Recommendation for a COUNCIL RECOMMENDATION on the 2019 National Reform Programme of Estonia and delivering a Council opinion on the 2019 Stability Programme of Estonia
Date: 2019-06-05
Institutions: European Commission, Secretariat-General
Subjects: Estonia, economic policy, economic reform, labour market, money laundering, pay policy, public expenditure, stability pact, stability programme, transport infrastructure

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   EUROPEAN COMMISSION  Brussels, 5.6.2019  COM(2019) 506 final  Recommendation for a COUNCIL RECOMMENDATION on the 2019 National Reform Programme of Estonia and delivering a Council opinion on the 2019 Stability Programme of Estonia    
 
 
Recommendation for a 

COUNCIL RECOMMENDATION 

on the 2019 National Reform Programme of Estonia and delivering a Council opinion on 
the 2019 Stability Programme of Estonia 

THE COUNCIL OF THE EUROPEAN UNION, 

Having  regard  to  the  Treaty  on  the  Functioning  of  the  European  Union,  and  in  particular 
Articles 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(2) thereof, 

Having regard to the recommendation of the European Commission, 

Having regard to the resolutions of the European Parliament, 

Having regard to the conclusions of the European Council, 

Having regard to the opinion of the Employment Committee, 

Having regard to the opinion of the Economic and Financial Committee, 

Having regard to the opinion of the Social Protection Committee, 

Having regard to the opinion of the Economic Policy Committee, 

Whereas: 

(1) 

On 21 November 2018, the Commission adopted the Annual Growth Survey, marking 
the start of the 2019 European Semester for economic policy coordination. It took due 
account  of  the  European  Pillar  of  Social  Rights,  proclaimed  by  the  European 
Parliament, the Council and the Commission on 17 November 2017. The priorities of 
the  Annual  Growth  Survey  were  endorsed  by  the  European  Council  on  21  March 
2019.  On  21  November  2018,  on  the  basis  of  Regulation  (EU)  No  1176/2011,  the 
Commission  also  adopted  the  Alert  Mechanism  Report,  in  which  it  did  not  identify 
Estonia as  one of the Member States for which  an in-depth  review would be carried 
out. On the same date, the Commission also adopted a recommendation for a Council 
recommendation on the economic policy of the euro area, which was endorsed by the 
European  Council  on  21  March  2019.  On  9  April  2019,  the  Council  adopted  the 
recommendation  on  the  economic  policy  of  the  euro  area  (‘Recommendation  for  the 
euro area’).  

(2) 

As a Member State whose currency is the euro and in view of the close interlinkages 
between  the  economies  in  the  economic  and  monetary  union,  Estonia  should  ensure 

1 

OJ L 209, 2.8.1997, p. 1. 

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(3) 

(4) 

(5) 

(6) 

the  full  and  timely  implementation  of  the  Recommendation  for  the  euro  area,  as 
reflected  in  recommendation  (3)  below.  In  particular,  measures  focusing  economic 
policy  related  to  investment  in  the  specified  areas  will  help  address  the  second  euro 
area recommendation as regards supporting investment.  
The 2019 country report for Estonia2 was published on 27 February 2019. It assessed 
Estonia’s progress in addressing the country-specific recommendations adopted by the 
Council  on  13  July  2018,  the  follow-up  given  to  the  recommendations  adopted  in 
previous years and Estonia's progress towards its national Europe 2020 targets.  

On 30 May 2019, Estonia submitted its 2019 National Reform Programme and, on 30 
April 2019, its 2019 Stability Programme.  

Relevant country-specific recommendations have been addressed in the programming 
of  the  European  Structural  and  Investment  Funds  ('ESI  Funds')  for  the  2014-2020 
period.  As  provided  for  in  Article  23  of  Regulation  (EU)  No  1303/2013  of  the 
European  Parliament  and  of  the  Council3,  where  it  is  necessary  to  support  the 
implementation of relevant Council recommendations, the Commission may request a 
Member  State  to  review  and  propose  amendments  to  its  Partnership  Agreement  and 
relevant programmes. The Commission has provided further details on how it would 
make use of that provision in guidelines on the application of the measures linking the 
effectiveness of the ESI Funds to sound economic governance4.  

