COMMISSION STAFF WORKING DOCUMENT Country Report Estonia 2020 Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE EUROPEAN COUNCIL, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP 2020 European Semester: Assessment of progress on structural reforms, prevention and correction of macroeconomic imbalances, and results of in-depth reviews under Regulation (EU) No 1176/2011
Date: 2020-02-26
Institutions: European Commission, Secretariat-General
Subjects: Estonia, economic situation, green economy, investment, labour market, macroeconomics, public finance, social policy, structural adjustment, tax system

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 26.2.2020  SWD(2020) 505 final  COMMISSION STAFF WORKING DOCUMENT Country Report Estonia 2020 Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE EUROPEAN COUNCIL, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP 2020 European Semester: Assessment of progress on structural reforms, prevention and correction of macroeconomic imbalances, and results of in-depth reviews under Regulation (EU) No 1176/2011 {COM(2020) 150 final}  
 
 
CONTENTS 

Executive summary 

1.  Economic situation and outlook 

2.  Progress with country-specific recommendations 

3.  Reform priorities 

3.1.  Public finances and taxation 

3.2.  Financial sector 

3.3.  Labour market, education and social policies 

3.4. Competitiveness reforms and investment 

3.5.  Environmental sustainability 

Annex A: Overview Table 

Annex B: Commission Debt Sustainability Analysis and fiscal risks 

Annex C: Standard Tables 

Annex D: Investment guidance on Just Transition Fund 2021-2027 for Estonia 

Annex E: Progress towards the Sustainable Development Goals (SDGs) 

References 

LIST OF TABLES 

Table 1.1: 

Key economic and financial indicators _ Estonia 

Table 2.1: 

Assessment of implementation of 2019 country-specific recommendations 

Table 3.2.1: 

Financial soundness of banks 

Table 3.3.1:  Activity rates of subgroups in Estonia and EU‑28, 2018 

Table 3.4.1:  Completion of TEN-T core network 2016, % in Estonia 

Table 3.4.2:  Main socio-economic indicators  by degree of urbanisation, Estonia, 2018 

Table C.1: 

Financial market indicators 

Table C.2: 

Headline social scoreboard indicators 

Table C.3: 

Labour market and education indicators 

Table C.4: 

Social inclusion and health indicators 

Table C.5: 

Product market performance and policy indicators 

Table C.6: 

Green growth 

1 

3 

7 

13 

17 

17 

22 

25 

34 

47 

50 

54 

55 

61 

63 

68 

12 

14 

22 

27 

40 

42 

55 

56 

57 

58 

59 

60 

 
 
 
Ta²ble E.1: 

Indicators measuring Estonia’s progress towards the SDGs 

LIST OF GRAPHS 

Graph 1.1: 

Real GDP growth and contributions 

Graph 1.2: 

Export market share, goods and services, nominal 

Graph 1.3: 

HICP quarterly growth 

Graph 1.4: 

Investment growth and  contributions, % 

Graph 1.5: 

Breakdown of external position (current and capital accounts) 

Graph 1.6: 

Real effective exchange rate based on unit labour cost 

Graph 1.7: 

Components of the Net International Investment Position 

Graph 1.8: 

Labour market indicators 

Graph 1.9: 

Decomposition of rate of change of unit labour cost in (EA/EU) - Estonia 

Graph 1.10:  At-risk-of-poverty and severe material deprivation rates 

Graph 2.1: 

Overall multiannual implementation of 2011-2019 CSRs to date 

Graph 3.1.1:  Public expenditure by function 

Graph 3.2.1:  Composite cost of borrowing 

Graph 3.3.1:  Demographic change 2009-2019 

Graph 3.3.2:  At-risk-of-poverty or social exclusion rate, age groups, Estonia 

Graph 3.3.3:  Education and labour market for youth 

Graph 3.4.1:  Gap compared to the euro area in 2018 levels 

Graph 3.4.2:  Growth of labour productivity decomposed as changes in total factor productivity 

and capital deepening 

Graph 3.4.3:  Direct investment by field of activity as share of GDP 

Graph 3.4.4: 

Investment by asset type 

Graph 3.4.5:  Share of environmental costs in Estonia for road and rail transport 

Graph 3.5.1:  Final energy consumption by sector 2008-2017 

Graph 3.5.2:  Final energy consumption by sector in 2017 

LIST OF BOXES 

Box 2.1: EU funds and programmes to address structural challenges and to foster growth and 

competitiveness in Estonia 

Box 3.3.2: Monitoring performance in light of the European Pillar of Social Rights 

Box 3.4.3: Investment challenges and reforms in Estonia 

Box 3.4.4: Regional disparities 

63 

7 

7 

8 

8 

9 

9 

10 

10 

10 

11 

13 

19 

24 

25 

29 

32 

34 

34 

35 

35 

40 

47 

48 

16 

26 

36 

45 

2 

 
 
 
 
 
 
EXECUTIVE SUMMARY 

is  benefitting  from  the 
Estonia’s  economy 
favourable 
labour  market  and  business 
environment.  Economic  growth  has  been  strong 
across  all  sectors,  boosted  by  public  and  private 
investment.  Innovation  has  increased  but  has  not 
led  to  any  substantial  rise  in  labour  productivity. 
Skills  shortages  have  emerged  due  to  rapidly 
changing  labour  market  trends  and  technological 
developments,  putting  pressure  on  firms’  cost 
competitiveness. Ageing and the poor health of the 
population  raise  concerns  about  the  adequacy  of 
the pension and healthcare systems. Low resource 
efficiency and high energy and carbon intensity, in 
particular,  due  to  Estonia’s  reliance  on  oil  shale 
pose challenges in terms of achieving the country’s 
binding  decarbonisation  targets  under  EU  climate 
environmental 
policy.  Future 
sustainability will depend on how well the country 
mitigates 
those  challenges  while  building  an 
innovative economy (1). 

growth 

and 

in 

In  2020-2021,  economic  growth  is  expected  to 
slow  to  above  2%  due  to  weaker  external 
demand  and  uncertainties 
international 
trade.  Domestic demand is set to remain the key 
growth driver primarily due to the increase in real 
disposable 
incomes  supported  by  moderating 
inflation. The employment rate and wage increases 
are  forecast  to  weaken  somewhat,  but  labour 
market  participation  is  set  to  remain  high.  Wages 
have been  growing faster than  labour productivity 
for  several  years 
in  a  row,  reducing  cost 
competitiveness.  Estonia’s  oil  shale  sector  has 
scaled  down  production  which  has  reduced  GDP 
growth.   

Public  finances  remain  in  good  shape.  Public 
debt  was  below  9%  of  GDP  in  2018,  by  far  the 
lowest in the EU. However, in recent years during 
the  cyclical  economic  peak,  the  public  deficit 
increased  and  government  spending  became  pro-
cyclical.  

Estonia  has  made  some  progress  in  addressing 
the  2019  country-specific  recommendations. 

(1)  This  report  assesses   Estonia’s  economy  in  light  of  the 
European  Commission’s  Annual  Sustainable  Growth 
Strategy,  published  on  17  December  2019.  In 
this 
document, the Commission sets out a new strategy on how 
to address not only the short-term economic challenges but 
also  the  economy's  longer-term  challenges.  This  new 
economic agenda of competitive sustainability rests on four 
dimensions:  environmental  sustainability,  productivity 
gains, fairness and macroeconomic stability 

3 

There  has  been  some  progress  in  the  following 
areas:   

  addressing 

skills 

shortages 

foster 
innovation  by  improving  the  capacity  and 
labour  market  relevance  of  the  education  and 
training system;  

and 

 

 

improving  the  adequacy  of  the  social  safety 
net; and 

taking  measures to reduce the gender pay gap, 
including by improving wage transparency. 

There  has  been  limited  progress  in  the  following 
areas: 

  ensuring 

effective 

enforcement  of 
framework;  

supervision 
the  anti-money 

and 
the 
laundering 

 

 

improving  access  to  integrated  social  and 
health services; and 

transport 

sustainable 

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

and 

Estonia  performs  relatively  well  on  most 
indicators  in  the  Social  Scoreboard  supporting 
the  European  Pillar  of  Social  Rights,  but  some 
concerns  remain.  Estonia’s  labour  market  is  one 
of  the  best  performing  in  the  EU.  However,  the 
proportion  of  people  with  unmet  medical  needs 
remains one of the highest in the EU. The share of 
young  people  not  in  education,  employment  or 
training  has  increased  further.  Social  transfers  are 
less effective in reducing poverty than on average 
in  the  EU  and  the  indicator  of  people  at-risk-of-
poverty  or  social  exclusion  remains  a  point  to 
watch.  

Regarding progress towards its national targets 
under the Europe 2020 strategy, Estonia already 
met  its  employment  rate  target  and  its  tertiary 
education  target  in  2015.  It  has  also  achieved  a 
share  of  renewable  energy  corresponding  to  its 
2020 target, and has  made some  progress towards 
reducing 
improving 

efficiency 

energy 

and 

 
                                                           
Executive summary 

lack of an overall framework to provide social 
and  health  services  in  an  integrated  way  and 
the  high  costs.  Poverty  and  social  exclusion 
have increased, mainly because the incomes of 
the poorest - the elderly and people with lower 
educational  attainment - have,  increased  less 
than average wages.  

  Making the second pillar pension system 
voluntary  raises  fiscal  and  economic 
risks related to the adequacy of pensions. 
The  current 
first  pillar  pay-as-you-go 
system  is  set  to  provide  relatively  low 
pensions.  Winding  down  the  second  pillar 
pension  system  implies  less  prefunding  for 
pensions  and 
the 
set 
diversification  of  pension  income  in  the 
long  term.  In  light  of  population  ageing, 
this aggravates the concerns about the long-
term adequacy of the pension system. 

reduce 

to 

is 

are 

slow. 

results 

investment 

  R&D,  including  digitalisation,  have  not 
economy-wide  productivity 
delivered 
gains.  Business 
in  R&D 
remains  low  compared  to  other  countries, 
posing a barrier to productivity growth. The 
transfer  of  knowledge  from  universities  to 
companies  and  the  commercialisation  of 
The 
research 
intermediaries  able  to  support  industrial 
innovation are not yet established or are not 
functioning  at  their  full  potential.  While 
Estonia’s  overall  innovation  performance 
has  improved,  the  levels  of  research-based 
innovation  capacity  and  activity  in  the 
business sector remain low. The economy is 
becoming  increasingly  digitalised,  but  the 
take-up  of  information  and  communication 
technologies  in  manufacturing  has  been 
low.   

in 

investment 

  Major  investment  needs  persist.  Well-
targeted 
infrastructure, 
research  and  innovation,  and  in  promoting 
resource 
strengthen 
efficiency  would 
Estonia’s  long-term  potential.    Investments 
in education and skills, as  well as in social 
inclusion,  health  and  social  services  could 
foster  sustainable  and  inclusive  growth.  
Business  investment  has  accelerated  but 
investment  in  research  and  innovation  and 
intellectual property assets is relatively low. 

greenhouse  gas  emissions.  However,  Estonia  is 
underperforming on reducing early  school leaving 
and  on  reaching  its  national  targets  for  reducing 
poverty and increasing investment in research and 
development.  Estonia  lags considerably  behind  its 
target for renewable energy in transport.   

Estonia  has  performed  particularly  well  with 
respect to SDG 4 “Quality of education”, showing 
progress at all levels of education except the most 
recent trend for early leavers.  The important issue 
to  watch  concerns  SDG  13  “Climate  Action”,  as 
Estonia is among the EU countries with the widest 
gap  between  its  target  and  the  likely  greenhouse 
gas emissions in 2030.(2) 

Key structural issues analysed in this report, which 
point 
for  Estonia’s 
economy, are the following: 

to  particular  challenges 

including  digital  skills.  While 

  Skills  shortages  and  mismatches  persist, 
which  limits  productivity  gains  Firms  have 
had difficulties in finding people with adequate 
skills, 
the 
education  and  training  system  performs  well 
and  is  equitable,  its  capacity  to  respond  to 
labour  market  needs  is  limited  by  elevated 
early school leaving and an insufficient  labour 
education. 
of 
market 
Participation  in  adult  learning  has  increased, 
but the re- and upskilling of the workforce has 
not kept pace with labour market trends. One of 
the  reasons  is  that  businesses  provide  limited 
on-the-job  training.  The  high  share  of  ageing 
teachers is a long-term but ever more pressing 
challenge for the education system.  

relevance 

higher 

  Serious  challenges  remain  regarding  the 
social  safety  net,  especially  access  to  social 
services  for  some  groups.  The  availability  of 
affordable  social  services,  including  long-term 
care  services,  remains  limited  especially  for 
elderly  people  and  low-income  earners.  The 
provision of services is particularly difficult in 
some  regions.  The  underlying  reasons  are  the 

(2)  Within the scope of its legal basis, the European Semester 
can help drive national economic and employment policies 
towards the achievement of the United Nations sustainable 
development  goals  (SDGs)  by  monitoring  progress  and 
ensuring  closer  coordination  of  national  efforts.  The 
present report contains reinforced analysis and monitoring 
on the SDGs. A new annex (Annex E) presents a statistical 
assessment of trends in relation to SDGs in Estonia during 
the past 5 years, based on Eurostat’s EU SDG indicator set. 

4 

 
                                                           
Executive summary 

low  cost 

assets  and 
funding.  Banks 
operating  in  Estonia  have  become  less 
dependent  on  their  parent  banks  and  now 
largely  fund  themselves  from  domestic 
deposits and the wholesale funding market. 
While the share of non-resident deposits has 
declined  and  action  has  been  taken  against 
non-compliant  banks,  money  laundering 
risks remain. Proposals to increase the level 
of  sanctions  are  still  to  be  adopted.  The 
capacity of the financial supervisor has not 
yet  been  strengthened  and  the  risk-based 
fully 
not 
approach 
implemented.  Failing 
these 
issues  could  expose  the  economy  to  risks 
that may undermine competitiveness.  

been 
yet 
to  address 

has 

  Measures  to  help  the  north-east  and 
south-east regions catch up with the rest 
of  the  country  have  stalled.  Regional 
disparities  are  linked  to  past  industrial 
restructuring,  but  differences  in  skills  and 
labour  supply  have  increased  over  time. 
The  way  local  authorities  are  financed  has 
not  yet  been  reformed.  In  the  absence  of 
solutions, 
sustainable 
funding 
municipalities’  room  for  manoeuvre 
to 
promote  entrepreneurship  and  to  attract 
people  is  limited.  Despite  investments  in 
infrastructure, concerns about depopulation, 
low labour activity and access to health and 
social  services  have  emerged,  suggesting 
the need for a holistic regional development 
strategy.  

  The  health  system 

is 

facing  major 
challenges.  Although  life  expectancy  is 
increasing rapidly in Estonia, the number of 
healthy life years remains among the lowest 
in  the  EU  and  is  decreasing,  with  large 
disparities by gender, region, education and 
income. Poor health outcomes can be linked 
to insufficient healthcare funding, shortages 
in  healthcare  staff  and  lifestyle-related  risk 
factors.  Self-reported  unmet  needs  for 
medical  care  have  further  increased  and 
remain one of the highest in the EU due  to 
long  waiting  times  for  both  primary  and 
specialist care.     

economic 

A  high-quality  and  well-interconnected 
transport system remains a key for boosting 
Estonia’s 
and 
deepening  its  integration  to  the  single 
market.  Public  investments,  including  EU 
funds,  have  helped  to  address  Estonia's 
investment needs.    

activities 

  Environmental  sustainability  remains  a 
challenge due to high carbon and energy 
intensity. Estonia is likely to miss its 2030 
greenhouse  gas  emission 
targets.  The 
sectors  which  produce  the  most  emissions 
are 
transport  and buildings.  Both  are 
energy-intensive, and transport in particular 
relies on carbon intensive sources. A major 
share of energy in Estonia is produced from 
oil  shale,  which  plays  an 
important 
economic and social role. It is however also 
a  significant  contributor  to  the  country’s 
high  greenhouse  gas  emissions,  and  harms 
the  environment.  The  government  has 
implemented some measures to tackle these 
issues,  but  the  results  have  been  modest. 
Furthermore,  there  are  no  tax  or  other 
incentives  for  reducing  CO2  emissions. 
Reducing  carbon  intensity  in  transport  and 
buildings,  restructuring  the  oil  shale  sector 
economy 
and 
improve 
business 
The 
environmental 
Commission’s 
Just 
proposal 
Transition Mechanism under the next multi-
annual  financial  framework  for  the  period 
2021-2027 includes a Just Transition Fund, 
a  dedicated  just  transition  scheme  under 
InvestEU  and  a  new  public  sector  loan 
facility with the European Investment Bank. 
It  is  designed  to  ensure  that  the  transition 
towards climate neutrality is fair by helping 
the  most  affected  regions  in  Estonia  to 
economic 
address 
consequences. Key priorities for support by 
the  Just  Transition  Fund,  set  up  as  part  of 
the 
are 
Just  Transition  Mechanism 
identified  in  Annex  D,  building  on  the 
analysis  of 
transition  challenges 
outlined in this report. 

circular 
could 
sustainability. 

implementing 
models 

social 

and 

the 

the 

for 

a 

  The  Estonian  banking  sector  is  sound 
overall  but  money 
laundering  risks 
remain.  Estonian  banks  are  profitable 
thanks  to  high  efficiency,  good  quality 

5 

 
Executive summary 

  The  gender  pay  gap  remains  among  the 
highest  in  the  EU.  Recent  reforms  of  the 
parental  leave  and  benefit  system  are  helping 
into  work,  but  care 
women  move  back 
responsibilities 
for  parents, 
remain  high 
especially  for  women.  Estonia  is  developing 
information technology tools to help employers 
to  increase  pay  transparency  and  is  running  a 
research project to address the unexplained part 
of the gender pay. 

6 

 
 
1.  ECONOMIC SITUATION AND OUTLOOK 

Macroeconomic developments and outlook 

in 

Estonia’s  real  economic  growth  in  2019  was 
relatively  strong  reaching  an  estimated  3.8% 
(see  Graph  1.1).  Domestic  demand  was  the  main 
growth driver, with key contributions coming from 
a  recovery 
investment  and  from  private 
consumption,  supported  by  high  employment  and 
increased  real  incomes.  Economic  activity  was 
rather  strong  in  most  economic  sectors,  with  the 
notable 
energy 
production, where activity decreased following the 
partial  closure  of  Eesti  Energia’s  generating 
capacity in north-east Estonia.  

exception  of  mining 

and 

The  current  account  is  projected  to  remain  in 
surplus  over  the  coming  years.  Over  the  period 
2012-2018, 
the  Estonian  economy  became 
increasingly  specialised  in  the  export  of  services, 
notably of information technology services, where 
Estonian companies have developed a competitive 
advantage  and  have 
increased  value  added 
European 
(European 
Commission,  2018b). The  current  account  surplus 
stood at about 2% of GDP in 2019. Exports were a 
major source of growth for traditional sectors such 
as  paper,  wood,  plastics,  pharmaceuticals,  metal 
products,  and  machinery  and  equipment.  Export 
growth  is  forecast  to  moderate  in  2020  due  to 
weaker external demand.  

Commission 

2019a; 

Graph 1.1: 

Real GDP growth and contributions 

Graph 1.2: 

Export market share, goods and services, 
nominal 

Source: European Commission 

Source: European Commission  

GDP  growth  is  forecast to moderate  further  to 
just 2.2% in 2020 and 2.4% in 2021. In line with 
cyclical  developments  affecting  Estonia’s  main 
trading  partners,  export  growth  is  expected  to 
slow.  Private  consumption  is  forecast  to  ease 
somewhat,  as  the  labour  market  is  set  to  cool 
down,  wages  adjust  and  unemployment  increase 
slightly.  At  the  same  time,  investment  is  set  to 
moderate more substantially given its high growth 
rate in 2019. 

Inflation 

Inflation  was  set  to  decelerate  to  2.3%  in  2019 
and to remain slightly above 2% over 2020 and 
2021.  This  trend  is  largely  due  to  lower  global 
energy  prices  (see  Graph  1.3).  The  changes  to 
consumption taxes will have a smaller inflationary 
impact  than  in  the  past,  while  the  strong  wage 
growth  will  exert  inflationary  effect  on  prices  of 
services. Overall, inflation in Estonia is forecast to 
stay above the euro area average. 

