stability Programme of 
Estonia and its opinion6 is reflected in particular in its recommendation under (1) set 
out below. Taking into account the European Council conclusions of 25 March 2011, 
the Council has examined the National Reform Programme of Estonia, 

HEREBY RECOMMENDS that Estonia should take action within the 2011-2012 period to: 

(1) 

(2) 

(3) 

(4) 

Achieve structural surplus by 2013 at the latest, while limiting deficit in 2012 to at 
most 2.1% of GDP in 2012, keeping tight control over expenditure and enhancing the 
efficiency of public spending. 

Take steps to support labour demand, by reducing the tax and social security burden 
in a budgetary neutral way, especially for low and medium-income earners. Improve 
the  effectiveness  of  active  labour  market  policies  by  targeting  measures  on  young 
people and the long-term unemployed, especially in areas of high unemployment, in 
order to reduce the risk of poverty. 

Ensure implementation of planned incentives to reduce energy intensity and improve 
the  energy  efficiency  of  the  economy,  targeted  on  the  buildings  and  transportation 
sectors, including by ensuring better market functioning.  

While  implementing  the  education  system  reform,  give  priority  to  measures 
improving the quality and availability of pre-school and professional education, and 
strengthen the system of professional qualifications. Focus education outcomes more 
on  labour  market  needs,  and  provide  opportunities  for  low-skilled  workers  to  take 
part in life-long learning.  

Done at Brussels, 

For the Council 
The President 

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6 

SEC(2011) 715. 
Foreseen in Article 5(3) of Council Regulation (EC) No 1466/97. 

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