Estonia is currently in the preventive arm of the Stability and Growth Pact. The 2019 
Stability  Programme  was  submitted  on  a  no-policy-change  basis.  The  government 
plans to move from a general government deficit of 0.6% of GDP in 2018 to a deficit 
of 0.2% of GDP in 2019, 0.3% of GDP in 2020 and register a deficit of 0.7% of GDP 
by  2022.  Based  on  the  recalculated  structural  balance5,  the  medium-term  budgetary 
objective,  set  at  a  deficit  of  0.5%  of  GDP  in  structural  terms,  is  not  planned  to  be 
achieved  over  the  period  covered  by  the  2019  Stability  Programme.  The  general 
government  debt-to-GDP  ratio is  projected to  decline to  5.3% of GDP by 2022. The 
macroeconomic scenario underpinning those budgetary projections is favourable. The 
measures needed to support the planned deficit targets have not been specified posing 
a risk to the revenue yield assumptions. 

(7) 

On 13 July 2018, the Council recommended Estonia to ensure that the nominal growth 
rate  of  net  primary  government  expenditure6  does  not  exceed  4.1%  in  2019, 
corresponding  to  an  annual  structural  adjustment  of  0.6%  of  GDP.  In  view  of  the 
Commission autumn 2018 forecast,  which projected a closer position to  the medium 

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SWD(2019) 1005 final. 
Regulation (EU) No 1303/2013 of the European Parliament and of the Council of 17 December 2013 
laying  down  common  provisions  on  the  European  Regional  Development  Fund,  the  European  Social 
Fund,  the  Cohesion  Fund,  the  European  Agricultural  Fund  for  Rural  Development  and  the  European 
Maritime  and  Fisheries  Fund  and  laying  down  general  provisions  on  the  European  Regional 
Development  Fund,  the  European  Social  Fund,  the  Cohesion  Fund  and  the  European  Maritime  and 
Fisheries Fund and repealing Council Regulation (EC) No 1083/2006 (OJ L 347, 20.12.2013, p. 320). 
COM(2014) 494 final. 
Cyclically-adjusted  balance  net  of  one-off  and  temporary  measures,  recalculated  by  the  Commission 
using the commonly agreed methodology. 
Net  primary  government  expenditure  comprises  total  government  expenditure  excluding  interest 
expenditure,  expenditure  on  Union  programmes  fully  matched  by  Union  funds  revenue  and  non-
discretionary  changes  in  unemployment  benefit  expenditure.  Nationally  financed  gross  fixed  capital 
formation  is  smoothed  over  a  4-year  period.  Discretionary  revenue  measures  or  revenue  increases 
mandated by law are factored in. One-off measures on both the revenue and expenditure sides are netted 
out. 

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(8) 

(9) 

term  budgetary  objective  in  2019,  and  consistent  with  the  rules  for  unfreezing  the 
required adjustment, the nominal growth rate of net primary government expenditure 
should not exceed 4.9%, corresponding to an annual structural adjustment of 0.3% in 
2019.  Based  on  the  Commission  2019  spring  forecast,  there  is  a  risk  of  significant 
deviation from that requirement in 2019.  

In 2020, in view of Estonia's projected output gap of 2.7% of GDP and with projected 
GDP growth below to the estimated potential growth rate, the nominal growth rate of 
net  primary  government  expenditure  should  not  exceed  4.1%,  in  line  with  the 
structural  adjustment  of  0.6%  of  GDP  stemming  from  the  commonly  agreed 
adjustment matrix of requirements under the Stability and Growth Pact. Based on the 
Commission  2019  spring  forecast  under  unchanged  policies,  there  is  a  risk  of 
significant  deviation  from  that  requirement  in  2020.  Overall,  the  Council  is  of  the 
opinion  that  the  necessary  measures  should  be  taken  as  of  2019  to  comply  with  the 
provisions of the Stability and Growth Pact. 

Preventing  money  laundering  has  become  a  priority  for  Estonia  against  the 
background  of  large  money-laundering  scandals.  Estonia  has  strengthened  its  anti-
money  laundering  framework  and  the  proportion  of  non-resident  deposits  in  the 
Estonian  banking  sector  has  significantly  decreased.  However,  challenges  remain. 
While the Estonian government introduced additional measures and guidelines on how 
to  further  strengthen  the  prevention  in  this  area,  a  legislative  initiative  aiming  at 
increasing  the  capacities  of  the  anti-money  laundering  supervision  has  not  yet  been 
adopted  by  the  Estonian  Parliament.  Attention  should  be  paid  to  the  effective 
implementation of these measures, once adopted. 