7 

-6-4-202468101210111213141516171819'20'21'%, ppsInventories investmentInvestment (GFCF)ConsumptionNet exportsReal GDP growth-30-20-100102030040506070809101112131415161718Rate of change y-o-y (%)Contribution: World export growth (euros, neg. Sign)Contribution: Export growth (euros)Export Market Share growth rate 
         
 
 
         
1. Economic situation and outlook 

Graph 1.3:  HICP quarterly growth 

Investment 

increased 

in  nominal 

Following a year of subdued growth, investment 
picked  up  robustly  in  2019,  and  its  share  is 
projected  to  stabilise  at  around  25%  of  GDP. 
The  investment  recovery  was  mainly  driven  by 
private  investment,  which  is  expected  to  have 
increased  by  over  15% 
terms. 
in  most  sectors,  with 
Investment 
particularly  high  investment  rates  in  machinery 
and  equipment  and  in  industrial  manufacturing 
(see  Graph  1.4) 
favourable 
borrowing  conditions  and  corporate  profits. 
Investment's  contribution  to  growth  is  set  to 
moderate in 2020-2021, and the overall investment 
intensity is likely to level off at slightly above the 
EU average (see Section 3.4). 

supported  by 

Source: European Commission 

Graph 1.4: 

Investment growth and  contributions, % 

Financial sector and private debt 

The  Estonian  banking  sector  remains  sound 
overall. Banks are profitable and  well-capitalised, 
and this limits risks to financial stability. Banking 
sector  assets  stand  at  around  110%  of  GDP. 
Concentration  in  the  banking  sector  is  relatively 
high,  as  the  three  largest    banks  hold  85%  of 
banking  sector  assets  and  interest  rates  have  been 
slightly  higher  than  in  the  euro  area  on  average. 
Some money laundering risks remain (see Section 
3.2).  

Private  sector  deleveraging  continued  and 
private  debt  level  appeared  sustainable.  Private 
sector  debt  dropped  to  102%  of  GDP  in  2018, 
below  its  prudential  threshold  and  fundamental 
benchmark (3).  This  is  also  true  for  the  debt 
subcomponents,  household  debt  and  debt  of  non-
financial  corporations.  Overall,  vulnerabilities 
associated  with  private  debt  are  assessed  to  be 
limited. 

(3)  Fundamentals  based  benchmarks  are  derived 

from 
regressions  capturing  the  main  determinants  of  credit 
growth and taking into account a given initial stock of debt. 
Prudential  thresholds  represent  the  debt  threshold  above 
which the probability of a banking crisis is relatively high. 
Methodologies  are  described  in  European  Commission 
(2017)  and  updates  to  the  methodology  have  been 
subsequently proposed in European Commission (2018c).  

Source: European Commission 

Construction sector and housing market  

the  buoyant  demand 

Estonia’s  construction  sector  has  recovered 
given 
for  housing. 
Construction  increased  by  more  than  70%  since 
2010, peaking in 2018-2019, while profitability of 
this activity also picked up considerably. Demand 
for  housing  increased  mainly  in  urban  areas,  and 
so  far  Estonia  does  not  seem  to  face  particular 
housing  supply  shortages  (European  Commission, 
2019f), which helps to contain the upward pressure 
on  house  prices.  House  price  increases  have 
trended downwards to below 6% in the first half of 
2019, with moderate growth in household debt (see 
Section 3.2).  

8 

-2-101234515Q416Q216Q417Q217Q418Q218Q419Q219Q4*20Q2*20Q4*21Q2*21Q4*% change yoyEnergyUnprocessed foodProcessed foodServicesNon-energy ind. goodsHICP-40-30-20-10010203040500103050709111315171921% y-o-yOther constr.DwellingsEquipmentOtherTotalForecast         
                                                           
 
        
1. Economic situation and outlook 

Graph 1.5: 

Breakdown of external position (current and 
capital accounts) 

even  more  positive,  estimated  at  4%  of  GDP  in 
2019. 

Graph 1.6: 

Real effective exchange rate based on unit 
labour cost 

Source: European Commission 

Cost competitiveness 

Source: European Commission 

Cost  competitiveness  compared  to  the  EU  has 
declined  since  2008  as  incomes  have  continued 
to rise. Income convergence continued throughout 
2019  as  wages  increased  significantly  in  both  the 
private  and public  sectors. Income convergence is 
partly  reflected  by  Estonia’s  improved  labour 
productivity  and  has  contributed  to  positive  net 
migration in recent years.  

to 

breach 

average 

continues 

At  the  same  time,  structural  labour  and  skills 
shortages have contributed to an erosion of cost 
competitiveness. Wages have increased faster than 
labour  productivity.  Nominal  unit  labour  cost 
growth  accelerated  to  6.5%  in  2018  and  its  three-
the 
year 
macroeconomic  imbalances  procedure  threshold. 
The  real  effective  exchange  rate  appreciation 
accelerated  to  4.6%  in  2018  but  is  projected  to 
moderate substantially from 2019 onwards. Export 
market  share  is  projected  to  decline,  suggesting 
that  cost  competitiveness  issues  may  increasingly 
weigh  on  export  of  Estonian  firms (4).  Still,  the 
current  account  has  been  in  a  stable  surplus  and 
well  above  the  level  required  to  stabilise  the 
external  debt  position  (see  Graphs  1.5  and  1.6), 
while  the  cyclically  adjusted  current  account  is 

(4)  Bank  of  Estonia  estimated  that,  overall,  dependency  on 
cost  competitiveness  varies  across  sectors  (Eesti  Pank, 
2019). 

9 

Vulnerabilities  associated  with  Estonia’s  net 
international  investment  position  are  limited 
and continue to diminish (see Graph 1.7). The net 
international  investment  position  is  moderately 
negative, at -28% of GDP in 2018, and is forecast 
to improve going forward. It compares favourably 
to  the  prudential  threshold  but  remains  above  the 
benchmark that fundamental drivers would suggest 
is  sustainable.  When  excluding  non-defaultable 
debt instruments, such as foreign direct investment 
and  equity,  Estonia’s  external  position  is  even 
positive,  suggesting  that  associated  vulnerabilities 
are limited.   

Public finance 

The  general  government  budget  is  expected  to 
show  a  small  nominal  deficit  over  2020-2021. 
While  the  2020  budget  plans  some  expenditure 
restraint,  slower  economic  growth  will  affect  tax 
revenues.  Given  that  the  economy  is  forecast  to 
grow below its potential rate in 2020 and 2021, the 
structural  fiscal  position  is  projected  to  improve 
from a deficit of around 1½% of GDP in 2019 to a 
deficit of ½% of GDP by 2021. Public debt is set 
to remain low at about 8% of GDP by 2021, by far 
the lowest level in the EU. 

-30-20-100102001020304050607080910111213141516171819*% of GDPCapital accountSecondary income balancePrimary income balance  Trade balance - services  Trade balance - goodsTrade balanceCurrent account balance (CA)Net lending/borrowing (CA+KA)70809010011012013006Q307Q308Q309Q310Q311Q312Q313Q314Q315Q316Q317Q318Q319Q32010=100EEEA19EU28         
                                                           
        
 
1. Economic situation and outlook 

Demand  for  labour  resulted  in  strong  wage 
increases in 2018. According to Statistics Estonia, 
the average monthly gross wage increased by 7.3% 
in 2018, to €1,310. While wage growth was broad- 
based,  the  rise  was  notably  driven  by  the  public 
sector, given the wage adjustment for teachers and 
medical  personnel.  Compensation  per  employee, 
which  is  somewhat  broader  measure  than  wages, 
increased  by  10.2%  and  the  nominal  unit  labour 
cost by 6.5% in 2018. Wage growth was relatively 
rapid in 2019 but still grow above what is expected 
based  on  the  historical  relationship  with  inflation, 
productivity and unemployment (5). 

Graph 1.9:  Decomposition of rate of change of unit labour 

cost in (EA/EU) - Estonia 

Source: European Commission 

The  purchasing  power  of  employees  increased 
in  recent  years,  but  unevenly  across  different 
income  groups  of  the  population.  In  2018,  real 
wages  increased  by  5.4%.  Estonia’s  statutory 
national  minimum  wage  is  agreed  by  the  social 
partners,  the  Estonian  Employers’  Confederation 
and the  Confederation of Estonian Trade  Unions,. 
At  37%  of  the  average  wage  and  43%  of  the 

in 

labour  productivity,  prices 

(5)  This  is  a  benchmark  for  wage  growth  consistent  with 
internal  and  external  labour  market  conditions.  It  is 
calculated  as  the  wage  growth  predicted  on  the  basis  of 
the 
changes 
unemployment  rate,  and  wage  growth  consistent  with 
constant unit labour cost based real effective exchange rate 
(see  Labour  market  and  wage  developments  in  Europe, 
2018  and  Arpaia  and  Kiss,  2015).  However,  the  wage 
benchmark should be interpreted with caution in the case of 
Estonia,  as  after  a  sustained  period  of  wage  growth,  the 
benchmark predicts a period  of  slower  wage  growth.  This 
is  because  a  period  of  correction  was  observed  in  past 
instances of above- or below-expected wage growth. 

and 

Graph 1.7:  Components of the Net International 

Investment Position 

Source: European Commission 

Labour market 

The  labour  market  has  continued  to  perform 
well.  Employment  increased  in  2018  and  reached 
79.5%,  as  demand  for  labour  has  been  high  in  all 
sectors.  Activity  rates  have  increased  since  2012, 
mostly on the account of positive return migration 
and  higher  activity  of  those  who  study  and  of  the 
elderly.  The  unemployment  rate  decreased  to  just 
over  5%  in  2018.  1.3%  of  the  labour  force  were 
long-term  unemployed  and  youth  unemployment 
declined to 11.9% in 2018. 

Graph 1.8: 

Labour market indicators 

Source: European Commission 

10 

-200-1000100020304050607080910111213141516171819*% of GDPReserve assetsNet portfolio investment, equity and investment fund shares/unitsNet portfolio investment, debt securitiesOther investment (net)Net direct investmentNet financial derivatives and employee stock optionsNet Int'l investment position (NIIP)NENDI (NIIP excluding non-defaultable instruments)727476788082848605101520253035010203040506070809101112131415161718%%EEActivity rate 20-64 (rhs)Unemployment rate 15-74 (lhs)Long-term unemployment rate 15-74 (lhs)Youth unemployment rate 15-24 (lhs)NEET rate 15-24 (lhs)-10-505101520253004050607080910111213141516171819*20*Rate of change y-o-y (%)Inflation (GDP deflator growth)Real Compensation per EmployeeProductivity Contribution (negative sign)Nominal unit labour costULC in EU28        
   
     
                                                           
1. Economic situation and outlook 

median  wage  in  2018,  the  minimum  wage  level 
was among the lowest in the EU. Overall, the share 
of full-time employees earning the minimum wage 
is  around  7%.  According  to  the  labour  market 
analysis,  Estonia’s  minimum  wage  earners  are 
likely  to  be  employed  in  service,  retail  and 
unskilled jobs (Eesti Pank, 2018). 

The risk of poverty is increasing, but inequality 
is  slightly  below  the  EU  average.  The  at  risk  of 
poverty or social exclusion further increased above 
the  EU  average  at  24.4%  in  2018  due  to  the 
income  of  the  poorest  not  keeping  up  with  the 
average  wage  growth.  The  monetary  poverty  rate 
was 
lower 
the  highest  among  people  with 
educational  attainment  and  older  people.  Since 
2011,  the  share  of  people  at  risk  -of  -poverty  has 
increased,  while  the  share  of  people  with  severe 
material  deprivation  and  people  living  in  low- 
work 
intensity  households  has  declined  (see 
Section 3.3). Overall, income inequality decreased, 
as 
top  20%  of 
income  of 
households was five times that of the poorest 20%, 
which is just below the average income inequality 
ratio in the EU. 

the  relative 

the 

Graph 1.10:  At-risk-of-poverty and severe material 

deprivation rates 

Source: European Commission 

Regional development 

The 
socioeconomic  urban-rural  divide  has 
reflected  growing  inequality  in  terms  of  social 

and 

skilled 

average.  Better 

situation,  employment  and  policy  outreach.  In 
2017 (6),  GDP  per  head  in  the  capital  region  was 
113%,  while  in  the  remaining  four  regions  the 
income levels ranged between 45% and 57% of the 
EU 
educated 
workers (7)  have  moved  to  cities,  leaving  behind 
lower-income  and  older  residents.  The  lack  of 
qualified  workforce and of good job opportunities 
has  constrained  the  competitiveness  and  has  had 
negative  social  effects.  The  gap  in  the  at-risk-of-
poverty-rate  between rural areas and cities is high 
and growing (29.5% compared to 22.1% in 2018). 
In  2000-2018,  the  population  decreased  in  all 
Estonian regions except Harjumaa, and almost one 
out  of  four  people  left  Ida-Virumaa  (see  Box 
3.4.2).  

Sustainable development goals 

Estonia  performs  relatively  well  overall  in 
achieving  the  sustainable  development  goals 
(SDGs).  Over  the  past  5  years,  Estonia  has  made 
progress  in  almost  all  areas,  with  the  notable 
exception  of  environmental  goals,  in  particular 
SDG  12  responsible  consumption  and  production 
and  SDG  13  climate  action,  where  a  number  of 
indicators  show  deteriorating  trends.     While  in 
social areas Estonia has performed relatively well, 
its  performance  has  been  persistently  weak  on 
SDG 3 ‘good health and wellbeing’, namely in the 
areas  of  access  to  healthcare  and  the  share  of 
people  with  good  health.  The  situation  has 
remained  challenging  with  respect  to  SDG  5 
‘gender  equality’  and  SDG  8  ‘Decent  work  and 
economic  growth’ due to the  wide  gender gaps  in 
pay  and  inactivity  due  to  caring  responsibilities. 
Estonia  has  performed  well  on  SDG  16  ‘peace, 
justice  and  strong  institutions’  and  SDG  17 
‘partnerships for the goals’.  

(6)  Using  Eurostat  nomenclature  of 

territorial  units  for 

statistics (NUTS 3) level.  

(7)  The  share  of  population  with  tertiary  education  in  rural 
areas decreased to 27%, while it cities it reached 44.7% in 
2018. 

11 

0510152025300506070809101112131415161718% of populationEEAt-risk-of-poverty-or-social-exclusion rateAt-risk-of-poverty rateSevere material deprivationPeople living in low work intensity households 
  
 
                                                           
1. Economic situation and outlook 

Table 1.1: 

Key economic and financial indicators _ Estonia 

(1) NIIP excluding direct investment and portfolio equity shares 
(2) domestic banking groups and stand-alone banks, EU and non-EU foreign-controlled subsidiaries and EU and non-EU 
foreign-controlled branches. 
(3) The tax-to-GDP indicator includes imputed social contributions and hence differs from the tax-to-GDP indicator used in the 
section on taxation 
(4) Defined as the income tax on gross wage earnings plus the employee's social security contributions less universal cash 
benefits, expressed as a percentage of gross wage earnings 
Source: Eurostat and ECB as of 4-2-2020, where available; European Commission for forecast figures (Winter forecast 2020 for 
real GDP and HICP, Autumn forecast 2019 otherwise) 

12 

2004-072008-122013-1620172018201920202021Real GDP (y-o-y)8.4-1.62.25.74.83.82.22.4Potential growth (y-o-y)6.10.32.63.53.53.83.53.4Private consumption (y-o-y)9.7-2.54.22.84.3...Public consumption (y-o-y)4.01.22.41.10.9...Gross fixed capital formation (y-o-y)13.3-4.1-0.912.51.7...Exports of goods and services (y-o-y)14.85.42.23.84.3...Imports of goods and services (y-o-y) 16.62.02.44.25.7...Contribution to GDP growth:Domestic demand (y-o-y)10.5-2.82.44.62.7...Inventories (y-o-y)0.5-0.60.4-0.20.9...Net exports (y-o-y)-2.62.30.0-0.1-0.8...Contribution to potential GDP growth:Total Labour (hours) (y-o-y)0.2-1.10.70.80.40.40.20.1Capital accumulation (y-o-y)3.31.41.21.31.31.41.41.3Total factor productivity (y-o-y)2.60.10.81.51.92.02.02.0Output gap7.5-2.00.72.23.42.91.50.5Unemployment rate7.211.67.35.85.45.15.45.8GDP deflator (y-o-y)8.03.62.43.64.53.43.02.7Harmonised index of consumer prices (HICP, y-o-y)4.64.51.13.73.42.32.12.1Nominal compensation per employee (y-o-y)15.73.55.47.010.27.35.85.8Labour productivity (real, person employed, y-o-y)6.60.00.93.03.5...Unit labour costs (ULC, whole economy, y-o-y)8.63.44.53.96.54.73.63.2Real unit labour costs (y-o-y)0.6-0.12.00.21.91.30.60.4Real effective exchange rate (ULC, y-o-y)6.80.73.73.85.82.01.00.9Real effective exchange rate (HICP, y-o-y)2.00.91.81.54.50.2-0.40.1Net savings rate of households (net saving as percentage of net disposable income)-7.54.54.85.87.1...Private credit flow, consolidated (% of GDP)25.11.94.84.83.7...Private sector debt, consolidated (% of GDP)104.4129.9113.9107.6101.5...of which household debt, consolidated (% of GDP)36.149.439.539.338.4...of which non-financial corporate debt, consolidated (% of GDP)68.380.574.468.363.1...Gross non-performing debt (% of total debt instruments and total loans and advances) (2).5.62.01.91.3...Corporations, net lending (+) or net borrowing (-) (% of GDP)-7.11.51.22.43.20.91.31.3Corporations, gross operating surplus (% of GDP)33.030.130.529.729.628.828.828.6Households, net lending (+) or net borrowing (-) (% of GDP)-5.71.41.21.01.83.43.23.3Deflated house price index (y-o-y).-10.49.71.82.1...Residential investment (% of GDP)5.33.13.94.64.6...Current account balance (% of GDP), balance of payments-12.6-1.01.12.72.01.41.61.6Trade balance (% of GDP), balance of payments-8.03.03.54.33.5...Terms of trade of goods and services (y-o-y)1.8-0.31.00.90.40.10.40.2Capital account balance (% of GDP)1.23.11.71.01.4...Net international investment position (% of GDP)-78.4-65.4-43.9-32.5-27.7...NENDI - NIIP excluding non-defaultable instruments (% of GDP) (1)-16.8-16.213.820.125.7...IIP liabilities excluding non-defaultable instruments (% of GDP) (1)79.492.676.368.260.0...Export performance vs. advanced countries (% change over 5 years)57.529.813.1-0.6-1.3...Export market share, goods and services (y-o-y)7.91.30.6-0.12.31.3-1.2-0.9Net FDI flows (% of GDP)-6.4-4.9-1.3-3.9-4.7...General government balance (% of GDP)2.3-0.80.1-0.8-0.6-0.2-0.2-0.2Structural budget balance (% of GDP)..-0.1-1.8-2.2-1.6-0.9-0.5General government gross debt (% of GDP)4.66.810.29.38.48.78.48.2Tax-to-GDP ratio (%) (3)30.732.532.732.933.033.233.233.3Tax rate for a single person earning the average wage (%) (4)19.819.119.018.414.6...Tax rate for a single person earning 50% of the average wage (%) (4)15.215.515.015.56.0...forecast 
   
 
2.  PROGRESS WITH COUNTRY-SPECIFIC RECOMMENDATIONS 

of 

all 

93% 

Since  the  start  of  the  European  Semester  in 
2011, 
country-specific 
recommendations  addressed  to  Estonia  have 
recorded at least ‘some progress’.8  20% of these 
country-specific 
(CSRs) 
recorded  ‘substantial  progress’  and  7%  ‘limited 
progress’ (see Graph 2.1).  

recommendations 

Graph 2.1:  Overall multiannual implementation of 2011-

2019 CSRs to date 

* The overall assessment of the country-specific 
recommendations related to fiscal policy excludes 
compliance with the Stability and Growth Pact 
** 2011 annual assessment: Different CSR assessment 
categories 
*** The multiannual CSR assessment looks at the 
implementation until 2020 Country Report since the CSRs 
were first adopted. 
Source: European Commission 

Over 
the  past  years,  Estonia  has  made 
substantial progress in addressing the challenge 
of the shrinking labour force. It has improved the 
labour  market 
integration  of  people  with 
disabilities  through  the  Work  Ability  reform, 
which  has been in  force since July 2016. Specific 
measures  have  been  deployed  for  bringing  young 
people and the long-term unemployed to the labour 
market, helping to lower the unemployment rates.  

Estonia improved work incentives by reducing the 
tax  burden  on  low-income  earners,  lowering  the 
unemployment  insurance  contribution  rate  and 
abolishing  the  fringe-benefit  tax  on  work-related 
studies.  

(8) For the assessment of other reforms implemented in the past 

see, in particular, section 3 

Steps  have  been  taken  to  reduce  the  very  high 
gender pay gap. The implementation of the 2016-
2023 Welfare Plan addresses gender segregation in 
the  labour  market.  The  parental  leave  and  benefit 
system  has  been  reorganised.  Some  changes 
already  in  force  include  greater  flexibility  and 
incentives for parents to take up jobs.  

Estonia  has  made  progress  in  improving  the 
labour  market  relevance  of  the  education  and 
training systems. The funding model of the higher 
in  2017.  The  skills 
education  was  changed 
forecasting  tool  OSKA  was  introduced  in  2016, 
and it is continuously assessed and improved.  

Regarding  R&I,  Estonia  has  made  progress  in 
strengthening  its  R&D  system,  but  not  in  the 
business  sector.  The  country’s  difficulties  in 
retaining  researchers  in  business  organisations 
have turned into a permanent weakness. However, 
there  are  signs  that  the  governance  of  the  R&D 
system is  improving in terms of  merging research 
and  business  strategies  and  making  strategic 
choices. 