(10)  Skills shortages and mismatches are among the main obstacles to business investment 
and  limit  greater  productivity  gains.  In  recent  years,  Estonia  has  implemented 
comprehensive reforms but labour market trends and the decrease in the working-age 
population  present  long-term  challenges  to  the  education  and  training  system.  These 
challenges include a still high rate of early school leaving, incomplete reorganisation 
of  the  school  network;  the  insufficient  labour  market  relevance  of  higher  education 
and  vocational  education  and  training;  and  the  challenges  linked  to  the  ageing  of 
teachers and the low attractiveness  of the profession. Although participation in  adult 
learning is improving, the upskilling and  reskilling of the workforce is not occurring 
fast enough to keep up with labour market trends. The insufficient capacity to innovate 
is  at  the  centre  of  the  identified  skills  needs.  In  spite  of  the  high  percentage  of 
information  and  communication  technology  specialists,  there  is  limited  digital  skills 
training  provided  by  enterprises.  Improving  the  labour  market  relevance  of  the 
education  and  training  system,  including  by  investing  in  career  guidance,  tackling 
early school leaving and better anticipating skills needs, would help ensure that people 
are  equipped  with  the  rights  skills.  In  addition,  enhancing  the  working  conditions  of 
teachers, the quality of teaching and the education policies in response to demographic 
and  economic  trends  would  strengthen  the  capacity  of  the  education  and  training 
system.  

(11)  Despite improvements,  poverty, social  exclusion  and income inequality remain high, 
particularly among older people. Around 42% of those aged 65 and above were at risk 
of poverty and social exclusion in  2017 compared to the European Union average of 
15%. Social benefits are still not effective in reducing poverty and the social safety net 
is weak. The provision of good quality and affordable social services is hampered by 
the  weak  coordination  between  the  health  and  social  care  services  and  by  the  wide 
variation in municipalities' ability to identify the needs for social services and deliver 

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them. Individuals also have to cover a large part of the costs of the services provided 
by the  authorities. Estonia’s public spending on long-term care was  less than half of 
the  EU  average  (0.6%  of  GDP  compared  with  1.6%  of  GDP  in  2016).  There  are  no 
preventive  measures  or  a  support  system  to  alleviate  the  burden  on  informal  carers. 
The proportion of people with unmet medical needs remains one of the highest in the 
EU (11.7%) indicating problems with the accessibility and effectiveness of the health 
care system. These challenges point to the need to deliver affordable and good quality 
social and health care services in  an integrated way and to develop a comprehensive 
long-term care framework. Investments supporting social inclusion, including in social 
infrastructure, would foster inclusive growth. 

(12)  The gender pay gap at 25.6% in 2017 remains among the highest in the Union and is 
slightly wider than the previous year. Moreover, the impact of parenthood on women’s 
employment  is  well  above  the  Union  average  (25.2  and  9.0%  respectively).  Long 
parental  leaves  often  lead  to  slower  career  progression  for  women.  Women  tend  to 
work  in  lower-paid  economic  sectors  and  occupations  even  though  their  education 
level is higher than men's. Recent measures added flexibility to the parental leave and 
benefit system with a view to facilitating parents’ return to the labour market. The use 
of  childcare  has  been  improving.  However,  factors  such  as  economic  activity, 
occupation, age, job  experience or working time explain only part of the gender pay 
gap,  leaving  an  unexplained  gap  of  20%  against  the  EU  average  of  11.5%.  Pay 
transparency could help to better understand the reasons behind this high gender wage 
gap. Continued investment in childcare and active labour market measures would help 
the  social  partners  and 
women’s  employment.  Furthermore,  engaging  with 
strengthening their capacity remain important in a broader context. 

(13)  As  a  peripheral  country  with  a  low  population  density,  a  well-functioning  and 
interconnected transport  system is  key for  Estonia’s economic  activities and exports. 
Estonia’s  transport  infrastructure  faces  some  shortcomings  in  terms  of  connectivity 
and  sustainability.  Rail  and  intermodal  transport  remain  underdeveloped.  Moreover, 
greenhouse gas emissions from road transport have increased the last 5 years. Further 
innovative  and  sustainable  solutions  could  help  address  congestion  and  public 
transport-related  problems.  Synchronising  Estonia’s  electricity  system  with  the 
continental  European  network  is  key  to  ensuring  security  of  electricity  supply  in  the 
entire  Baltic  region.  Investment 
the 
competitiveness of the Estonian companies.  

infrastructure  would  help 

improve 

in 

(14)  With  low  levels  of  investment  in  research  and  development,  especially  from  the 
private  sector,  Estonia’s  productivity  has  been  lagging  behind.  While  in 2017  public 
expenditure on research and development was slightly below the EU average, business 
investment  was  only  0.61%  of  GDP  —  about  half  the  EU  average.  There  is  a  low 
proportion  of  companies,  in  particular  among  small  and  medium-sized  enterprises, 
reporting research and innovation activities. Non-research and development innovation 
expenditure is declining and the collaboration between science and businesses is weak. 
Some  of  these  factors  are  dragging  down  the  country's  innovation  performance  and 
productivity.  More  targeted  investment  in  research,  development  and  innovation, 
including  in  the  digitalisation  and  automation  of  firms  would  increase  Estonia’s 
productivity  and  competitiveness.  Better  prioritisation  of  research  topics  in  areas  of 
relevance for the economy would do likewise. The Estonian authorities have designed 
and  implemented  several  measures  to  address  the  shortcomings  in  the  research  and 
innovation system but their impact remains limited to date.  

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(15)  Challenges  in  the  areas  of  resource  and  energy  efficiency  remain.  Estonia’s  eco-
innovation  performance  does  not  fully  reflect  the  country’s  potential,  and  its 
composite  eco-innovation  score  of  60  is  40%  below  the  EU  average.  Despite  some 
improvements  in  recent  years,  Estonia  performs  about  three  times  below  the  EU 
average  in  terms  of  resource  productivity  and  the  gap  with  the  rest  of  the  EU  is 
widening. Only a small proportion of Estonian small and medium-sized enterprises are 
taking actions to improve their resource efficiency and become greener. Furthermore, 
the  economy  is  highly  energy  intensive,  with  energy  consumption  levels  well  above 
the  EU  average.  All  Estonian  regions  are  lagging  behind  in  improving  resource  and 
energy efficiency. At 0.4%, Estonia is well below its national targets of 10% share of 
renewable energy in transport. Fostering resource and energy efficiency, in particular 
in the buildings sector, and supporting the circular economy, including by increasing 
investment, would further contribute to a more competitive and sustainable economy. 

(16) 

Insolvency  procedures  in  Estonia  take  around  three  years  and  the  recovery  rate  is 
slightly above 40%. This traps labour and financial resources in less productive firms. 
It  undermines  incentives  to  invest  and  provide  financing  to  firms.  Reforming  the 
insolvency  framework  would  be  important  with  a  view  to  shorten  the  duration  of 
insolvency proceedings and increase the recovery rate for creditors. In particular, this 
could  include  encouraging  the  use  of  pre-  and  post-  insolvency  restructuring 
proceedings and preventing piece-meal liquidation of companies. 

(17)  The programming of EU funds for the period 2021-2027 could help address some of 
the  gaps  identified  in  the  recommendations,  in  particular  in  the  areas  covered  by 
Annex  D  to  the  country  report7.  This  would  allow  Estonia  to  make  the  best  use  of 
those funds in respect of the identified sectors, taking into account regional disparities. 

(18) 

In  the  context  of  the  2019  European  Semester,  the  Commission  has  carried  out  a 
comprehensive  analysis  of  Estonia’s  economic  policy  and  published  it  in  the  2019 
country  report.  It  has  also  assessed  the  2019  Stability  Programme  and  the  2019 
National  Reform  Programme  and  the  follow-up  given  to  the  recommendations 
addressed  to  Estonia  in  previous  years.  It  has  taken  into  account  not  only  their 
relevance  for  sustainable  fiscal  and  socioeconomic  policy  in  Estonia,  but  also  their 
compliance with Union rules and guidance, given the need to strengthen the Union’s 
overall  economic  governance  by  providing  Union-level  input  into  future  national 
decisions.  

(19) 

In  the  light  of  this  assessment,  the  Council  has  examined  the  2019  Stability 
Programme and its opinion8 is reflected in particular in recommendation (1) below.  

HEREBY RECOMMENDS that Estonia take action in 2019 and 2020 to: 

1. 

2. 

Ensure that the nominal growth rate of net primary government expenditure does not 
exceed  4.1%  in  2020,  corresponding  to  an  annual  structural  adjustment  of  0.6%  of 
GDP. Ensure effective supervision and the enforcement of the anti-money laundering 
framework. 

Address skills shortages and foster innovation by improving the capacity and labour 
market relevance of the education and training system. Improve the adequacy of the 
social  safety  net  and  access  to  affordable  and  integrated  social  services.  Take 
measures to reduce the gender pay gap, including by improving wage transparency. 

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SWD(2019) 1005 final. 
Under Article 5(2) of Council Regulation (EC) No 1466/97. 

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3. 

Focus  investment-related  economic  policy  on  sustainable  transport  and  energy 
infrastructure, including interconnections, on fostering research and innovation, and 
on resource and energy efficiency, taking into account regional disparities. 

Done at Brussels, 

For the Council 
The President 

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