Estonia  has  made  some  progress 
addressing 
2019 
recommendations (CSRs).  

in 
country-specific 

the 

(9) 

With  respect  to  the  CSR  1,  Estonia  has  made 
limited  progress  as  regards  ensuring  effective 
supervision and the enforcement of the anti-money 
laundering  framework.  While  steps  have  been 
taken  against  non-compliant  credit  institutions, 
limited resources and tools hamper effective action 
by supervisors and the full implementation of risk-
based  supervision.  The  delay  in  introducing  new 
sanctioning thresholds limits the deterrent effect of 
supervisory fines. While more resources are being 
allocated  to  the  Financial  Intelligence  Unit  and  to 
the Prosecutor’s Office, proactive cooperation  has 
still  not  been  achieved.  The  number  of 
prosecutions and convictions of money laundering 
cases remains limited. 

(9)  Information  on  the  level  of  progress  and  actions  taken  to 
address  the  policy  advice  in  each  respective  subpart  of  a 
CSR  is  presented  in  the  overview  table  in  Annex  A.  This 
overall  assessment  does  not  include  an  assessment  of 
compliance with the Stability and Growth Pact. 

13 

No Progress0%Limited Progress7%Some Progress73%Substantial Progress20%Full Implementation0% 
   
                                                           
                                                           
2. Progress with country-specific recommendations 

Table 2.1: 

Assessment of implementation of 2019 country-specific recommendations 

Source: European Commission 

With  respect  to  CSR  2,  Estonia  made  some 
progress  in  improving  the  adequacy  of  the  social 
safety  net  with  regard  to  pensions  and  benefits. 
Disability benefits for children have increased two- 
to threefold as of 2020.  Annual pension increases 
come  in  particular  from  indexation  of  pensions, 
subsistence  benefits,  and  work  ability  allowances. 
From April 2020, the basic pension will marginally 
increase.  The  changes  to  the  second  pillar  are 
expected  to  reduce  the  future  sustainability  and 
adequacy of pensions.  

Estonia  made  limited progress in providing good 
quality  and  affordable  social  services  and  this 
remains an outstanding challenge. Some measures 
have been taken, e.g. care homes have been made 
more  energy  efficient,  homes  made  more 
improved  and  a 
transport 
accessible,  social 
dementia  competence  centre  developed.  There  is 
an  agreement    on  the  concept  regarding  the  
financing  and  management  model  for  the  long-
term  care.  However,  a  new  framework  for 
integrated  provision  of  social  and  healthcare 
services has yet to be designed and implemented.  

Estonia  made  some  progress  in  reducing  the 
gender  pay  gap.  From  July  2020,  paternal  leave 
will increase from 10 days to 30 days and the use 
of the parental leave period will become flexible or 
the  first  3  years  of  the  child’s  life.  Estonia  is 
developing  information  technology  tools  to  help 
employers  to  increase  pay  transparency  and  is 
running  a 
the 
unexplained part of the gender pay.  

research  project 

to  address 

Estonia  made  some  progress  in  improving  the 
labour  market  relevance  of  higher  and  vocational 
education.  The  forecasting  system  OSKA  was 
evaluated  to  know  how  to  make  the  skills  supply 
match  the  labour  market  demand  at  each  level  of 
the education and training system.  

With respect to CSR 3 (investment), Estonia made 
limited progress. R&D investments in the private 
sector  have  remained  low  and  have  decreased 
further  over  the  last  years  to  0.59%  of  GDP  in 
energy 
2018.  Regarding 
infrastructure,  Estonia  has  made 
substantial 
progress,  as  the  implementation  of  the  Baltic 

investment 

in 

14 

Estonia (CSR 1 is euro area relevant) Overall assessment of progress with 2019 CSRs: Some CSR 1: 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.  Limited progress to ensure effective supervision and the enforcement of the anti-money laundering framework CSR 2: 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. Some progress   Some progress to improve the labour market relevance of both higher and vocational education  Some progress to improve the adequacy of the social safety net  Limited progress to improve access to affordable and integrated social services  Some progress to reduce the gender pay gap CSR 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. Limited progress  Some progress to focus investment-related policy on energy infrastructure and on energy efficiency  Limited progress to focus investment-related policy on R&I and on resource efficiency  No progress to focus investment-related policy on sustainable transport   
  
 
2. Progress with country-specific recommendations 

interconnection  project  is  proceeding  as  expected. 
Estonia  has  made  some  progress  with  regards  to 
investment  in  energy  efficiency,  but  improving 
access  of  low  and  medium  income  households  to 
finance  could  facilitate  further 
improvements. 
Estonia  has  made  limited  progress  in  focusing  its 
investment  on  resource  efficiency  of  companies 
and  no  progress  with  focusing  its  investment 
related economic policies on sustainable transport. 
The  assessment  of  CSR  3  (investment)  does  not 
take into account the contribution of the EU 2021-
2027 cohesion policy funds (10).  

request 

from  a  Member  State, 

Upon 
the 
Commission can provide tailor-made expertise via 
the Structural Reform Support Programme to help 
design  and  implement  growth-enhancing  reforms. 

(10)  The  regulatory  framework  underpinning  the  programming 
of  the  2021-2027  EU  cohesion  policy   funds,  has  not  yet 
been  adopted  by  the  co-legislator,  pending  amongst  other 
financial 
things  an  agreement  on 
framework. 

the  multiannual 

in 

for 

the 

example, 

supported 

Since  2017,  such  support  has  been  provided  to 
Estonia  for  16  projects.  In  2019,  several  projects 
the  ground.  The 
have  been  delivered  on 
the 
Commission, 
authorities 
full  digitisation  of the 
construction  sector..  The  Commission  is  also 
supporting  Estonia’s  efforts  to  provide  social  and 
health  services  in  a  more  integrated  and  data-
supported  way.  In  addition,  by  supporting  the 
Estonian  government  in  its  fight  against  cyber-
crimes,  the  Commission  laid  the  groundwork  for 
more  effective  prevention, 
investigation  and 
prosecution of those crimes. In 2019, work started 
on an input study to inform the new transport and 
mobility  masterplan,  on  building  a  stronger  link 
between  the  use  of  spending  reviews  and  the 
performance  based  budget  processes,  and  on 
improving  labour  market  services.  Support  also 
started on data management as a pre-condition for 
e-Government  and  digital  public  administration, 
with  the  aim  of  fully  benefitting  from  the  main 
emergent technologies in the future. 

15 

                                                           
2. Progress with country-specific recommendations 

Box 2.1: EU funds and programmes to address structural challenges and to foster growth 
and competitiveness in Estonia 

Estonia is one of the countries benefiting most from EU support. The financial allocation from the EU Cohesion policy 
funds (1) for Estonia amounts to €4.7 billion in the current Multiannual Financial Framework, equivalent to around 2.8% of 
the GDP annually or around 52.9% of all public investment per year on average. As of the end of 2019, some €3.9 billion 
(around 86% of the total amount planned) was allocated to specific projects, while €2.2 billion was reported as spent by the 
selected projects (2) showing a level of project implementation well above the EU average. 
While  bringing  about  a  more  harmonious  development  through  reducing  economic,  social  and  territorial 
disparities, EU Cohesion policy funding also plays a significant role in addressing structural challenges in Estonia. 
The Cohesion Policy programmes for Estonia have allocated EU funding of €1.00 billion for smart growth, €1.1 billion for 
sustainable  growth  and  sustainable  transport  and  €1.3  billion  for  inclusive  growth.  In  2019  following  a  performance 
review (3) €202.4 million have been made available within performing priorities for Estonia.  
EU Cohesion policy funding is contributing to major transformations of the Estonian economy by promoting growth 
and employment via investments, among others, in research, technological development and innovation, competitiveness of 
enterprises, sustainable transport, employment and labour  mobility. By 2019, investments driven by EU Cohesion Policy 
funds have already led to building or modernisation of 201 km of roads, both at regional level and in connection with the 
Trans-European Transport Network, support was already decided for 10763 enterprises including 449 start-ups, generating 
1178 new jobs. Funds contributed also to the reduction of greenhouse gas emissions by 35 198 tons of CO2.  
Using the resources of European Regional Development Fund and Horizon 2020 project Tartu opened bike-sharing system 
in 2019. The system includes 69 electrically provided bike stations and 750 bikes (500 of them are electrical). The biggest 
bike-sharing network in the Baltics has 36,000 registered users.  
The European Social Fund is focusing on boosting jobs opportunities and tackling youth unemployment. The Work Ability 
reform helps, with the support of ESF, to activate persons with reduced work ability. By the end of 2018, more than 21 500 
persons with reduced work ability have taken up a job. Also 557 ex-prisoners were re-integrated into the job market since 
2015, with more than half of them having found a job. 120 600 young people and 48 500 adults have participated in career 
counselling. 46 000 adults have benefitted from upskilling trainings. 1 000 childcare places have been created.  

Agricultural and fisheries funds and other EU programmes also contribute to addressing the investment needs. 
Combined with national co-financing, the European Agricultural Fund for Rural Development (EAFRD) makes available 
in total €0.9 billion to promote improved competitiveness in the agri-food sector, to deliver on environmental priorities and 
to  address  development  disparities  in  rural  areas  while  the  European  Maritime  and  Fisheries  Fund  (EMFF)  contributes 
€129.13 million. Estonia benefits from other EU programmes, such as the Connecting Europe Facility, which allocated EU 
funding of €221.8 million to specific projects on strategic transport networks, Horizon 2020 which allocated EU funding of 
€178.2 million (including 113 small and medium sized enterprises with about €43.9 million).   
EU funding contributes to mobilisation of important private investment. By the end of 2018, European Structural and 
Investment funds (4) supported programmes to mobilise additional capital by committing about €218.4 million in the form 
of  loans,  guarantees  and  equity (5),  which  is  4.8%  of  all  decided  allocations  of  the  European  Structural  and  Investment 
funds (ESIF). 
EU funds already invest substantial amounts on actions in line with the Sustainable Development Goals . In Estonia, 
European Structural and Investment Funds support 11 out the 17 SDGs and up to 95% of the expenditure is contributing to 
those.  

(1)  European Regional Development Fund, Cohesion Fund, European Social Fund, including national co-financing. 
(2)  https://cohesiondata.ec.europa.eu/countries/EE  
(3)  The performance review is regulated by Article 22 of the Regulation (EU) No 1303/2013, the amount includes national 

co-financing. 

(4)  European Regional Development Fund, Cohesion Fund, European Social Fund, European Agricultural Fund for Rural 

Development and European Maritime and Fisheries Fund. 

(5)  Member States´ reporting on financial instruments based on Article 46 Regulation 1303/2013, cut-off date 31/12/2018. 

16 

 
3.  REFORM PRIORITIES 

3.1.  PUBLIC FINANCES AND TAXATION 

3.1.1.  BUDGETARY DEVELOPMENTS AND FISCAL 

FRAMEWORK  

Estonia’s  public  finances  have  kept  the  debt 
ratio  at  a  very  low  level,  but  fiscal  policy  has 
been pro-cyclical. Public expenditure growth was 
rapid  in  recent  years,  when  real  growth  outpaced 
potential growth. Public finances were in a higher-
than-planned  deficit  over  the  economic  upturn 
years.  In  2018  and  2019,  Estonia 
increased 
expenditure  increased  on  healthcare,  education, 
social  funding,  the  financing  of  local  government 
infrastructure.  Social 
mergers,  and 
(pensions,  parental  benefits)  has 
expenditure 
grown  relatively  rapidly  due 
indirect 
automatic link to overall wage growth. At the same 
time,  Estonia's  public  debt  was  8.4%  of  GDP  in 
2018, by far the lowest level in the EU.  

transport 

to  an 

the 

fiscal 

Pro-cyclical  policy  in  good  economic  times  has 
reduced  fiscal  leeway  in  the  current  cyclical 
economic  moderation.  Estonia's  fiscal  position 
recorded  a  nominal  deficit  of  0.6%  of  GDP  in 
2018,  during  the  peak  of  the  economic  cycle, 
which corresponded to a structural fiscal deficit of 
less 
over  2%  of  potential  GDP.  While 
favourable  economic  outlook  is  set  to  affect 
revenues,  there  is  also  the  need  to  correct  for  
previous 
slippages,  putting  additional 
pressure  on the budget. The  2020 budget foresees 
some  expenditure  restraint,  especially  regarding 
locally-funded investments and some categories of 
central  government  wages.  On the back of  slower 
revenue  growth, the budget is projected to remain 
in  a  small  nominal  deficit  of  0.2%  in  2020  and 
2021, according to the Commission 2019 Autumn 
forecast. Given that economic growth is forecast to 
slow down and to operate well below its potential 
in  2020  and  2021,  the  structural  fiscal  position  is 
projected to improve from a deficit of around 1½% 
of GDP in 2019 to about 1% of GDP in 2020 and 
½% of GDP in 2021.   

Estonia’s fiscal framework is based on a budget 
balance  rule  defined  in  structural  terms,  but 
does  not  make  use  of  expenditure  rules.  The 
exclusive  focus  on  the  structural  balance  rule  in 
Estonia has limited the importance and visibility of 
notably, 
other 

indicators.  Most 

relevant 

the 

rapid 

growth 

expenditure  rules,  or  binding  expenditure  targets 
the  medium-term 
have  not  been  used  and 
budgetary  framework  does  not  provide  sufficient 
protection  against  expenditure  volatility.  This 
counter-cyclical 
reduces 
framework’s 
public 
properties.  The 
expenditures  in  2018  and  2019  could  not  be 
assessed 
expenditure 
constraint,  such  as  an  expenditure  rule,  medium-
term  ceiling  or  target,  reducing  the  ability  to 
control  expenditure  dynamics.  As  a  way 
to 
mitigate  possible  risks,  a  regular  assessment  of 
developments  on  the  expenditure  side  of  the 
the  national  budgetary 
budget  could 
process (11). 

any  domestic 

against 

inform 

in 

Changes to the pension system 

The  current  pension  system  stands  on  three 
pillars:  the  public  pay-as-you-go  system  (first 
pillar),  mandatory  pension  funds  (second  pillar) 
and  voluntary  pension  funds  (third  pillar).  The 
second  and  third  pillars  are  funded.  The  pension 
system is financed from the 33% social tax rate, of 
which  a  20%  rate  is  designated  for  pensions.  For 
people who do not participate in the second pillar, 
the 20% social tax goes entirely into the first pillar 
state  pension 
second  pillar 
insurance.  For 
participants, the 20% social tax is split into 16% to 
the  first  pillar  and  4%  to  their  personal  second 
pillar  account.  In  this  case,  employees  pay  an 
additional 2% of their salary into the second pillar. 

functioning  of 

the  second  pillar 

in  the  system.  The  second  pillar 

The 
is 
hampered  by  low  returns,  which  undermines 
trust 
is 
mandatory for  people  born  after  1983,  or  for 
people  who  have  at  some  point  in  time  opted  to 
the  second  pillar.  The  management  of 
join 
investments has been outsourced to private pension 
funds.  Since  their  creation  in  the  early  2000s, 
Estonia’s second pillar funds have delivered one of 
the  lowest  nominal  and  real  returns  (adjusted  for 
inflation)  in  the  EU  (OECD,  2019b).  The  low 
relatively  high 
returns 

explained  by 

are 

(11)  Such  an  assessment  could  for  example  be  made  by  the 
Fiscal  Council  (www.eelarvenoukogu.ee),  which  is  an 
independent body assessing the macroeconomic and public 
finance  forecasts  used  for  budgetary  planning  and 
monitoring compliance with the domestic budgetary rules, 
as well as EU budgetary rules. 

17 

 
                                                           
3.1. Public finances and taxation 

population  exposed  to  high  risks  of  poverty  and 
social exclusion (see Section 3.3.2)(15). 

The  changes  imply  more  immediate  revenues 
for the first pillar and additional one-off budget 
revenues,  at  the  expense  of  long-term  pension 
funding.  For  people  exiting  the  second  pillar,  the 
4%  social  tax  is  redirected  to  the  first  pillar.  This 
raises  the  revenues  of  the  first  pillar  and,  as  one 
option, can be used to raise current pensions above 
the usual pension indexation,  which is the  plan of 
the  current  government.  Cashed  out  pension 
savings are subject to a 20% income  tax (or 10%, 
if the savings are taken out at the pensionable age). 
For  this  reason,  the  short-term  effects  on  public 
finances  are  likely  to  be  positive,  though  at  the 
expense of long-term pension funding. 

risks 

Analysis  of  the  proposed  reform  has  also 
highlighted  macroeconomic 
and 
challenges  for  the  financial  sector  and  capital 
markets.  The  Bank  of  Estonia’s 
impact 
assessment  flagged  that  sharply  unwinding  the 
pension funds would increase economic volatility. 
In  2018,  the  accumulated  assets  in  the  second 
pillar funds amounted to about €4.5 billion or 17% 
of  GDP.  A  partial  withdrawal  of  these  savings 
would  temporarily  boost  domestic  demand,  but 
cause  an  opposite  effect  once  the  stimulus  runs 
out.  The  magnitude  of 
this  macroeconomic 
volatility  would  depend  on  the  share  of  people 
exiting the funds in a given year, which is hard to 
predict (as discussed above). Moreover, as 17% of 
the  current  savings  are  invested  in  the  Estonian 
economy,  withdrawal  from  the  second  pillar  may 
have  structural  effects  on  the  Estonian  financial 
and capital markets. In fact, the financial sector has 
to 
already 
minimise  possible  negative  effects  (see  Bank  of 
Estonia,  2019).  Shrinking  resources  in  the  second 
pillar  would  make  it  more  difficult  for  the  local 
financial  market  to  grow,  hampering  the  diversity 
of the funding in the economy.  

started  operational 

adjustments 

management  fees  and  investment  restrictions  into 
riskier  (but  potentially  more  profitable)  asset 
classes  (Piirits,  Laurimäe,  2019).  The  legislative 
changes  entered  into  force  in  January  2019  to 
lower  the  pension  fund’s  management  fees  and 
reduce  investment  restrictions  with  the  aim  of 
improving investment returns (12).   

and 

the  Parliament 

In November 2019, the government submitted a 
bill 
that  would  make 
to 
participation 
in  the  second  pension  pillar 
voluntary. The  government  did not carry out any 
impact  assessments  prior  to  these  fundamental 
a  week-long 
changes 
launched  only 
consultation  of  social  partners.  Under 
this 
legislative  proposal,  as  of  2021  current  second 
pillar  savers  have  broadly  three  options:  1)  to 
continue  saving  through  pension  funds;  2)  to 
manage 
in  an 
their  own  pension  savings 
‘investment  account’  without  leaving  the  second 
pillar  system (13);  3)  to  leave  the  second  pillar, 
either  by  cashing  out  the  accumulated  savings  or 
by 
keeping 
accumulated  savings  in  the  pension  funds.  New 
entrants  to  the  labour  market    and  those  currently 
out  of  the  2nd  pillar  would  be  free  to  decide 
whether  to  join  the  second  pillar  or  not.  Overall, 
these  proposed  changes  do  not  address  the  causes 
of  low  returns  in  the  second  pillar,  but  give  the 
right to exit the pillar. 

contributions  while 

ending 

the 

The number of people who will exit the second 
pillar is highly uncertain. Surveys have indicated 
that about 20-45% of people will consider exiting 
the  second  pillar,  with  low-income  employees 
(who  generally  also  have 
lowest  public 
pensions)  more  likely  to  exit (14).  These  choices 
might  also  change  over  the  years  in  reaction  to 
personal  life  events,  economic  cycles  and  the 
future  performance  of  the  funds.  Notwithstanding 
those  uncertainties, it is likely that the  importance 
of  the  second  pillar  will  dwindle  and  that  the 
adequacy  of  the  overall  pensions  will  become 
more  dependent  on  the  first  pillar  pay-as-you-go 
entitlements,  which  so  far  have  left  the  elderly 

(12)  Changes 

to 

the 
the  Investment  Funds  Act 
management  fees  by  one  third  and  100%  of  the  fund  can 
now be invested in equities (previously 75%).  

lowered 

(13)  In  this  case  private  individuals  would  hope  to  achieve 
higher  returns  than  pension  fund  managers  by  making 
investment decisions on their own.  

(14)  Public  opinion  surveys  from  Kantar  Emor  and  Turu-

uuringute AS. 

(15)  With  regard  to  parental pension,  the possibility  of  opt  out 
from  the  second  pillar  will  create  a  third  category  of 
parents  who  formerly  contributed  to  the  second  pillar  but 
after  cash  out  will  not  receive  any  pension  supplement  in 
the  first  pillar.  Future  pensions  of  these  parents  will  most 
likely be lower than for the ones who continue contributing 
to the second pillar and the ones who never contributed to 
the second pillar 

18 

                                                           
                                                           
3.1. Public finances and taxation 

Debt sustainability analysis and fiscal risks 

Graph 3.1.1:  Public expenditure by function 

Government-sector  revenues  and  expenditures 
are  lower  than  the  EU  average,  with  relatively 
low  spending  on  pensions  and  healthcare. 
Estonia’s 
tax  burden  has  historically  been 
relatively  low  (see  Section  3.1.2),  which  in  turn 
translates into lower-than-average public spending. 
Notably, Estonia  spends less  than the  EU average 
on healthcare and social protection, including old-
age  pensions  (see  Graph  3.1.1).  Considering 
Estonia’s  relatively  weak  performance  on  social 
cohesion and healthcare (see Section 3.3), this may 
also  mean  that  some  public  functions  have  been 
under-funded.  

pension 

spending.  Long-term 

Medium-  and  long-term  fiscal  sustainability 
risks  are  limited,  given  the  very  low  level  of 
public debt and a projected decrease in public first 
pillar 
fiscal 
sustainability  risks  are  currently  estimated  to  be 
low  because  future  spending  pressures  related  to 
population ageing are contained (see Annex B). In 
particular,  public  first  pillar  pension  expenditures 
as  a  share  of  GDP  is  projected  to  fall  steadily 
through  to  2070  according  to  the  2018  Ageing 
Report,  mainly  due  to  a  decline  in  the  public 
benefit ratio, i.e. average public pensions vis-à-vis 
average  wages (16). The total (public plus private) 
pension  benefit  ratio  was  projected  to  remain 
broadly  stable  as  the  decline  in  public  pension 
spending  was  intended  to  be  compensated  by  the 
growing  private  second  pillar  pensions.  These 
fiscal  sustainability  projections  do  not  yet  include 
the  potential  effects  of  the  upcoming  changes  to 
the second pillar pension funds, discussed above. 

(16)  The decline in the first pillar occurs for two reasons. First, 
public pensions grow at a slower pace than wages because 
they are indexed 80% to social taxes and 20% to consumer 
prices.    Secondly,  it  reflects  the  assumed  continuing 
transition  to  a  two-pillar  pension  system  whereby  the 
through  part  of  the  social 
second  pillar  is  funded 
contributions  (a  4%  share  of  social  tax  is  redirected  from 
the  first  pillar  to  the  second  pillar).  These  projections  do 
not yet include the upcoming changes to the second pillar. 

Source: European Commission 

The  adequacy  of  pension  and  healthcare 
expenditure will remain a concern in the longer 
term. The share of the elderly population at risk of 
poverty  in  Estonia  is  above  the  EU  average  (see 
Section 3.3.2.). Due to population ageing, the ratio 
of employees per pensioner is projected to decline 
from 2.2 in 2018 to 1.6 in 2060 (Bank of Estonia, 
the  pension 
2019).  This  would  exacerbate 
adequacy  concerns  under 
trends, 
especially if the second pillar unwinds. In the past, 
low adequacy of pensions and healthcare spending 
was 
through  consecutive  ad  hoc 
increases of pensions on top of the indexation rate 
and by injections into the healthcare fund.  

the  current 

remedied 

Making  participation 
in  the  second  pillar 
voluntary  implies  less  prefunding  for  pensions 
and  more  uncertainty  in  the  long  term.  It 
undermines 
the  multi-pillar  pension  approach 
followed during the past two decades, and reduces 
the  diversification  of  pension  income  and  risks. 
Moreover, the envisaged unwinding of the second 
pillar  scheme  might  result 
lower  overall 
replacement rates in the long term, which would be 
problematic given the already rather low adequacy 
in 
of  Estonian  pensions.  Strong  declines 
replacement  rates  would  likely  be  socially  and 
economically  untenable  and  might  require  higher 
public spending and thus higher taxes. 

in 

19 

0510152025303540455002468101214161820General public servicesDefencePublic order and safetyEconomic affairsEnvironmental protectionHousing and communityamenitiesHealthRecreation, culture andreligionEducationSocial protectionOld ageTotalEuropean Union - 28 countriesEstoniaEU28 total (right axis)Estonia total (right axis)% of GDP% of GDP                                                           
   
3.1. Public finances and taxation 

emissions of 132 grammes per kilometre compared 
to  the  EU  average  of  118.5  grammes  in  2017 
(European  Environment  Agency,  2018). 
In 
addition,  the  government’s  plan  to  reduce  the  tax 
rate for transport fuels does not provide consumers 
with  an  incentive  to  replace  their  vehicles  with 
environmentally  friendlier  alternatives.  The  2030 
Estonian  National  Energy  and  Climate  Plan  
recommends  introducing  a  congestion  charge  for 
the  capital  city  and  more  environmentally 
motivated  parking  fees  at  municipal  level,  but 
lacks any country-wide strategy for transport taxes. 

that 

inequality 

The  income  tax  reform  somewhat  reduced 
income 
pensioners.  The 
for 
Commission  expected  in  the  2019  country  report 
that  the  2018  tax  reform  would  have  a  limited 
effect  on  reducing  income  inequality  as  measured 
by the Gini coefficient, because the income of the 
poorest  households  depends  on  pensions  or 
subsistence    benefits.  However,  the  preliminary 
estimates  suggest 
the  reform  somewhat 
reduced  the  previously  relatively  high  tax  wedge 
for  low  and  middle-income  earners.  According  to 
the  Ministry  of  Finance  of  Estonia,  based  on  the 
tax  returns  filed  by  employers  and  social  security 
bodies  for  the  first  11  months  of  2018 (18),  the 
effective  tax  rate  decreased  for  64%  of  income 
earners and remained the same for 23% of income 
earners. The effective tax rate increased for 13% of 
income  earners.  The  effective  tax  rate  decreased 
for  55%  of  old  age  pensioners  who  do  not  work, 
increased for 1% and remained the same for 44%. 
For old age pensioners who work, the effective tax 
rate  decreased  for  63%,  increased  for  35%  and 
remained  the  same  for  2% (19).  This  seems  to 
suggest 
tax  reform  generally 
improved the situation of about half of the old age 
pensioners  who  do  not  work.  Besides  that,  it 
encouraged individuals to earn more, but provided 
a  disincentive 
for  higher  earning  old-age 
pensioners to be active on the labour market. There 
is  no  data  about  the  effect  of  the  tax  reform  on 
other types of low-income deciles. However, since 
the  subsistence  benefits  did  not  constitute  taxable 
income before or after the tax reform, the 2018 tax 

the  2018 

that 

(18)  https://blogi.fin.ee/2019/01/maksuvaba-tulu-reform-2018-

esialgsed-tulemused-ja-ootused/ 

(19)  With the new system, workers with average income in the 
range  of  €487-€1,776  per  month  and  pensioners  with 
income  in  the  range  of  €417-  €1,351  per  month  paid  less 
income tax for 2018 than for 2017. 

3.1.2.  TAXATION FRAMEWORK  

framework 

The  Estonian 
is 
taxation 
characterised by low taxation of income, capital 
and  property  and  a  high  reliance  on  indirect 
taxes.  In  2018,  the  total  tax  burden  in  Estonia  at 
32.8% was considerably below the EU average of 
39.2 %  of  GDP  (Eurostat,  2019).  Revenues  from 
labour taxes  were  low (16.6% of GDP) compared 
to  the  EU  average  (19.64%  of  GDP)  in  2018 
(European  Commission,  2020).  Corporate  income 
taxes and taxation of household capital income are 
also below the EU average. Estonia has no wealth 
tax and the taxation of capital is the lowest among 
all  Member  States  (2.48%  compared  to  an  EU 
average  of  8.5%  of  GDP),  with  low  tax  revenues 
from  both  capital  stocks  as  well  as  the  various 
types of capital income. Moreover, Estonia has the 
lowest  revenues  from  property  taxes  among  all 
Member States. Revenues from recurrent taxes on 
immovable  property,  which  are  considered  to  be 
among the most growth-friendly taxes amounted to 
0.2% of GDP in 2018, significantly below  the EU 
average 
(European  Commission, 
2020)(17).  On  the  other  hand,  at  13.8%,  revenues 
from  consumption  taxes  were  above  the  EU 
average  of  11.1%  of  GDP  in  2018  (European 
increases  budget 
Commission,  2019a),  which 
lesser  consumer 
in  periods  of 
vulnerability 
demand.  

1.5% 

of 

There  is  scope  to  improve  the  contribution  of 
the  tax  system  to  supporting  environmental 
objectives.  Estonia  collects  more  revenue  from 
environmental  taxation  (8.3%  of  total  tax  revenue 
in  2018)  than  the  EU  average  6.14%  (European 
Commission, 2019a), but the majority of it comes 
from a rather narrow base: excise tax on fuels and 
environmental fees for excavating oil shale. At the 
same 
taxes 
(excluding fuel taxes) account for 0.2% of total tax 
revenue,  the  lowest  in  the  EU.  The  Estonian 
vehicle 
support 
environmental  objectives  (European  Commission, 
2019a).  There  is  no  CO2-based  vehicle  tax  in 
result,  new  vehicles 
Estonia 
purchased in Estonia are the most environmentally 
unfriendly  in  the  EU  with  an  average  CO2 

system  does  not 

(2018).  As  a 

revenues 

transport 

taxation 

time, 

from 

(17)  In  terms  of  composition  of  property  taxation,  recurrent 
taxes on immovable property amounted to 0.2% of GDP in 
Estonia,  significantly  below  the  EU  average  of  1.6%  of 
GDP. 

20 

                                                           
                                                           
3.1. Public finances and taxation 

income over the last 12 months. This is above the 
EU  average  of  10%.  The  national  authorities 
estimate  that  in  2018  the  foregone  labour  tax 
revenue was €86 million, consisting of €21 million 
for  totally  undeclared  wages  and  €65  million  for 
partially  undeclared  wages.  Undeclared  payments 
concern  in  particular  sectors  such  as  commerce, 
car  service,  manufacturing,  construction,  and 
information  and  communication  services.  The  tax 
authority  is  planning  to  take  further  measures  to 
fight  tax  evasion,  such  as  introducing  online  cash 
registers,  cooperating  with  banks, 
increasing 
transparency and facilitating access to tax data.  

Financing of municipalities  

fiscal 

reform 

launched 

autonomy 

taxation  possibilities  of 

the 
2017.  The 

local  government  has  not 
The  reform  of 
and 
expanded 
the 
the 
environmental 
local 
municipalities.  Estonia 
local 
in 
government 
governments depend mostly  on tax revenues from 
centrally-levied 
taxes  (European  Commission, 
2019a).  Local  governments  may  only  decide  to 
establish advertising taxes, taxes for closing roads 
and  streets,  motor  vehicle  taxes,  animal  taxes, 
entertainment taxes and parking charges. Although 
most  municipalities  invest  in  infrastructure  to 
facilitate  tourism,  there  is  no  possibility  to  set 
tourism  taxes.  Similarly,  local  governments  are 
responsible for local waste and water management 
but  are  not  able  to  set  any  environmental  taxes 
except  for  motor  vehicle  taxes.  Low  autonomy  in 
defining 
local 
tax  base  might 
governments'  ability 
to  provide  services  and 
incentives  to  attract  businesses,  as  well  as  their 
ability to address local environmental issues. 

limit 

the 

reform did not affect  the  situation of recipients of 
such benefits.  

The  corporate  income  tax  is  favourable  for 
investment  in  general  (European  Commission, 
2019a).  There  are  no  special  provisions  to  favour 
R&D  activities,  but  companies  can  deduct 
business-related R&D expenses and do not have to 
pay income tax on the income that they reinvest in 
R&D. 

The obligation to pay advance corporate income 
tax  for  Estonian  resident  credit  institutions 
seems to put small resident credit institutions at 
a competitive disadvantage. As of 2018, Estonian 
resident  credit 
to  make  an 
institutions  need 
advance payment of corporate income tax. The tax 
rate is 14% and the amount is calculated and paid 
quarterly  on  accrued  profits.  Small  resident  credit 
institutions  claim  that  the  obligation  to  make 
tax 
advance  payments  of  corporate 
hampers 
to  compete  with  large 
their  ability 
foreign-owned credit institutions.  

income 

Estonia  performs  well  on  measures  related  to 
tax  administration  efficiency.  According 
to 
PricewaterhouseCoopers  and 
the  World  Bank 
(World  Bank  Group  and  PwC,  2019),  in  2018  it 
took 50 hours a year for a medium-sized company 
to comply  with tax obligations,  which  is the  most 
efficient  outcome  in  the  EU.  The  time  it  takes  to 
comply  with  and  obtain  a  value-added  tax  refund 
and  the  time  it  takes  to  comply  with  corporate 
income tax audits are among the lowest in the EU. 
E-filing  of  tax  returns  is  wide-spread  and  pre-
filling  data  of  personal  income  tax  returns  is 
widely used.  

Tax  compliance  is  relatively  good;  however, 
undeclared  work,  particularly 
the  partial 
declaration  of  salaries,  remains  an  issue.  The 
value-added  tax  gap  was  5.4%  of  the  total  value-
added  tax  liability  in  2017,  which  marked  an 
approximate 9 percentage point decrease over a 5-
year  period.  It  was  considerably  below  the  EU 
average  of  11.2%  in  2017.  According  to  the  Tax 
and  Customs  Board  of  Estonia,  undeclared  work 
has decreased in Estonia, but the partial declaration 
of  salaries  (‘envelope  salaries’)  remains  an  issue. 
At  the  same  time,  the  preliminary  results  of  the 
Eurobarometer survey from September 2019 (to be 
published in February 2020) show that undeclared 
income in Estonia is estimated at 13% of the total 

21 

3.2.  FINANCIAL SECTOR 

interest 

income 

The  financial  position  of  the  Estonian  banking 
sector is strong. Banks remain profitable thanks to 
high  efficiency,  good  quality  assets  and  low  cost 
funding coupled  with relatively  high interest rates 
in  a  setting  of  high  market  concentration.  So  far, 
the  price  of  market-based  (parent  bank)  funding 
has remained favourable, despite the suspicions of 
money laundering that have affected several banks 
operating  in  Estonia  and  the  groups  owning 
Estonian  banks.  Moreover,  despite  low  interest 
rates and a negative Euribor, banks have managed 
to  maintain 
and  general 
profitability.  This  translates  into  high  levels  of 
return  on  equity,  while  the  return  on  assets 
amounted  to  1.1%  (Table  3.2.1).  The  ability  of 
households and companies to repay their loans has 
remained  strong,  underpinned  by  still  robust 
economic  activity.  As  a  result,  loan  losses  have 
been  very  small;  the  non-performing  loans  ratio 
stood at 1.8 in 2019. This allowed larger banks to 
their  model-implied  risk  weights  and 
reduce 
consequently  their  capital  requirements.  In  2019, 
the  total  capital  ratio  fell  to  27%  on  average,  but 
remains well above the minimum capital adequacy 
requirements  and  the  capital  buffers  currently  in 
force. It consists almost entirely of common equity 
tier  1,  the  highest  quality  capital.  All  banks  meet 
the minimum required liquidity coverage ratio with 
a sufficient margin (average of 135%). 

Table 3.2.1: 

Financial soundness of banks 

ECB aggregated balance sheet: loans excluding to 
government and MFI / deposits excluding from government 
and MFI. Loan-to-deposit ratio excluding cross-border 
operations. 
For comparability only annual values are presented 
Source: ECB CBD2 

Banks  operating  in  Estonia  have  become  less 
dependent  on  their  foreign  parent  banks  and 
now  largely  fund  themselves  from  domestic 
deposits  and  the  wholesale  funding  market. 
Despite  low  interest  rates,  local  deposits  are  still 
outpacing credit growth, with a consistent average 
year-on-year growth of about 9% in 2018 and 7% 
in  2019.  This  has  helped  improve  the  loan-to-

deposit  ratio  to  108%  in  October  2019.  Under  a 
covered  bond  legislation  adopted  in  February  and 
in  force  since  October  2019  lenders  can  use 
mortgage  loans  as  collateral  for  issuing  covered 
bonds.  This  is  expected  to  address  the  small 
funding  gap.  The  implementation  of  the  Covered 
Bonds  Act  could  be  the  first  key  step  towards 
creating  a  pan-Baltic  legal  framework  for  the 
issuance  of  covered  bonds  to  foster  the  Baltic 
capital markets and increase financial stability. 

While  household  debt  is  moderate,  banks’ 
exposure  to  mortgage  debt  is  relatively  high, 
pointing to vulnerabilities. Housing loan demand 
continues  to  be  supported  by  favourable  labour 
market  conditions,  rapid  wage  growth  and  strong 
consumer  confidence,  as  well  as  rising  house 
prices.  Household  debt-to-GDP  stands  at  39%, 
below  the  euro  area  average  of  55%  (2018  data) 
and debt-to-disposable income is 70%, still below 
the euro area average of 94%. However, the share 
of  housing  loans  in  the  total  assets  of  the  banks 
operating  in  Estonia  is  almost  twice  the  average 
level  in  the  euro  area.  This  makes  the  banks 
vulnerable  to  any  negative  change  on  the  real 
estate  market  affecting 
servicing  by 
households.  In  order  to  ensure  that  banks  have 
sufficient  capital 
to  cover  future  risks  from 
housing  loans,  from  30  September  2019,  Eesti 
Pank set a risk weight floor of 15% for Swedbank 
and  SEB.  These  are  the  two  largest  banks  in 
Estonia: they issued 80% of new housing loans in 
Estonia during the  first  half of 2019 and both  use 
internal ratings to assess their risk exposures. This, 
alongside  the  loan-to-value  limit,  debt-to-service 
income ceiling and maximum loan maturity should 
appropriately support macro-financial resilience to 
potential shocks arising from  high household debt 
levels.  

loan 

Structural  changes  in  the  Luminor  Group 
necessitate  monitoring  risks  and  developments 
in  all  Baltic  states  in  the  calibration  of  macro-
prudential  policies.  Following  the  conversion  of 
the  Latvian  and  Lithuanian  subsidiaries  of 
Luminor  Group  into  branches  and  their  merger 
with  the  head  office  in  Estonia,  the  Estonian 
financial  sector  grew  by  almost  half  to  145%  of 
GDP  and  its  credit  portfolio  almost  doubled 
(accounting for branches in Latvia and Lithuania). 
The  three  largest  banks  (Swedbank,  SEB  and 
Luminor)  now  hold  a  market  share  of  85%,  of 
which  the  Swedish  banks  now  account  for  two 

22 

2014q42015q42016q42017q42018q42019q2Non-performing loans3.22.21.71.91.31.8o/w foreign entities2.41.71.31.41.00.7o/w NFC & HH sectors3.52.92.32.41.72.3o/w NFC sector2.82.92.43.22.22.7o/w HH sector4.03.02.21.61.32.0Coverage ratio37.742.446.725.425.029.3Return on equity(1)9.76.811.19.29.89.5Return on assets(1)1.61.11.51.41.41.1Total capital ratio41.835.434.430.631.027.0CET 1 ratio41.334.833.830.030.326.5Tier 1 ratio41.334.933.830.130.426.6Loan to deposit ratio125.3123.7125.1119.0114.0112.5 
 
  
 
3.2. Financial sector 

is 

information  sharing  but  also  show  that  much 
information 
request,  not 
shared  upon 
proactively.  On  the  prosecution  side,  the  case 
opened  at  the  end  of  2018  involving  former 
Danske Bank employees is still pending. 

total  deposit  and 

The  share  of  non-resident  deposits,  which  bear 
a  larger  risk  of  money  laundering,  fell  from 
19%  to  6%  between  2014  and  2018.  In 
particular,  the  share  of  deposits  from  high-risk 
jurisdictions fell from 8.5% to 0.5% over the same 
period.  This  trend  reversed  again  in  2019  as  the 
average value of non-resident deposits increased in 
2019.  However,  the  share  of  non-EU  deposits 
remains  minor  (1%).  These  deposits  are  largely 
held  by  medium  risk  customers.  Only  a  minor 
share of customers are deemed as high risk (0.2%) 
holding  1.2%  of 
require 
appropriate  customer  due  diligence.  Identification 
of beneficial ownership is key in the case of legal 
for  non-resident 
services 
entities.  Custody 
customers also increased in 2019 (+63% compared 
to  2018) (20)  and  account  for  60%  of  all  custody 
services provided by credit institutions operating in 
Estonia.  These  products  might  be    exposed  to 
money  laundering  risks  in  light  of  the  speed  of 
transactions,  the  anonymity  involved  and  reliance 
on  checks  by  institutions  operating  in  other 
include  higher  risk 
jurisdictions,  which  may 
relationships. The deficiencies detected in its credit 
institutions  have  not  yet  fed  into  Estonia’s  risk 
assessment which is to be reviewed. .  

The  government  proposed  a  new  set  of  anti-
money laundering legislation, but most is yet to 
be adopted. In December 2019, Parliament passed 
stricter  rules  for  licenses  to  virtual  currency 
providers  and  wallet  providers  and  enhanced 
supervisory  powers  for  the  Financial  Intelligence 
Unit.  Other  legislation  including  transposition  of 
the EU’s 5th Anti-Money Laundering Directive, the 
the 
higher  ceilings 
introduction  of  confiscation  without  conviction 
powers, have still to be adopted. 

for  misdemeanours  and 

in 

legislative  changes  and  policy 
Delays 
implementation  still  hinder  progress.  The 
delayed submission of legislation to strengthen the 
preventive framework and administrative sanctions 
limits  the  deterrent  effect  of  the  tools  currently 

(20)  Comparison  between  data  for  September  2019  and 

September 2018. 

thirds. Due to banks’ increased  concentration and 
their  strong  interlinkages,  potential  risks  (for 
example  associated  with  the  Swedish  real  estate 
sector)  from  parent  and  neighbouring  countries 
may be transmitted to the Estonian financial sector, 
hence  the  importance  of  holding  sufficient  capital 
buffers  in  order  to  ensure  the  loan  supply  in 
Estonia and liquidity buffers.  

Anti-money laundering 

laundering  and 

Estonia  has  reaffirmed 
its  commitment  to 
terrorism 
fighting  money 
financing  as  key  to  preserving  trust  in  and  the 
stability  of  its  financial  system.  First  hit  by  the 
money  laundering  scandal  involving  the  Estonian 
branch  of  Danske  Bank,  Estonia  has  been  under 
pressure  to  strengthen  its  anti-money  laundering 
system.  Further  scandals  have  since  emerged, 
involving other Nordic credit institutions operating 
in  Estonia.  Finantsinspektsioon,  the  supervisory 
authority,  took  action  against  these  institutions: 
Versobank  AS  in  2018  has  seen  its  licence 
withdrawn and Danske Bank can no longer operate 
recently, 
in  Estonia 
Finantsinspektsioon  cooperated  with  its  Swedish 
counterpart to investigate alleged misapplication of 
money 
the  Estonian 
branches  of  Swedbank  and  SEB.  Due  to  parallel 
judicial  investigations,  the  case  against  Swedbank 
was  dropped.  The  licences  of  three  payment 
institutions  were  also  withdrawn  after  repeated 
violations of anti-money laundering requirements. 

laundering  measures 

2019.  More 

since 

in 

taken 

various  measures 

Despite 
by 
Finantsinspektsioon,  there  is  room  to  further 
enhance  the  effectiveness  of  supervision  and 
inspections 
enforcement.  On-site  supervisory 
remain  limited  (during  2014-2018,  only  ¼  of 
supervised  entities  were  physically  inspected)  and 
Finantsinspektsioon  has  had  to  rely  heavily  on 
extraordinary  inspections  of  credit  institutions 
(43%  of  inspections  in  2014-2018).  Additional 
resources  that  were  received  in  2019  were  only 
partly  directed 
laundering 
supervisory  functions,  with  limited  increases  in 
human resources and skills in this area. In contrast, 
and 
the  Financial 
the 
Prosecutor’s  Office  will 
additional 
dedicated  resources  in  2020  to  increase  their 
capacity in terms of staff, tools and trainings. Data 
on exchange of information between the Financial 
Intelligence  Unit  and  law  enforcers  signal  good 

Intelligence  Unit 
receive 

its  anti-money 

to 

23 

                                                           
3.2. Financial sector 

percentage  of  companies  for  which  insufficient 
collateral  represents  an  obstacle  to  receiving  a 
bank  loan  is  also  higher  than  the  EU  average. 
Public  support  has  been  shifting  from  grants  to 
state-backed 
loans  and  guarantees.  However, 
increasing concentration in the banking sector may 
have  made  obtaining  bank  loans  more  difficult. 
Estonia  has  higher  a  cost  of  borrowing  than  the 
euro  area  average,  and  the  difference  is  more 
pronounced for long-term loans (see Graph 3.2.1). 
The  higher  cost  of  borrowing  and  stricter 
conditions  for  obtaining  loans  could  affect  small 
firms and  firms in rural areas, but also  innovative 
firms.  

funds 

investment 

Cooperation  between 
the  Baltics  helps 
overcoming  market  constraints  on  early-stage 
growth  capital,  but 
in  mature 
companies  is  still  limited.  Cooperation  under  the 
Baltic  Innovation  Fund  helped  the  start-up  eco 
system  in the  region  with  more  than €435  million 
raised  for  investment  in  young  and  growing 
companies. This helped to overcome the small size 
of the national markets. It is expected that over the 
next  5  years,  the  Baltic  Innovation  Fund  2  will 
invest  €156  million  in  private  equity  and  venture 
developing 
further 
capital 
equity 
investments 
and  medium-sized 
small 
companies.  Selected  fund  managers  are  expected 
to  raise  private  financing,  bringing  the  total 
amount  for  investments  to  over  €300  million. 
However,  despite  the  steady  increase  of  equity 
financing  since  2015,  funding  opportunities  for 
more  mature  companies  are 
still  narrow. 
Moreover, Nasdaq Tallinn’s secondary market (21) 
is  still  too  illiquid  and  is  relatively  undiscovered 
by  global  investors.  Special  investment  vehicles 
may hence be needed which focus on investments 
in  listed  small  and  medium-sized  companies, 
preferably on a Baltic level, to attract institutional 
investors. 

into 

(21)  Nasdaq  Tallinn  is  part  of  the  joint  Nasdaq  Baltic  market 
that  was  established  to  minimise  investment  barriers 
between  Latvian,  Lithuanian  and  Estonian  markets.  It 
includes a common Baltic equities market with harmonised 
trading  rules  and  market  practices,  the  same  trading 
system,  joint  trading  lists,  harmonised  indexes,  a  single 
membership, and trading and settlement currency allowing 
investors  easy  access 
listed  financial 
instruments through any of the pan-Baltic members. 

to  all  Baltic 

also 

suffers 

ownership 

available to supervisory authorities. The register of 
from 
beneficial 
shortcomings,  amongst  which  compliance: 
in 
October 2019 a quarter of legal entities registered 
in  the  country  still  had  to  provide  information  on 
their  ultimate  ownership.  A  revised  national  risk 
assessment,  planned  for  2020,  will  help  to  better 
target resources and reassess risks based on a new 
methodology  while  learning  from recent  scandals. 
The 
the  Financial 
resources  of 
Intelligence  Unit  and  the  Prosecutor  Office  will 
allow  more  staff  to  be  devoted  to  fighting  and 
repressing  money  laundering,  but  more  can  be 
done  to  increase  the  sanctioning  power  and  the 
watchdog, 
capacity 
Finantsinspektsioon, 
risk-based 
inspections. 

to  carry  out 

increased 

banking 

the 

of 

Graph 3.2.1:  Composite cost of borrowing 

Source: European Commission based on ECB data 

Access to finance 

Conditions  for access to finance are favourable 
slightly. 
overall,  but  have  deteriorated 
According  to  the  survey  results  (ECB,  2019a; 
ECB,  2019b),  while 
firms  appear  generally 
satisfied  with  the  external  financing  received,  the 
share  of  companies  considering  access  to  finance 
as their  most pressing concern increased to 9% in 
2018.  As  sources  of  financing,  bank  loans  have 
been relevant for 41% of small and medium-sized 
companies,  but  the  share  of  companies  reporting 
that  the  fear  of  rejection  prevents  them  from 
applying for a loan is much bigger in Estonia than 
in  the  EU  (14%  and  4%,  respectively).  The 

24 

0123456Sep. 2018Oct. 2018Nov. 2018Dec. 2018Jan. 2019Feb. 2019Mar. 2019Apr. 2019May 2019June 2019July 2019Aug. 2019Sep. 2019Euro areaEstoniaEstonia long-term loansEstonia short-term loans  
  
                                                           
3.3.  LABOUR MARKET, EDUCATION AND SOCIAL POLICIES 

3.3.1.  LABOUR MARKET 

Strong 
labour  demand  has  delivered  high 
employment  and  participation,  but  challenges 
lie  ahead  as 
the  economy  slows  down. 
Employment  increased  further  by  0.8percentage 
points  in  2018,  reaching  a  record  high  of  79.5%, 
flagging  as  the  best  performer  in  the  Social 
Scoreboard.  This  increase  materialises  in  the 
context of an already positive labour environment, 
with  low  unemployment  (5.4%)  and  high  activity 
rates  (83.8%)  in  2018.  The  recent  employment 
growth  has  been  shared  more  or  less  equally 
between  permanent  and  temporary  employment, 
but  self-employment  increased  the  most  in  2018 
reaching 10.6% of total employment. However, as 
economic  growth  is  slowing,  there  are  already 
signs  that  new  job  creation  will  moderate  in  the 
short term.   

Graph 3.3.1:  Demographic change 2009-2019 

Source: European Commission based on national data 

The  labour  supply  has  not  kept  up  with  the 
changing  needs  of  the  economy,  creating  a 
potential barrier to growth. While in recent years 
the  total  population  increased  due  to  positive  net 
the 
migration,  population  ageing  has  offset 
(see 
labour  market 
the 
positive  effect  on 
Graph 3.3.1). The working age (20-64) population 
decreased by almost 32,000 people, or 3.9%, over 
the past decade. In 2015, net migration to Estonia 

turned positive, reflecting income convergence. In 
terms of composition, the share of young people in 
the  working  age  population  has  dropped.  The 
population is set to decline further due to low birth 
rates. The working age population will decrease by 
around  12%  by  2035  compared  to  2015  (Puur, 
Piirits,  Sakkeus,  Klesment,  Eamets,  2018).  This 
the  existing  labour  shortages 
will  exacerbate 
(European  Commission, 
European 
2019a; 
Commission, 2019b). 

in 

identified 

information 

Skills  shortages  and  high  over-qualification 
indicate  room for better  use of skills.  Shortages 
have  been 
and 
communication  technology  specialists,  teaching 
and other professions (OSKA, 2016). According to 
forecasts,  half of those entering the  labour  market 
will  need  a  higher  education  degree  and  a  third 
will  need  a  vocational  education  qualification 
(OSKA,  2018a) (22).  However,  the  number  of 
graduates  in  either  track  will  not  suffice  to  meet 
future  needs.  Employers  require  more  transversal 
competences, 
from  graduates  of  vocational 
education  and  training  and  more  practical  skills 
from  higher  education  graduates  (OECD,  2019d). 
Nevertheless,  the  high  share  of  low  value-added 
sectors and the high share of the labour force with 
tertiary education result in over-qualification: 20% 
of workers with tertiary education are employed in 
occupations  that  do  not  require  it.  At  the  same 
time, Estonia has experienced an increase in high-
skilled  tasks  relative  to  middle-  and  low-skilled 
tasks  (upskilling),  and  the  share  of  routine  tasks 
has  declined.  Overall,  skills  mismatches  have 
declined significantly since 2010, and the  level of 
disparities  in  the  labour  market  outcomes  for 
different  skill  groups  is  one  of  the  lowest  in  the 
II 
EU (European  Commission,  2019i,  Part 
Analytical chapter).  

(22)  As  response  to  emerging  skills  mismatches,  Estonia 
developed  and  is  further  enhancing  its  comprehensive 
system  to  anticipate  labour  market  needs  and  skills 
(OSKA). 

25 

750,000760,000770,000780,000790,000800,000810,000820,000-6,000-4,000-2,00002,0004,0006,0008,0000910111213141516171819Natural increase (lhs)Net  migration (lhs)Working age population (rhs) 
   
 
 
                                                           
 
3.3. Labour market, education and social policies 

Box 3.3.2: Monitoring performance in light of the European Pillar of Social Rights 

The European Pillar of Social Rights is a compass  for  a renewed  process of upward convergence towards 
better working and living conditions in the European Union. It sets out twenty essential principles and rights 
in  the  areas  of  equal  opportunities  and  access  to  the  labour  market;  fair  working  conditions;  and  social 
protection and inclusion. 

The  Social  Scoreboard  supporting  the  European  Pillar  of  Social  Rights  points  to  some  employment 
and social challenges in Estonia. Estonia’s economic and labour market performance has remained stable 
in  recent  years  with  high  employment  and  activity  rates.  Nevertheless,  inactivity  due  to  caring 
responsibilities remains high, in part due to the improving but still relatively low share of children aged less 
than 3 years in formal childcare. This is 
related  to  there  being  no  childcare 
below the age of 1.5. While the  gender 
employment gap remains below the EU 
average,  the  gender  pay  gap  remains 
among  the  highest in the  EU.  The  high 
self-reported  unmet  need  for  medical 
care, due to long waiting times for both 
primary and specialist care, remains one 
of  the  pressing  challenges  for  Estonia. 
Finally,  the  share  of  people  at  risk  of 
poverty  or  social  exclusion  and  the 
impact  of  social  transfers  on  poverty 
reduction  remain  points  to  watch,  as 
they are driven by the at-risk-of-poverty 
level of people aged 65+. 

gender 

High  school  dropout  rates  hamper 
the integration of young people in the 
labour  market  and  society  at  large. 
Despite  recent  improvements  the  early 
school-leaving  rate  remains  high,  with 
large 
This 
contributes to the rising share of young 
people  neither  in  employment,  nor  in 
education  or  training,  in  spite  of  good 
labour  market  developments  overall. 
Moreover, 
levels 
significantly increase the risk of poverty 
or social exclusion going forward.  

disparities. 

education 

low 

to 

study 

formats 

2019  modification 

The 
the 
Vocational  Education  Act  made 
studying  in  vocational  schools  more 
flexible,  and  introduced  testing  of 
innovative 
in 
collaboration with local governments. 
to 
The  amendments  allow  schools 
quickly 
country’s 
to 
educational  and  labour  market  needs. 
The  result-based  financing  is  expected 
to  motivate  schools  to  perform  well. 
Schools  are  also  given  the  chance  to 
open  curricula  that  are  not  directly 

react 

the 

linked to professional studies but which prepare students for selecting a profession.  

26 

Social Scoreboard & SDGs for ESTONIA SOCIAL SCOREBOARD SDGs Equal opportunities and access to the labour market  Early leavers from  education and training  (% of population aged 18-24)      Youth NEET  (% of population aged 15-24) Gender employment gap Income quintile ratio (S80/S20) At risk of poverty or social exclusion (in %) Dynamic labour markets and fair working conditions   Employment rate  (% of population aged 20-64)  Unemployment rate  (% active population aged 15-74) Long-term unemployment rate (% active population aged 15-74) GDHI per capita growth  Net earnings of a full-time single worker earning AW Social protection and inclusion  Impact of social transfers (other than pensions) on poverty reduction    Children aged less than 3 years in formal childcare Self-reported unmet need for medical care  Individuals' level of digital skills Critical situation To watch Weak but improving Good but to monitor On average Better than average Best performers Members States are classified on the Social Scoreboard according to a statistical methodology agreed with the EMCO and SPC Committees. It looks jointly at levels and changes of the indicators in comparison with the respective EU averages and classifies Member States in seven categories. For methodological details, please consult the draft Joint Employment Report 2019, COM (2018)761 final; NEET: neither in employment nor in education and training; GDHI: gross disposable household income. Update of January 2020. Classification of GDHI per capita growth based on 2017 data.  The limited supply of skilled labour is likely to 
remain  a  growth  bottleneck  in  the  medium-
term.  This  is  mostly  due  to  demographic  change 
and to structural problems in the education system 
(see  Section 3.3.3).  Participation  in  adult  learning 
in Estonia remains above the EU average both for 
employees  and  unemployed  people.  While 
companies  have  identified  the  lack  of  skilled 
labour 
to 
investment (European  Investment  Bank,  2019a), 
corporate spending on on-the-job training is among 
the  lowest  in  the  EU (OECD,  2019b). The  uptake 
of  public  programmes  that  support  investment  in 
human capital has been limited (see Section 3.3.3).  

constraint 

main 

the 

as 

The transition to a climate-neutral economy will 
create further need for investment in skills. The 
employment impacts of reaching the Paris Climate 
Agreement  are  estimated  to  be  positive  overall 
(+0.5%  by  2030).  In  Estonia,  more  than  10,000 
people are thought to be working in sectors that are 
expected  to  transform  thanks  to  the  transition 
towards  a  climate-neutral  economy,  and  another 
20,000  are  employed  in  jobs  indirectly  related  to 
those industries (logistics, services,  etc.). Ida-Viru 
county  that  is  largely  dependent  on  the  oil  shale 
sector,  will be particularly  impacted and therefore 
additional  investments  will  be  key  to  a  successful 
transition (see Box 3.4.2 and Section 3.5).  

positive 

together  with 

Over  recent  years,  labour  shortages  have  been 
eased  by  activation  policies.  Though  starting 
from  relatively  low  levels,  Estonia  has  over  the 
course of the last 3 years increased both spending 
and  participation  in  active  labour  market  policies. 
This, 
economic 
developments,  has  helped increasing activity rates 
across all segments of the population (Table 3.3.1). 
Major  reform  initiatives  that  affect  the  labour 
market,  such  as  the  implementation  of  the  Youth 
Guarantee,  the  work  ability  reform,  or  reforms  to 
the  parental  leave  and  benefits  system,  have  been 
introduced  to  further  increase  the  activity  rates. 
This  in  turn  helped  raise  activity  rates  of  young 
people, women and people with disabilities as well 
as  of  older  workers  (see  Section 3.3.2).  However, 
challenges 
sustainable 
employability. 

ensuring 

remain 

Table 3.3.1:  Activity rates of subgroups in Estonia and 

EU‑28, 2018 

*Data for 2017;  
**Comparison 2017-2014 
Source: European Commission based on Eurostat data 

Migration  and  labour  mobility  to  Estonia  has 
also  helped  fill  labour  and  skills  shortages.  In 
2015,  net  migration  to  Estonia  turned  positive, 
reflecting in part the improved economic situation 
in  the  country  that  saw  wages  in  Estonia  grow 
from 35% to 51% of the EU average between 2011 
and  2018.  The  number  of  fixed-term  residence 
permits  is  subject  to  an  annual  quota  of  0.1%  of 
the  Estonian  native  population.  The  2020  quota 
stood at 1,378 people, which was already filled in 
January.  The  government  has  also  pursued  a 
coordinated  talent  policy  to  attract  top  specialists 
to  the  Estonian  labour  market.  The  increase  in 
foreign  short-term  workers (23)  in  particular  has 
like 
eased 

labour  shortage 

in  sectors 

the 

(23)  A  person  can  work  in  Estonia  based  on  a  visa  if  their 
employment  is  registered  at  the  Police  and  Border  Guard 
Board.  This  allows  for  a  short-term  work  up  to  365  days 
during  a  455  day  period  (in  case  of  seasonal  work, 
employment  is  allowed  for  270  days  during  a  365  day 
period). Longer stays are allowed for teachers, professors, 
high  level  professionals  or  those  working  in  science  or 
start-up  companies  that  are  based  in  Estonia.  Such  short-
term work is subject to wage criteria applied for short-term 
workers – the salary of a short-term employee from a third 
country  needs  to  be  at  least  equal  to  the  national  average 
gross wage (€1,310 in 2019). 

27 

 
 
  
 
                                                           
3.3. Labour market, education and social policies 

The parental leave and benefit system reform is 
expected  to  increase  the  need  for  childcare 
provision.  Estonia  used  to  have  a  generous 
parental  leave  system  but  with  many  built-in 
rigidities; this was reformed and is implemented in 
phases  starting  in  2018  (European  Commission, 
2019a).  In  2018,  the  impact  of  parenthood  on 
women’s  employment  was  almost  three  times  the 
EU average (25.2% vs 9.0%). As a result, 6.9% of 
women  in  Estonia  in  2018  were  inactive  due  to 
personal  and  family  responsibilities  compared  to 
the EU average of 4.7% that affects the sustainable 
development  goal  8  (decent  work).  This  accounts 
for  over  a  third  of  all  inactive  women  in  Estonia. 
Only 27% of children below the age of three took 
part in formal childcare in 2017, far below the EU 
lack  of 
average 
obligatory  childcare  provision  for  children  under 
1.5  years  of  age  mutes  the  impact  of  the  new 
parental leave flexibility.  

(34.2%).  Additionally, 

the 

The  involvement  of  social  partners  in  reforms 
and  policies  in  Estonia  has  improved  but 
remains  limited.  Gaps  in  the  quality  of  social 
partners’ involvement in legislative procedures are 
apparent,  notably  in  relation  to  the  preparation  of 
changes  to  the  second  pillar  pension  scheme 
(Eurofound, 2020, forthcoming). At the same time, 
social  partners  are  involved  in  the  discussions  on 
the  overarching  2035  strategy  in  the  European 
Semester  process.  In  November  2019,  social 
partners also agreed on minimum wage for 2020 of 
€584  per  month.  Nevertheless,  the  capacity  of 
social  partners  has  been  weak,  and  trade  union 
coverage has remained very low (4.7% in 2017).   

3.3.2.  SOCIAL POLICY  

Poverty  remains  high,  especially  in  certain 
regions  and  among  vulnerable  groups.  Overall, 
poverty  has  further  increased  in  2018  and  the 
persistence  of  poverty  remained  above  the  EU 
average. The at-risk-of-poverty or social exclusion 
rate  increased  to  24.4%  against  an  EU  average  of 
21.9%  in  2018,  with  strong  regional  disparities 
(see  Box  3.4.2)  in  particular  for  the  elderly  (see 
Graph 3.3.3)(24).  This  trend  was  driven  by  the  at-

(24)  Elderly  people  aged  65+  (46.3%  vs  15.9%  in  2018  in  the 
EU),  people  with  disabilities  (38.5%  in  2018  vs  21.3%  in 
the  EU)  and  with  lower  educational  attainment  (41.6%  vs 
26.3% in the EU) have higher than average and increasing 
rate  differs 
poverty 

at-risk-of-poverty 

rates.  The 

construction, 
industry.   

agriculture, 

and  manufacturing 

The  Work  Ability  reform  has  helped  increase 
the activity rate of people  with disabilities. The 
activity  rate  of  people  with  disabilities  increased 
from 63% in 2016 to 68% in 2017, overtaking the 
EU  average  of  61%.  On  average,  44%  of  newly 
registered  jobseekers  with  reduced  work  ability 
find  a  job  within  12  months,  resulting  in  8,453 
people  in  2017  and  10,204  people  in  2018 
becoming employed. The Work Ability reform has 
brought down the equilibrium unemployment rate, 
indicating  the  success  of  the  reform  (Eesti  Pank, 
2019). Around one third of people in Estonia with 
reduced  work  ability  suffer  from  mental  illnesses, 
giving  rise  to  the  analysis  on  mental  health 
challenges in the workplace that was carried out in 
August  2019 (Sotsiaalministeerium,  2019).  There 
is  further  scope  to  support  the  labour  market 
participation  of  vulnerable  groups  and  people  on 
long-term  sick  leave,  and  for  measures  to  prevent 
loss of ability to work and to preserve good health 
and  safety  at  work.  To  this  end,  available  and 
affordable quality services are key.  

The  gender  pay  gap  in  Estonia  remains  one  of 
the highest in the EU. The gap was considerably 
higher than the EU average in 2017, 25.6% versus 
16.0%,  indicating  that  Estonia  requires  still  some 
efforts  to  achieve  sustainable  development  goal  5 
(gender  equality).  Measures  to  tackle  the  gender 
pay  gap  are  part  of  Estonia’s  2016-2023  Welfare 
Development Plan. The government has abolished 
earlier plans to introduce the requirement for wage 
transparency  into  legislation.  The  government  is 
preparing  digital  tools  aimed  at  improving  pay 
transparency  and  the  understanding  of  the  causes 
of  the  gender  pay  gap.  A  national  target  of  2.5pp 
reduction of the gap by 2023 would close it in 40 
years.  Simulations  by  the  European  Commission, 
based on the Euromod  model, show  that reducing 
the  gender  pay  gap  to  3.3%  would  reduce  the 
overall  at-risk-of-poverty  rate  by  1.3  percentage 
points,  particularly  for  households  with  one  adult 
and  children,  which  would  see  it  reduced  by  6.2 
percentage  points  (more  than  two  thirds  of  these 
households  are  headed  by  women).  It  would  in 
turn  reduce  the  spending  on  subsistence  benefits 
by  around  4%  and  generate  over  €250  million  in 
revenues  from  personal  income  tax  and  around 
€400  million 
security 
in  additional 
contributions. 

social 

28 

                                                           
3.3. Labour market, education and social policies 

Graph 3.3.2:  At-risk-of-poverty or social exclusion rate, age 

groups, Estonia 

risk-of-poverty rate as the continued rapid increase 
in  wages  outperformed  the  increase  in  benefits. 
Though  the  share  of  people  in  low  intensity 
households  is  declining,  in  2018,  the  at-risk-of-
poverty  rate  among  unemployed  people  aged  16-
64  was  51.9%  in  Estonia  (48.9%  in  the  EU). 
Possible  changes  to  the  unemployment  benefit 
system  to  improve  coverage  and  adequacy  are  in 
sight  as  a  response 
to  a  study  from  2019 
(Laurimäe, Piirits, Koppel, Melesk, Masso, 2019).  
Estonia’s  performance 
terms  of  material 
deprivation  and  child  poverty  was  better  than  the 
EU  average  in  2018 (25).  Compared  to  2016,  the 
child poverty rate has decreased by 3.4 percentage 
points,  thanks  to  substantial  increase  in  child 
benefits.  This  has  helped 
towards 
achieving  sustainable development goal 1. 

to  move 

in 

The high activity rate of the elderly helps them 
avoid  poverty.  The  average  old  age  pension  was 
41%  of  the  average  monthly  net  wage  in  2018. 
Hence, in 2018 a total of 26.3% of 65-74 year olds 
were  working  in  order  to  increases  their  income 
and  ability  to  save.  A  pension  increase  was 
in  November  2019. 
approved  by  Parliament 
Starting in 2020 the base amount of pensions  will 
be  increased  by  €7  in  addition  to  the  annual  rise 
from  indexation  (€38).  The  authorities  estimate 
that  this  will  lower  the  at-risk-of-poverty  rate  for 
people  65+  by  0.6  percentage  points  and  for 
pensioners  living  alone  by  0.4  percentage  points. 
These  changes  will  be  partly  offset  as  more 
pensioners will earn above the income threshold of 
€500  and  will  need  to  pay  income  tax.  For 
example, in 2020 the average old-age pension will 
increase to €528.10 (up from the  €483 of average 
old  age  pension  in  2019),  making  approximately 
61%  of  pensioners  liable  for  income  tax  (37%  in 
2019) (see Section 3.1.2). 

considerably between counties, e.g. in Valga (38.2%), Ida-
Viru  (33.9%)  and  Võru  (29.6%)  but  only  (16.6%)  in 
Tallinn and (18.5%) in Saare county. 

(25)  The material and social deprivation indicator (MSD) is the 
result of a revision of the material deprivation indicator. It 
also  includes  items  related  to  social  activities.  The  MSD 
rate  is  the  share  of  people  in  the  total  population  lacking 
(because of an enforced lack) at least five of the 13 MSD 
items. 

(1) AROPE: At-risk-of-poverty or social exclusion rate (% of 
total population). People who are at-risk-of poverty (AROP) 
and/or suffering from severe material deprivation (SMD) 
and/or living in household with zero or very low work intensity 
(LWI). 
Source: Eurostat, EU-SILC 

Income  inequality  decreased  to  around  the  EU 
average  in  2018.  The  ratio  of  the  richest  20%  to 
the  poorest  decreased  from  5.4  to  5.07,  slightly 
below  the  EU  average  of  5.17.  At  the  same  time, 
the  income  of  the  poorest  40%  amounted  only  to 
20.1%  of  the  overall  income,  which  is  below  the 
EU  average  of  21%  and  still  below  pre-crisis 
levels.  

Social benefits in Estonia are less effective than 
average  in  the  EU  in  reducing  the  incidence  of 
poverty.  In  2017,  social  transfers  reduced  the  at-
risk-of-poverty  rate  by  27%,  and  the  poverty  gap 
by 43% (compared to an EU  average of 34% and 
55% respectively). As of 2020, benefits to children 
with  disabilities  will  increase  two-  to  threefold 
depending on the level of disability. The maximum 
will  be  €241  compared  to  €80.55  in  2019.  On 
average,  family  benefits  had  the  largest  effect  on 
reducing  the  poverty  rate  (18%),  followed  by 
sickness  and  disability  benefits  (12%)(European 
the 
Commission,  2019i).  The  adequacy  of 
minimum  income  scheme  in  supporting  people  is 

29 

051015202530354045500506070809101112131415161718% of populationEEChildren (<18y)Working age (18-64)Elderly (65+)                                                                                   
    
3.3. Labour market, education and social policies 

new framework for a more integrated provision of 
social  and  health  care  services.  Limited  measures 
to  improve  social  care  have  already  been  taken: 
care homes have been made more energy efficient, 
homes  made  more  accessible  and  social  transport 
has  been  improved.  Further  efforts  leading  to  an 
improved  system  of  care  include  the  launching  a 
pilot project for the integrated care of children with 
support  needs.  A  dementia  competence  centre  is 
also  being  developed.  Priority  was  given  to 
alleviating disparities between local governments.  

Healthcare 

Health continues to be a  challenge and the high 
rate of unmet need for medical care is likely to 
impact  poor  health  outcomes  and  thereby 
reduce  labour  productivity.  Health  outcomes  in 
Estonia have improved over the last few years, but 
remain  low  compared  to  the  EU  average.  While 
life  expectancy  increased  rapidly  to  78.4  between 
2000  and  2017,  it  is  2.5  years  below  the  EU 
average. Premature  mortality  before the age  of 65 
is  higher  in  Estonia  (20%)  than  in  the  EU  on 
average  (16%),  meaning  that  a  big  part  of  the 
workforce  is  lost  due  to  poor  health  status. 
People’s  health  skills  are  low,  shown  by  the  fact 
that  a  big  proportion  (50%)  of  preventable 
lifestyle  related  risk 
mortality 
factors(30).  Poorer  health  outcomes  can  also  be 
attributed  to  other  factors  that  stem  from  long 
waiting times linked to shortages in the healthcare 
workforce,  the  uneven  regional  distribution  of 
healthcare  personnel,  and  the  low  public  funding 
of the healthcare sector.  

is  caused  by 

The  level  of  self-reported  unmet  need  for 
medical care is among the highest in the EU. It 
increased  to  16.4%  in  2018,  significantly  higher 
than  the  EU  average  of  1.8%,  with  the  situation 
flagging  in  the  Social  Scoreboard  as  critical. 
Dietary  habits,  accidents,  tobacco  smoking  and 
alcohol  consumption  contribute  to  a  high  rate  of 
preventable mortality, one of the highest in the EU 
in  2017,  and  socioeconomic  inequalities  have  a 
large  impact  on  health  risks.  Lower  educated 
Estonians  tend  to  smoke  and  consume  alcohol 
much more than those with higher education.  

(30)  European  Commission  calculations  based  on  EUROSTAT 

data 

around the EU average, but has decreased from the 
previous year (26).  

income 

Serious  challenges  in  the  areas  of  social  and 
long-term care remain. The affordability of long-
term care is a serious challenge as registered by the 
high out–of-pocket payments needed to access this 
type  of  care  (almost  200%  of  a  care  user’s 
disposable 
in  case  of  severe  needs) 
(OECD,  2020b,  forthcoming).  The  number  of 
people  in  need  of  services  is  high  and  increasing 
and care workforce requires continued training and 
upskilling (27). The current system is fragmented as  
the  social  and  healthcare  services  are  not 
integrated  to  take  the  needs  of  the  person  into 
account (World  Bank,  2017).  Such 
integrated 
provision is necessary given the differences in the 
capacity of local authorities to provide services (28) 
(see Section 3.1.2). With no compulsory minimum 
standards  for  long-term  care,  local  governments 
lack  incentives  to  meet  quality  and  quantity 
indicators  for  long-term  care  provision (29).  The 
system 
lacks  prevention, 
monitoring  and  evaluation  mechanisms  (ESPN, 
2019,  forthcoming).  As  regards  the  delivery  of 
services  for  children,  the  need  for  assistance  is 
often identiﬁed too late, and support is fragmented 
between  different  institutions  and  services  (social 
services,  healthcare,  education).  Social  enterprises 
in  Estonia  have  the  potential  to  contribute  to 
alleviating  the  stretched  social  services  (OECD, 
2020a, forthcoming).   

inefficient  and 

is 

Work  is  ongoing  to  develop  and  implement  a 
framework  for  a  more  integrated  and  person-
centred  provision  of  services.  The  government 
took  a  decision  on  a  future  management  and 
financing  model  in  January  2020  with  earliest 
implementation from 2022. Based on the results of 
various  pilot  initiatives  in  this  area  and  inputs 
provided  by 
the  EU 
Structural  Reforms  Support  Programme.  More 
broadly,  the  Estonian  authorities  are  developing  a 

technical  support  from 

(26)  Joint  Employment  report  2019  and  2020,  based  on    the 
benchmarking  exercise  on  minimum  income  of  the  Social 
Protection Committee (see European Commission, 2019j). 
(27)  Currently around 65 thousand persons are assisted or cared 

for by their household member.  

(28)  Difficulties  of  access,  including  long  waiting times,  and  a 

shortage of service providers. 

(29)  Poliitikasuunised  Eesti  pikaajalise  hoolduse  süsteemi 
hoolduskoormuse 
vähendamise 

tõhustamiseks 
vähendamiseks 
rakkerühma lõpparuanne. Riigikantselei November 2017. 

pereliikmete 
Hoolduskoormuse 

ja 

30 

                                                           
                                                           
3.3. Labour market, education and social policies 

compared  with  less  than  one  third  of  those  in  the 
lowest 20% income group (OECD, 2019a). One of 
the  main  causes  of  high  income-based  health 
is  high  out-of-pocket  payments 
inequalities 
mentioned above, as high unmet needs for medical 
care force people who can afford it to pay to have 
their  medical  needs  met.  Regional  disparities 
stemming  from  the  impact  of  environmental  risks 
to  health  are  quite  remarkable.  In  particular,  the 
residents in the oil shale mining region of Ida-Viru 
report  higher  rates  of  respiratory  symptoms  and 
several  serious  chronic  health  issues,  including 
cardio-vascular diseases.  

Shortages  of  medical  workers  persist, 
in 
particular  concerning  nurses.  These  shortages 
are due to the insufficient number of graduates, but 
also 
lower  remuneration  and  worse  working 
conditions  in  the  health  sector,  which  makes  it 
difficult  to  attract  and  retain  young  people.  The 
shortages  have  been  particularly  pronounced  as 
regards  family  doctors 
in  rural  areas,  while 
accessing specialised medical care is reported to be 
more  difficult  in  cities.  This  situation  is  expected 
to worsen in the coming years due to the ageing of 
doctors,  as  every  fifth  family  doctor  has  already 
reached retirement age in Estonia. The shortage of 
doctors has negative consequences for the ongoing 
reforms  —  especially  efforts  to  improve  the 
primary care. 

Estonia 
is  seeking  to  facilitate  access  to 
healthcare.  A  pay-for-performance  system  for 
family  doctors  from  2015  tries  to  improve  the 
recruitment  and  retention  of  health  workers. 
Furthermore, the need to strengthen primary care is 
being  addressed  by  creating  multidisciplinary 
healthcare  centres,  with  19  out  of  the  54  already 
fully functional. However, the authorities continue 
to encounter challenges in finding staff, the lack of 
established procedures within the healthcare sector 
and  the  reluctance  of  family  doctors  to  change 
their current  working  methods. Access to  services 
is  facilitated  by  the  digitalisation  of  services  (e.g. 
e-consultations, e-prescriptions, e-referrals, central 
digital  registration  system)  and  the  networking  of 
hospitals.    However,  there  is  a  need  for  further 
investments  in  a  number  of  specific  areas  to 
enhance the quality of healthcare and improve the 
access  to  health  coverage  to  reach  the  sustainable 
development goal 3 good health and well-being. 

in 

the 

health 

considerable 

healthcare 
lowest 

challenges 
Despite 
expenditure 
Estonia’s 
public 
remains  one  of 
the  EU. 
Notwithstanding efforts to increase public funding 
for  healthcare,  it  remains  one  of  the  lowest  in  the 
EU  with  4.8%  of  GDP  in  2017  compared  to  the 
EU  average  of  7.8%  of  GDP  (see  Section 3.1). 
This,  together  with  high  unmet  needs  for  medical 
care  has  led  to  one  of  the  highest  out-of-pocket 
payments.  In  2017  people  paid  23.6%  of  their 
medical bills out of pocket, one of the highest rates 
in 
is  15.8%).  Income 
inequality plays a role as medicines are the largest 
single driver of spending for people in the poorest 
quintile,  while  richer  quintiles,  spend  more  on 
dental  care.  Estonia  is  implementing  reforms  in 
order  to  lower  out–of-pocket  spending  both  on 
pharmaceutical  and  dental  care.  In  2017,  0.7%  of 
beneficiaries received additional cost reductions on 
pharmaceuticals; these were increased to 15.6% in 
2018 (EHIF, 2019). 

the  EU  (EU  average 

The healthcare system does not cover the whole 
population.  The  system  currently  only  covers 
around 94% of the population, though it grants the 
right  to  emergency  care  services  to  uninsured 
people.  The  high  share  of  uninsured  people  in 
combination with organisational challenges related 
to  the  lack  of  family  doctors  and  poor  integration 
of services, has caused overuse of emergency care 
departments.  Almost  half  of  patients  seeking 
emergency  care  could  have  received  care  from 
family  doctors  at  a  more  cost-effective  setting 
(OECD,  2019a).  A  recent  study  (Koppel  et  al., 
2018)  found  that  since  health  coverage  in  Estonia 
is  linked  to  employment,  individuals  with  part-
time  work,  unstable 
informal 
employment  may  experience  insecure  coverage. 
Furthermore,  there  are  over  50  criteria  defining 
eligibility  for  health  insurance,  which  makes  it 
difficult for  citizens to navigate the system. Gaps 
in  coverage  also  create  barriers  to  access  (WHO, 
2019).  

jobs  or 

in 

Substantial  health  disparities  exist  depending 
on  gender,  region,  education  and  income.  On 
average, women live 9 years longer than men, and 
the  disparity  between  urban  and  rural  areas  is 
4.5 years.  Estonia  has  one  of  the  biggest  gaps 
between  low  and  high  income  earners  in  the  EU 
with  more  than  three  quarters  of  people  in  the 
highest 
considering 
themselves  to  be  in  good  or  very  good  health 

bracket 

income 

20% 

31 

3.3. Labour market, education and social policies 

increase the quality and labour market relevance of 
higher education, but their impact is yet to be seen.  

Graph 3.3.3:  Education and labour market for youth 

(1) Left-hand side: Early leavers from education and training 
(% of population), total, ages 18-24; NEET: Not in 
employment, education or training (% of population), total, 
ages 15-24; Right-hand side: Tertiary educational attainment 
(% of population), total, ages 30-34 
Source: Eurostat, LFS  

 The  take-up  of  vocational  education  and 
training  was  not  responsive  to  the  needs  of  the 
labour  market (33).  With  40.7%  of  enrolled 
students attending vocational programmes, Estonia 
is  below  the  EU  average  of  47.8%.  The  share  of 
apprenticeship students has increased but it is still 
only  at  5%.  The  level  of  employability  of  recent 
vocational education and training graduates  saw a 
notable  decline  in  2018,  dropping  to  76.6%  as 
compared  to  86.2%  in  2017  (EU  average  of 
79.5%).  Measures  are  under  way  to  improve  the 
quality  of  work-based  learning  and  to  further 
strengthen  career  counselling (34)  and  related 
services offered to young people. 

learning 
The  participation  of  adults 
continued  to  increase.  In  2018,  19.7%  of  adults 
aged  25-64  in  Estonia  had  had  a  recent  learning 
experience during the last 4 weeks, almost double  
the  EU  average  of  11.1%  (Eurostat,  Labour  force 

in 

(33)  (Statistics  Estonia  2018)  While  in  2018  the  number  of 
admitted  students  increased  slightly,  the  total  number  of 
students enrolled in VET decreased from 25,071 in 2016 to 
23,387 in 2018. 

(34)  From  2019  career  information  and  counselling  services 
have  been    offered  by  and  developed  in  the  public 
employment service. 

3.3.3.  EDUCATION AND SKILLS  

the 

learning 

technology 

The  education  system  is  performing  well,  but 
the  reported  skills  shortages  suggest  that  the 
link  with 
labour  market  remains  a 
challenge. Estonia tops the 2018 PISA ranking of 
EU  countries  in  mean  performance  in  reading, 
mathematics and science, and has the lowest shares 
of low achievers in all three domains. Estonia has 
above  average  results  when  it  comes  to  the 
population’s  digital  skills (31)  and  significant 
progress  has  been  made 
the 
in  expanding 
learning  resources  and 
availability  of  digital 
information 
(European 
Commission,  2019b).  The  latest  PISA  results 
confirmed  Estonia’s  excellent  performance 
in 
terms of low performers in reading, and a low gap 
when 
status. 
However,  an  above-average  share  of  pupils  leave 
education  and  training  early  and  many  students 
drop out from higher education (Graph 3.3.3). This 
leads 
tertiary 
graduates,  whose  competences  are  furthermore 
insufficiently  aligned  with  labour  market  needs. 
and  vocational 
Similarly, 
education  do  not  yet  meet  the  changing  needs  of 
the  labour  market.  Moreover,  the  good  quality  of 
the  education  system 
the 
emerging teacher shortages. 

insufficient  number  of 

is  endangered  by 

socio-economic 

considering 

learning 

lifelong 

to  an 

Higher  education  is  insufficiently  aligned  with 
labour  market  needs  and  dropout  rates  are 
high.  Although  tertiary  educational  attainment  in 
the  30-34  age  group  is  currently  above  the  EU 
average  (47.2%  compared  with  40.7%),  it  may 
worsen  if  the  high  dropout  rates  from  higher 
education  and  falling  enrolment  rates (32)  persist. 
The gender gap in tertiary attainment is significant 
(57.5% of women compared to 38% of men). The 
actual number of graduates in science, technology, 
engineering  and  mathematics  is  insufficient  to 
meet  the  needs  of  the  labour  market  (OSKA, 
2018a).  The  performance-based  funding  system 
introduced  in  2017,  accompanied  by  incentives  to 
increase  enrolments  in  certain  study  fields  aim  to 

(31)  2019 DESI index indicates that 62.5% of Estonians (vs EU 
average  60.6%)  report  they  have  at  least  basic  software 
skills,  34.7%  (vs  33.3%)  have  above  basic  digital  skills, 
and 61.6% (vs 58.3%) have at least basic digital skills  
(32)  Besides  demographic  trends,  enrolments  are  negatively 
impacted  by  a  high  share  of  early  school  leavers  and  an 
increasing proportion of upper secondary graduates that do 
not continue studying, in particular men, Russian speakers, 
and graduates from schools in remote areas  (MoER, 2017). 

32 

010203040506002468101214161800010203040506070809101112131415161718%%EETertiary education 30-34 (rhs)NEET 15-24 (lhs)Early school leavers 18-24 (lhs)                                                           
    
                                                           
3.3. Labour market, education and social policies 

of instruction master Estonian at intermediate (B1) 
level,  well  below  the  national  target  of  90%.  To 
support  Estonian  language  learning  from  an  early 
age,  a  pilot  project  providing  Estonian-speaking 
teachers 
in  pre-school  education  groups  was 
launched in the two Russian-speaking regions. The 
project is expected to be further expanded in 2020 
to cover basic schools too.  

teacher  shortages  and 

The  emerging 
the 
unattractiveness of the profession risk affecting 
the  quality  of  education.  Half  of  all  teachers  in 
primary and secondary education are over 50 years 
old and almost every fifth teacher is over 60. In the 
next decade, around half of the current teachers in 
secondary  schooling  will  therefore  have  to  be 
renewed.  (European  Commission,  2019b).  Many 
schools  report  difficulties  in  hiring  teachers  in 
specific  subjects (37) 
(OSKA,  2018b),  while 
teacher  education  programmes  are  generally 
undersubscribed. At the same time, only 26.4% of 
Estonian  teachers  believe  that  their  profession  is 
valued  in  society  (OECD,  2019d).  While  the 
number of candidates for teacher training increased 
strongly  in  the  past  year,  in  general,  teaching  is 
considered stressful, salaries are uncompetitive and 
working conditions remain unattractive. An above-
average  share  of  teachers  report  a  need  for 
professional 
continuing 
additional 
development (38).  To 
these  challenges, 
tackle 
Estonia 
to 
is  currently  developing  measures 
promote  alternative  pathways  to  the  teaching 
profession,  and  between  2014-2018,  teachers’ 
salaries have been raised by more than 40% (NRP, 
2019).  However,  the  increase  in  2020  will  be 
smaller than in previous years (39).  

(37)  This  relates  in  particular  to  mathematics,  chemistry, 

physics, geography and biology 

(38)  2018  OECD’s  Teaching  and  learning  international  survey 
indicates that 26.1% of teachers report a need for additional 
training in teaching students with special educational needs 
(EU: 21%), 19.2% in ICT for teaching (EU: 16.1%).   
(39)  The minimum monthly salary for teachers will increase by 

€65 from €1,250 to €1,315 in 2020. 

survey,  2018).    The  public  training  provision  for 
adults  relies  largely  on  the  EU  Structural  Funds. 
Since  autumn  2019,  quality  evaluations  of 
institutions  providing  non-formal  training  against 
the  requirements  set  by  the  Adult  Education  Act 
have started.  

school  education  combines 
The  Estonian 
excellent  performance  with  a  high  level  of 
equity. The 2018 PISA results show that the mean 
scores  in  science,  mathematics  and  reading  have 
increased  since  2009,  and  the  share  of  low 
achievement has remained the lowest in the EU in 
all three domains (35), putting Estonia on top of the 
PISA  ranking  among  EU  Member  States.  At  the 
same  time,  Estonia  also  has  one  of  the  most 
equitable  education  system,  with  the  smallest 
impact  of  socioeconomic  background  on  pupils’ 
performance (36).  As  a  consequence  Estonia  is 
making  progress  on  sustainable  development  goal 
4  (quality  education).  However,  this  positive 
performance  is  affected  by  the  chronic  issue  of 
early  school  leaving  that  hinders  future  access  to 
higher  education  (Graph 3.3.3).  Overall  11.3%  of 
18-24  year-olds  leave  education  and  training 
without  completing  upper  secondary  education 
(EU average 10.6%), and this rate has stagnated in 
recent  years.  It  affects  men  in  a  disproportionate 
way (16.1% compared to 6.4% of women), which 
helps  explain  their  future  low  tertiary  educational 
attainment (see above). The main factors appear to 
be weak learning outcomes and lack of motivation, 
suggesting  that  the  focus  should  be  put  on 
prevention  (MoER,  2018).  Wellbeing  at  school 
could  also  be  a  reason,  as  25%  of  15  year-olds 
pupils  in  Estonia  report  being  bullied  at  least  few 
times a month. This is above EU average (OECD, 
2019e). 

The  performance  gap  between  Estonian  and 
Russian-medium  basic  schools  persists  and 
strengthens  regional  disparities  as  well  as 
hindering  the  mobility  across  the  country 
because of the language barrier. The proficiency 
in  Estonian  of  students  with  a  different  mother 
tongue  remains low: less than 61.4% of graduates 
from basic schools  where Russian is the language 

(35)  11.1% of low achievers in reading, 10.2% in mathematics, 
8.8%  in  science,  compared  to  respectively  21.7%,  22.4%, 
and 21.6% at EU level. 

(36)  The  difference  between  the  shares  of  low  achievers  in 
reading in the bottom and top socioeconomic quarter is the 
smallest in the EU (9.8 percentage points).   

33 

                                                           
 
                                                           
3.4. COMPETITIVENESS REFORMS AND INVESTMENT 

3.4.1.  INVESTMENT AND PRODUCTIVITY  

Graph 3.4.2:  Growth of labour productivity decomposed as 

changes in total factor productivity and 
capital deepening 

Estonia’s income and productivity gap with the 
EU  has  decreased,  but  remains  significant.  In 
2018,  income  per  head  was  81%  of  the  EU 
average,  while  the  gap  in  labour  productivity  per 
hour  worked  was  almost  30%.  Over  the  last  two 
decades  capital  accumulation  through  investment 
has contributed to catch up. High employment and 
labour market participation rates explain the strong 
contribution  of  the  labour  market  component. 
Since 
factor 
productivity  growth  has  moderated,  suggesting 
potential  for  more  efficient  use  of  resources  and 
further  technological  upgrading  (see  Graphs  3.4.1 
and 3.4.2, and European Commission, 2019a).   

financial  crisis, 

total 

the 

the 

Graph 3.4.1:  Gap compared to the euro area in 2018 levels 

Source: European Commission 

Investment 

improving 

The  wide  gap  in  total  factor  productivity 
compared  the  rest  of  the  EU  hints  at  the 
possibility  of 
the  quality  of 
investment,  the  allocation  of  resources  and 
overall  efficiency.  On  average  around  90%  of 
investment  has  been  in  tangible  assets.  In  recent 
past, over a half of the total investment was made 
in construction, and about a third in machinery and 
equipment  and 
in 
in  vehicles. 
intangibles,  which  is  often  seen  as  leading  to 
higher  productivity  in  the  medium  term,  has  been 
around  10%  (Graph 3.4.3).  This  is  almost  a  third 
below  the  EU  average  in  terms  of  the  share  of 
GDP  (see  Box  3.4.1),  and  is  concentrated  mostly 
in  professional  and  scientific  activities  and 
information technologies and communication. This 
hints  at  problems  with  channels  for  diffusing 
technology  and  knowledge,  which  may  block 
in  productivity.  The  share  of 
further  gains 
companies  investing  in  Estonia  or  planning  to 
expand their investment was below the EU average 
in 2018 (EIB 2019a), while the lack of availability 
of  skilled  staff  is  among  the  most  frequently 
named  reasons  for  holding  back  investment  plans 
(see Box 3.4.1).  

Source: European Commission 

The  stock  of  foreign  direct  investment  per 
person  has  been  higher  than  the  EU  average, 
but  investment  is  concentrated  in  sectors  with 
already  high 
labour  productivity.  Financial 
services  and  insurance,  and  real  estate  activities 
have  attracted  the  highest  share  of  foreign  direct 
investment.  The  share  of  industrial  manufacturing 
in  foreign  direct  investment  has  been  stable  at 
around a quarter, while it is only recently that such 
investments  were  made  in  professional,  scientific 
and  technical  activity  and  in  information  and 
communication  (see  Graph  3.4.3).  On  average, 
through  foreign  direct 
companies  established 
investment  have  higher  productivity  than  other 
domestic  companies  since  they  can  benefit  from 
access  to  the  markets  and  technology  of  their 
parent  companies.  At  the  same  time,  as  a  rule, 
knowledge-intensive  activities  happen  in  mother 
companies,  and 
the  potential  for  knowledge 
spillovers remains untapped. 

34 

-36.323.0-0.7-60-40-2002040Productivity componentLabour market componentDemographic component-15-10-5051015969800020406081012141618% changeTFPCapital deepeningLabour productivity 
  
   
  
3.4. Competitiveness reforms and investment 

Graph 3.4.3:  Direct investment by field of activity as share 

of GDP 

highest  number  of  ‘unicorns’  per  capita, 
in 
absolute terms there are only four such companies.  

Graph 3.4.4:  Investment by asset type 

Source: European Commission 

Unless  productivity  catches  up,  there  is  a  risk 
that  Estonia  will  be  caught  in  the  middle-
income  trap.  Incomes  have  converged  to  the  EU 
average  faster  than  productivity.  Relatively  low 
productivity  means  that  Estonian  companies  use 
resources  less  productively  than  their  competitors 
and have fewer resources to develop new products 
and  services.  Looking  at  specialisation  patterns  in 
industry, none of the sectors has higher output per 
worker than the EU average in that sector. Despite 
the  overall  good  conditions  for  doing  business  in 
Estonia,  the  share  of  high  growth  companies 
measured  in  employment  is  only  7.2%  (the  EU 
average  is  11.3% (40).  The  majority  of  enterprises 
are  micro 
than 
companies  with 
10 employees,  and  may  not  have  enough  capacity 
to  grow  outside  the  Estonian  market  even  though 
being  close  to  export  markets  is  an  important 
factor  for  productivity (41).  While  Estonia  has  the 

fewer 

(40)  Share of high growth enterprises (growth by 10% or more) 
in  employment:  number  of  high  growth 
measured 
enterprises  divided  by  the  number  of  active  enterprises 
with  at  least  10  employees  (see  Graph  3.4.5).  Data  for 
2017.  

(41)  The productivity of  exporting companies is higher than of 
companies that produce for the domestic market only (Unt, 
T., Võrk, A. and U. Varblane (2018), “Analysis of position 
of  Estonian  firms  in  the  local  and  global  value  chains”, 

Source: European Commission 

Digital economy 

While  digitalisation  has  been  increasing,  the 
take-up by corporations remains relatively low, 
hindering further productivity growth.  Estonia 
ranked  8th  in  the  2019  Digital  Economy  and 
integration  of  digital 
in 
Society  Index,  but 
technology  by  companies  it  was  only  16th  in  the 
EU. The  main challenges are in firms’ low  use  of 
social  media  (13%)  and  electronic  information 
sharing  (28%).  In  addition,  the  share  of  Estonian 
small  and  medium-sized  companies  selling  online 
(16%)  remains  below  the  EU  average  (17%).  On 
the other hand, the share of companies using cloud 
services  (26%)  was  higher  than  the  EU  average 
(18%).  20%  of  Estonian  companies  have  a  high 
digital  intensity,  using  at  least  7  out  of  12  key 
digital  technologies  in  their  operations.  The  share 
communication 
of 
technologies sector in total value added increased  

information 

and 

the 

presentation  for  the  workshop  on  Productivity  in  Estonia, 
Brussels, 20 September 2019). 

35 

 - 20 40 60 80 1000506070809101112131415161718Other fields totalTransport and storageProfessional, scientific and technicalAutomotive industryManufacturingReal estate activitiesFinancial and insurance activities01,0002,0003,0004,0005,0006,0007,00009101112131415161718Intellectual property products (gross)Cultivated biological resources (gross)Other machinery and equipment and weapons systems (gross)ICT equipment (gross)Transport equipment (gross)Other buildings and structures (gross)Dwellings (gross)Total fixed assets (gross)   
                                                           
   
 
                                                                                   
3.4. Competitiveness reforms and investment 

Box 3.4.3: Investment challenges and reforms in Estonia 

Section 1. Macroeconomic perspective  

Investment increased substantially in 2019 reaching 25% of GDP. It was supported by low interest rates and 
high  savings  and  profits  recorded  in  recent  years  (see  Section  1).  Private  investment  was  particularly 
noteworthy in machinery and equipment and in construction, and the largest increases were in the electricity 
and gas sector and in industrial manufacturing. In 2018, investment in intellectual property was 10% of total 
investment,  and  happened  mainly  in  the  professional  and  scientific  activities  and  in  the  information 
technologies and communication sector.  

Section 2. Assessment of barriers to investment and ongoing reforms  

Several factors are holding back investment and productivity (see Section 3.4). Companies have repeatedly 
identified  the  lack  of  skills  and  the  insufficient  labour  supply  as  key  bottlenecks  to  investment  (see 
Section 3.3).  Skills  are  crucial  to  enable  investment  in  intangibles,  for  example  in  information  and 
communication technologies. While public institutions are generally perceived as efficient, some persistent 
problems  in  the  insolvency  framework  put  a  strain  on  business  dynamism.  In  the  economy  that  creates 
business  opportunities,  the  regulatory  bottleneck  in  insolvency  has  become  a  major  cross-cutting  issue. 
Finally, high entry barriers in knowledge-intensive sectors  mean that Estonian businesses risk  getting into 
the  middle-income  trap.  This  could  be  addressed  through  better  institutional  support  for  innovation  to 
improve competitiveness (see Section 3.4).  

Selected barriers to investment and priority actions under way  

1. The lack of an efficient insolvency procedure is critically affecting the business environment. Insolvency 
procedures take around 3 years,  and the recovery rate is slightly  above 40%. This blocks the resources in 
less productive firms and reduces incentives to invest. The revision of the insolvency framework started in 
2000, but there is still no proposal for legislative amendments linked to bankruptcy, reorganisation, and debt 
restructuring (see Section 3.4). 

2.  The  lack  of  skills  is  a  major  investment  bottleneck,  but  the  share  of  on-the-job  training  is  among  the 
lowest  in  the  developed  countries  (OECD  2019).  The  issue  of  upskilling  and  reskilling  is  relevant 
considering the challenges of transitioning to more resource and energy efficiency (see Section 3.5).    

36 

Regulatory/ administrative burdenTaxationPublic administrationAccess to financePublic procurement /PPPsCooperation btw academia, research and businessJudicial systemFinancing of R&D&ICSRInsolvency frameworkBusiness services / Regulated professionsCompetition and regulatory frameworkRetailEPL & framework for labour contracts ConstructionWages & wage settingDigital Economy / TelecomEducation CSREnergyTransportNo barrier to investment identifiedCSRInvestment barriers that are also subject to a CSRSome progressNo progressSubstantial progressLimited progressFully addressedPublic administration/Business environmentLabour market/ EducationSector specific regulationFinancial Sector / TaxationR&D&I 
3.4. Competitiveness reforms and investment 

political commitment to the 3% goal and to the 1% 
public part was agreed.  

to 

according 

levels  of 

research-based 

innovation 
The 
capacity  and  activity  in  the  business  sector  are 
low. Estonia improved its performance in the 2019 
European  Innovation  Scoreboard  and  moved  back 
to  the  group  of  strong  innovators.  Non-research 
innovation  expenditure  was  176.1%  of  the  EU 
average 
the  2019  European 
Innovation Scoreboard. In contrast, research-based 
expenditure  was  only  43.8%  of  the  EU  average. 
Efforts  to  develop  and  activate  research-based 
innovation  capacity  and  the  R&D  function  in 
companies  have  so  far  been  insufficient.  In  2019, 
the  grant  scheme  launched  in  2018  by  Enterprise 
Estonia  to  support  product  development  in  the 
manufacturing  sector,  underwent  a  substantial 
change,  including  an  increased  budget  of  €20 
the 
million  from 
requirements. 
introduction  of  more 
However, the interest in this grant has been low so 
far,  in  part  because  of  insufficient  publicity.  
Another 
supporting 
innovation,  NUTIKAS,  was  also  simplified  to 
improve the uptake by the private sector. While it 
previously  only  financed  applied  sciences  were 
financed,  under  the  revised  rules  companies  can 
in-house 
finance 
capabilities  for  research  and  innovation.  The 
results are still to be seen. 

the  Structural  Funds,  and 
flexible 

their  own  costs 

programme 

important 

to  build 

The 

advantages. 

Estonia underwent a peer review of its research 
and  innovation  system  under  the  EU  Policy 
Support Facility. The review found that Estonia is 
in  the  ‘middle-income  trap’  and  needs  to  increase 
the  national  effort  in  R&D  by  creating  distinctive 
main 
competitive 
recommendations 
included  ensuring  political 
commitment to the importance of R&I in national 
policy and a 1% target for government spending on 
R&D,  better  targeting  of  R&I  policy,  establishing 
innovation  agency  to  support  R&D,  strengthening 
‘intermediary  organisations’,  and  modernising 
research  at  universities (European  Commission, 
2019g, p.8). The Estonian authorities keep the 1% 
spending  target  in  sight.  They  made  immediate 
steps  towards  transforming  part  of  Enterprise 
Estonia 
agency.  The 
recommendation to establish thematic priorities for 
R&I  policy  in  the  light  of  the  societal  challenges 
was taken on board by the Prime Minister’s R&D 
to  modernise 
recommendation 
Council.  The 

innovation 

into 

an 

by  6.2%  in  2018.  There  is  evidence  of  high 
premium in terms of economy-wide productivity if 
digital technologies are adopted by  manufacturing 
firms (OECD, 2020a). 

Estonian  companies  have  started  benefiting 
from  digitisation  measures.  In  2018,  investment 
in  information  and  communication  technologies 
(ICT) picked up to 6.1% of the total investment. In 
order  to  improve  the  digitisation  of  small  and 
medium-sized  firms,  Estonia  implemented  the 
Digital  Diagnostics  measure  –  a  grant  scheme 
opened  at  the  end  of  2018.  Digital  Diagnostics 
supports  companies  by  providing  access  to  ICT 
experts  to  help  them  identify  opportunities  for 
improving  productivity  and  growth  through  the 
uptake  of  digital  technologies.  As  a  follow-up,  a 
new grant scheme was launched in April 2019 via 
Enterprise  Estonia,  supporting  investments  into 
automation,  digital  technologies  and  robots.  The 
grants range from €20,000 to €500,000. By the end 
of September 2019, the grant scheme had received 
applications  exceeding 
its  overall  budget  of 
€3 million.  In  addition,  the  Estonian-Norwegian 
Green  ICT  co-operation  programme,  a  grant 
facility,  will  open  call  for  applications  in  early 
2020.  This  programme  supports  the  development 
of new ICT-based products and services as well as 
the  digitisation  of  processes  in  the  manufacturing 
and  health  service  sectors.  The  grants  will  range 
from €200,000 to €1,250,000. 

Research, development and innovation 

Low  private 
research  and  development  
investment  remains  a  barrier  to  productivity 
growth. In 2018, R&D investment was below the 
national target, due mainly to low private funding. 
Estonia has a R&D intensity (42) target of 3%, with 
public  funding  at  1%  of  GDP  and  private  sector 
funding  at  2%.  Around  50%  of  government 
spending  on  research  comes  from  European 
Structural  Funds.  The  only  substantial  change  is 
the  50%  increase  in  basic  funding  for  universities 
in  2017.  The  actual  funding  increases  in  other 
areas have been quite modest. R&D expenditure in 
the  public  sector  reached  0.79%  of  GDP  in  2018, 
surpassing the EU average of 0.69%. However, the 
leverage effect on the level of R&D expenditure in 
the  business  sector  (0.59%  of  GDP  in  2018) 
remained  limited.  At  the  end  of  2018,  renewed 

(42)  R&D expenditures as % of GDP. 

37 

                                                           
3.4. Competitiveness reforms and investment 

of 

Affairs 

Estonia  is  on  track  to  improve  coordination 
between  innovation  and  research  policies.  The 
Ministry of Education and Research is in charge of 
national  research  and  education  policy.  The 
and 
Economic 
Ministry 
Communications 
technological 
oversees 
development  and  innovation  policy.  Coordination 
has  recently  improved  somewhat  as  the  Prime 
Minister’s  Research  and  Development  Council 
seems to take a more decisive role. The Council is 
an  expert  consultative  body  that  advises  the 
government, but it could do more. As discussed by 
the Council after it received the ‘peer review’ final 
report 
it  may  strengthen 
coordination  by  making  strategic  decisions  on 
thematic  priorities  and  funding.  A  promising  step 
towards  better  coordination  is  the  initiative  to 
merge  the  national  entrepreneurship  strategy  and 
the research and development strategy: the process 
of writing a single strategy  — TAIES — provides 
clear  opportunities  to  improve  coordination.  The 
Peer  review  of  the  Estonian  R&I  system  also 
pointed to the need to ensure better coordination of 
research  priorities  with  societal  needs  through 
sectoral 
greater 
ministries.    

in  autumn  2019, 

involvement  of 

the  other 

Several  weaknesses  have  limited  the  impact  of 
smart  specialisation  on  Estonia’s  innovation 
performance.  Weak  coordination  of  research 
policies  with  business  development  ones,  as  well 
as  insufficient  reaction  to  changes  in  competitive 
arenas,  have  prevented  the  country  from  reaping 
the  full  benefits  of  smart  specialisation.  The 
renewal  of  smart  specialisation  priorities  for 
research and innovation investment in view of the 
next  programming  period  provides  an  opportunity 
to  identify  growth  areas  in  line  with  the  latest 
developments,  and  the  strengths  and  potential  of 
the  Estonian  economy,  based  on  continuous 
dialogue  with  stakeholders  of  the  research  and 
innovation ecosystem. 

High  levels  of  domestic  material  consumption 
and  waste  generation  drag  down  resource 
productivity  and  hamper  competitiveness.  In 
2018,  resource  productivity  in  Estonia  dropped  to 
€0.44  per  kilogram,  one  of  the  lowest  in  the  EU 
and  far  below  the  EU  average  of  €2.04.  Estonia 
lacks  an  overarching  circular  economy 
still 
strategy,  but  the  circular  economy  will  be  one  of 
the  main  priorities  of 
the  2035  national 
development  strategy.  In  addition,  a  circular 

followed 

requiring 

universities  in  order  to  meet  national  needs  was 
partly 
outside 
by 
representatives  to  account  for  the  majority  in 
difficult 
university 
recommendation  to  implement  proved  to  be  the 
most  important  one-strengthening  the  system  of 
intermediary  organisations 
support 
industrial innovation.  

The  most 

councils. 

able 

to 

There  is  a  high  concentration  of  investment 
activities  in  the  private  sector.  Overall,  fewer 
than  300  companies  (0.3%  of  the  total)  made  any 
those 
into  R&D,  yet  90%  of 
investment 
investments  are  carried  out  by  ⅓  of 
these 
companies.  In  information  and  communication 
technology, 
is  even  more 
pronounced:  13  companies  invested  90%  of  the 
R&D  investment  in  this  sector  in  2016 (Kattel, 
2019).  

this  concentration 

the 

Cooperation  between  research  institutions  and 
enterprises  was  still  limited.  As  an  indicator  of 
the lagging cooperation, the share of public-private 
co-authored  publications  was  53.1  per  million 
population in 2018 (EU average 86.4). Developing 
the  capacities  of  the  public  research  system 
enabled  it  to  reach  a  good  level  of  scientific 
performance (43).  However, 
economic 
valorisation  of  these  capacities  remains  hindered 
by weak linkages with industry (44). While leading 
universities established structures such as TalTech 
Innovation and Business Centre Mektory (in 2013) 
for 
the  University  of  Tartu’s  Centre 
and 
Entrepreneurship  and  Innovation  (in  January 
2018),  the  system  of  innovation  intermediaries 
remains  weak.  Estonian  industry  lags  behind  the 
EU average in the number of researchers employed 
in private companies (Karo, 2019). The number of 
employed  researchers  with  a  PhD  has  been 
constantly  decreasing  in  the  business  sector  as  a 
whole,  as  well  as 
in  key  sectors  such  as 
manufacturing,  information  and  communication 
industries (Kattel,  Napierala,  2019).  Initiatives 
such  as  university  extension  services  could  help 
strengthen 
intermediary 
system 
organisations able to support industrial innovation 
(European Commission, 2019g).  

the 

of 

(43)  For  instance,  the  share  of  highly-cited  publication  among 
all national publications was 9.7% in 2016, close to the EU 
average of 10.3%.  

(44)  As  shown  for  instance  by  the  share  of  public-private  co-
publications in the total number of publications, which was 
only 2.4% in 2017 vs. an EU average of 5.5%.     

38 

                                                           
economy  strategic  document  and  action  plan  are 
under preparation and are expected to be finalised 
in 2021 (see Section 3.4.5). The circular economy 
sustainable 
is 
development goal 12-responsible consumption and 
production. 

implementing 

the  basis 

for 

in  the  circular 
investment 
The  need  for 
economy  remains  significant.  Key  issues  are 
incineration  overcapacity,  and  a  need  to  increase 
recycling capacities and to improve the ownership 
of  recycling  targets  by  municipalities.  According 
to  the  Study  on  investment  needs  in  the  waste 
sector 
(European  Commission  et  al,  2019), 
Estonia’s  capital  investment  cost  requirements  for 
2021-2027  amount  to  €63 million.  Investments  in 
projects  higher  up  in  the  waste  hierarchy,  such  as 
introduction  of  meaningful  pay-as-you-throw 
schemes, functional separate collection prioritising 
bio-waste  collection  and  treatment,  and  sorting 
for  separately  collected  waste  and 
facilities 
recycling  infrastructure  could  bring  significant 
improvements.  Investments  in  waste  prevention, 
including  re-use  projects,  repair  networks  and 
awareness  raising  are  also  key  to  Estonia’s  long-
term  competitiveness.  Concerning  biodiversity, 
which  is  at  the  core  of  sustainable  development 
goal  15,  Estonia  estimates  the  total  costs  of 
conservation and  management of  the Natura 2000 
network 
for  2021-2027  at  €304.47  million 
(‘priority action framework’).  

3.4.2.  MARKET INTEGRATION 

Estonia  is  performing  relatively  well  in  the 
European single market for goods and services, 
however  specific  challenges  remain.  Some 
regulatory  requirements  on  professional  services 
such as limitations to legal forms, shareholding or 
multidisciplinary  activities,  notably  restrictions  on 
shareholding  for  the  professions  of  lawyers,  are 
obstacles  to  business.  These  requirements  may 
limit firms’ access to capital, reduce the economies 
of  scale  and  scope,  and  restrict  competition.  In 
addition,  the  number  of  notifications  of  draft 
technical  regulations  remains  low.  In  2018,  the 
country notified only 14, which is a very low level 
and may indicate that it is missing the opportunity 
to  further  improve  its  integration  in  the  single 
market and thus gain more economic benefits.  

3.4. Competitiveness reforms and investment 

The digital single  market is key to  maintaining 
and  strengthening  Estonia’s  economic  growth. 
Estonia is committed to making progress with new 
digital  technologies  and  to  strategically  investing 
in  them  through  EU-coordinated  programmes. 
Estonia  is  currently  reviewing  its  Digital  Agenda 
2020  strategy,  last  updated  in  2018.  One  of  the 
goals  of  this  strategy  is  to  increase  the  uptake  of 
digital  technologies  among  companies,  allowing 
them  to  optimise  current  business  processes  and 
create  completely  new  and  innovative  goods  and 
services. 

Estonia  is  advancing  in  the  field  of  artificial 
intelligence.  The  country  ranks  23rd  globally  and 
first in central and eastern Europe according to the 
Intelligence  Readiness 
Government  Artificial 
Index 2019 (Oxford Insights, 2019). It reflects the 
well-developed  e-government  and 
innovations 
such  as  the  digital  state  code  repository  launched 
in 2019, which private and public stakeholders can 
use free of charge. However, the full benefits from 
a  wide  use  of  artificial 
intelligence  remain 
untapped.  In  July  2019,  the  Estonian  government 
adopted  a  Strategy  on  artificial  intelligence.  The 
Strategy  aims  to  boost  the  use  of  artificial 
intelligence  in  both  the  public  and  the  private 
sectors,  as  well  as 
legal 
to 
environment  and  skills  necessary  to  facilitate  the 
process.  Estonia  is  looking  at  the  possibilities  for 
using  artificial  intelligence  in  a  broad  range  of 
areas  such  public  services,  transport,  energy  and 
education  to  tackle  demographic  and  productivity 
challenges.  

improve 

the 

Estonia  is  strategically  investing  in  new  digital 
technologies  and  cybersecurity.  The  country 
participates  in  EU-coordinated  programmes,  for 
example  as  a  member  of  the  High-Performance 
Computing 
(EuroHPC). 
Joint  Undertaking 
Furthermore,  Estonia  continues  to  focus  on  the 
importance  of  cybersecurity  as  an  enabler  of  a 
relies  on  strong 
sustainable  society,  which 
technological 
emergency 
and 
preparedness,  as  highlighted  in  the  most  recent 
update of the cybersecurity strategy (2019-2022).  

resilience 

Estonia  has  improved  its  broadband  coverage. 
Both  fixed  (92%)  and  fast  (83%)  broadband 
coverage  has  improved,  but  Estonia  is  still  below 
the  EU  average  as  regards  fixed  broadband.  As 
regards  total  ultra-fast  broadband  coverage  (an 
indicator with increasing importance for the future) 

39 

increased 

to  32.8%.  Despite 

83%  of  Estonia’s  households  are  covered  against 
the  EU  average  of  60%.  Ultra-fast  coverage  in 
rural  areas 
the 
availability  of  networks,  the  penetration  of  fast 
(44%) and ultra-fast (14%) broadband is below the 
EU  average  (49%  and  26%  respectively).  This 
could  be  due  to  broadband  prices  being  higher  in 
Estonia  than  the  EU  average.  The  government  is 
anticipating  some  difficulties  in  allowing  the  use 
of  sufficiently  large  blocks  in  the  3.6  GHz  band, 
because  of  restrictions  stemming  from  cross-
border coordination issues with non-EU countries. 

Transport 

As  a  sparsely  populated  and  peripheral 
country,  Estonia  depends  on  a  functioning 
transport  system,  and  in  particular  on  land 
transport. While Estonia’s transport infrastructure 
ranks  highly,  it  is  the  maritime  and  air  transport 
infrastructure  that  is  best  developed.  Estonia  has 
not made progress so far on completing the TEN-T 
core  network,  and  ranks  as  one  of  the  worst  both 
for rail and road networks. Investment needs in the 
transport sector until 2030 are increasing with total 
estimated  investment  need  of  €2  billion  for  the 
corridor  network,  €1.6  billion  for  Rail  Baltica (45) 
and  further  funds  needed  to  upgrade  major  roads. 
The actual development of the Rail Baltica project 
remains  a  priority.  If  completed,  Rail  Baltica  will 
improve 
and 
connectivity  with 
internal  market.  As 
highlighted  by  the  Supreme  Audit  Institutions  of 
Estonia,  Latvia  and  Lithuania  in  their  joint  report 
of  January  2020,  there  are  risks  in  the  project 
implementation  phase,  including  in  relation  to 
costs  and  schedule, 
the  existing  project 
if 
management  system  is  not  enhanced  to  be  more 
effective.  Going  forward,  the  outcome  of  the 
decision-making  process  on  the  future  model  of 
infrastructure  management  will  be  decisive  for 
realising  the  full  market  potential  of  Rail  Baltica. 
Other  sections  of  the  TEN-T  network  as  well  as 
connections between TEN-T corridors and national 
or local transport networks remain a challenge, and 
additional focus on prioritising the development of 
sustainable modes of transport.  

congestion, 
the 

sustainability 

(45)  New UIC standard gauge high-speed railway on the North 
Sea-Baltic core network corridor, C (2018)6969 final. 

3.4. Competitiveness reforms and investment 

Table 3.4.1:  Completion of TEN-T core network 2016, % in 

Estonia 

Source: European Commission 

for 

Ensuring  improvements  in  the  quality  of  the 
transport  infrastructure  remains  a  concern. 
Annual  infrastructure  costs  in  Estonia  amount  to 
about  €1  billion  (2016,  fixed  and  variable  costs), 
from which 90% is for road transport and from this 
(European 
66% 
Commission,  2019l).  A  better  overview  of 
infrastructure  quality  and  dedicated  investment  
would be  important  to help  maintain and improve 
the  secondary  (municipal)  road  infrastructure  in 
particular  as 
regional 
development.  

passenger 

important 

transport 

for 

is 

it 

Graph 3.4.5:  Share of environmental costs in Estonia for 

road and rail transport 

Source: European Commission 

system 

transport 

Estonia’s 
remains 
environmentally  unfriendly  and  few  incentives 
are  provided  to  change  preferences.  The  total 
external  cost  of  inland  transport  in  Estonia  is 
estimated  at  €1.5  billion  annually,  corresponding 
to  5.3%  of  Estonia’s  GDP.  51%  of  this  is 
environmental  costs  (EU  average  44%).  Road 
users generate 96% of these costs, of which 2/3 are 
caused by passenger transport. The transport sector 
is  the  main  contributor  to  lower  air  quality  in 
Tallinn.  Around 500 premature  deaths per  year  in 
2016  were  attributable 
to  fine 
particulate  matter  (PM2.5).  At  the  same  time, 

to  exposure 

40 

Road Conventional RailHigh Speed RailInland Waterways34.12.70not applicable32%8%14%29%18%Climate (CO2)Well-to-Tank  (CO2)Air pollutionHabitat damageNoise                                                           
 
 
 
  
3.4. Competitiveness reforms and investment 

three  Baltic  States;  building  a  high-voltage  direct 
current  line  between  Lithuania  and  Poland;  and 
carrying  out  optimisation  measures.  All  of  these 
actions  involve  significant  investments  in  the 
coming years. Estonia also continues to implement 
key electricity infrastructure projects that form part 
of the Baltic Energy Market Interconnection Plan. 
The  third  interconnection  between  Estonia  and 
Latvia,  planned  to  be  commissioned  in  2020,  will 
be  key  to  alleviating  congestion  at  the  border 
between the two Member States.  

While  the  overall  energy  efficiency  of  primary 
energy  consumption  has  improved,  efforts  are 
needed  to  remain  in  line  with  final  energy 
targets.  To  reach  its  energy  efficiency  targets, 
Estonia  decided  to  allocate  €100  million  over  the 
next 4 years to reconstruct apartment buildings. A 
further budget of €1 million was approved in 2018 
to  install  solar  panels  (Ministry  of  Economic 
2018).  The 
Affairs 
government  recognised  the  ongoing  challenges  in 
energy  efficiency  in  buildings  2020  by  dedicating 
€5.3  million  in  the  State  Budget  to  updates  to 
heating infrastructure.  

and  Communication, 

According 
to  Estonia’s  National  Energy  and 
Climate Plan meeting Estonia’s energy and climate 
goals  between  2021  and  2030  will  require  public 
expenditure  of  around  €347  million  in  the  energy 
sector, €589 million in transport, €1,046 million in 
the  renovation  of  the  building  stock  and  €278.5 
million in agriculture. This represents €226 million 
per year on average. Further investments from the 
private and non-profit sectors are expected.  

The  closure  of  the  least  efficient  blocks  of  oil 
shale-based electricity generation units presents 
an  opportunity  to  green  Estonia’s  electricity 
generation  mix.  Estonia  has  achieved  its  2020 
target  for  the  share  of  renewable  energy.  The 
renewable  energy  support  scheme, 
amended 
introduced  following  changes  in  the  Electricity 
Market  Act  in  2018,  has  the  potential  to  support 
further  growth  of  renewables,  provided  that  there 
is sufficient clarity on the tenders, auction process 
and  the  regulatory  framework  related  to  national 
security  restrictions  on  wind  project  deployment.  
The gradual phase-out of oil shale-based electricity 
generation  means  that  electricity  imports  and  the 
development  of  domestic  renewable  energy  will 
play a key role in ensuring security of supply. Oil 
shale-based  electricity  accounted  for  about  three 

Estonia’s  transport  taxes  do  not  support  the 
reduction  of  negative  externalities  as  only  time-
based  charges  on  heavy  goods  vehicles  are  used 
that  do  not  motivate  changes  in  user-preferences, 
in  particular  for  road  passenger  transport  (see 
Section 3.1.2). 

is 

into 

looking 

Estonia  expects  to  reach  its  10%  target  for  the 
share of renewable energy in transport by 2020 
through  obligation  on  retailers  to  achieve  a 
statistical  target  share  of  renewables  sold.  The 
2017  level  of  renewables  in  transport  was  only 
1.2%,  while  sales  of  alternative  fuel  vehicles 
decreased  from  2.7%  to  0.2%  between  2012  and 
2017,  despite  the  measures  taken  in  recent  years 
(46).  The  government 
the 
electrification of Estonia’s rail network that  today 
mostly  runs  on  diesel,  with  the  aim  of  mitigating 
greenhouse  gas  emissions  from  rail  by  2028.  The 
government  also  provided  a  limited  number  of 
subsidies  for  the  purchase  of  some  200  electric 
vehicles  (0.8%  of  annual  new  registrations)  in 
2019. It has also privatised the nationwide electric 
charging  network  that  comprises  165  charging 
stations. The Liquid Fuel Act sets the proportion of 
renewable fuel sold to 6.4% of all transport fuels; 
this is expected to increase to 10% by 2020. There 
are no plans to use more efficient measures such as 
emissions-based taxation or to increase support for 
the  charging  network  or  the  use  of  low  or  zero-
emission  zones,  or  to  limit  the  use  of  vehicles 
classed  as  older  under  EU  emission  standards. 
While  some  support  for  biomethane  and  other 
renewables  in  transport  has  been  implemented  in 
legislation.   

Energy Union  

Estonia  is  progressing  towards  synchronisation 
with  the  continental  European  grids,  and  this 
remains  a  key  priority  for  the  coming  years. 
The  ongoing  Baltic  Synchronisation  Project, 
scheduled  for  completion  by  the  end  of  2025,  is 
key  for  ensuring  security  of  supply  in  the  Baltic 
into 
countries  and 
the  potential  of 
the  Baltic  Sea.  The 
renewable  energy 
Implementation  Roadmap  of  June  2019  includes 
the  following  milestones:  building  the  necessary 
infrastructure to reinforce the internal  grids of  the 

tapping 
in 

(46)  Basic nation-wide network of electric fast-charger stations, 
measures to promote the use of biofuels in public transport, 
tax incentives to promote bio-methane use. 

41 

                                                           
3.4. Competitiveness reforms and investment 

under the national budget  for 2019–2022). Better-
targeted  measures  such  as  stimulating  industrial 
investments, 
and 
innovation  have  been  launched  in  both  regions  to 
help create well-paid jobs (see Section 3.4.1). 

diversification 

economic 

Regional  aspects  are  not  sufficiently  integrated 
in  sectoral  policies  and  the  national  regional 
development  objectives  will  probably  not  be 
met.  In  2018,  close  to  80%  (€79  million)  of 
regional  development  investments  from  Structural 
Funds  were  made  outside  of  Harju  and  Tartu 
counties. However, by the end of 2018, only about 
20%  of  the  selected  business  development  grants 
from  Structural  Funds  were  invested  outside  of 
Harju  and  Tartu  counties.  Only  5%  of  start-ups 
operate  outside  of  these  counties.  Current  public 
support  for  innovation  activities  has  not  met 
for 
regional 
or 
strengthening 
lagging 
behind.  Effective  implementation  of  the  regional 
policy  measures 
better-targeted 
cooperation  between  different  strategies  and 
authorities. 

business 
the  support 

to  regions 

requires 

calling 

needs, 

is  an 

intense 

The  number  of  people  moving  to  the  capital 
region  from  the  rest  of  the  country  has  slowed 
down,  but  the  number  of  daily  commuters  has 
increased (48).  There 
internal 
mobility towards other larger urban and functional 
urban  areas  (see  Table  3.4.2).  The  number  of 
commuters  to  urban  settlements  is  increasing, 
which puts additional pressure on public transport 
and traffic. The quality of secondary road networks 
(in  particular  local  roads)  remains  low  due  to 
underinvestment  in  road  maintenance.  Without 
investing more into connectivity, the attractiveness 
of the more remote areas will remain limited. 

Table 3.4.2:  Main socio-economic indicators  by degree of 

urbanisation, Estonia, 2018 

Source: Eurostat, European Commission elaboration 

quarters  of  Estonia’s  electricity  mix  in  2018.  The 
recent rapid increase in the price of EU emissions 
trading  scheme  allowances  has  led  to  an  increase 
in  electricity  imports  into  Estonia  from  non-EU 
the 
countries, 
competitiveness 
produced 
electricity.  

has 
domestically 

which 
of 

weakened 

3.4.3.  REGIONAL DIMENSION 

Despite rapid convergence with the EU, the gap 
in  social  and  economic  performance  between 
the  capital  region  and  the  rest  of  the  country 
has increased. Harju and Tartu counties’ share in 
the  Estonian  total economy increased to 74.2% in 
2017. At the same time, GDP per capita was below 
50% of the Estonian average in Jõgeva, Põlva and 
Võru  counties.  The  regional  divide  is  marked  by 
higher  wages  and  better  employment  and  career 
opportunities  in  the  capital  region.  As  a  result, 
university  graduates  do  not  return  to  rural  areas. 
Furthermore, those who return from abroad prefer 
to stay in Tallinn and Tartu. The 2018 monitoring 
the  regional  development  strategy 
report  of 
(Ministry of Finance, 2019) also confirmed that the 
regional differences in Estonia were still large and 
significant  shifts  towards  more  uniform  territorial 
development had not taken place.  

Disparities in terms of GDP per capita are also 
reflected in the regional differences observed in 
labour productivity. In 2016, labour productivity 
was  below  the  EU  average  in  all  NUTS3  regions 
of Estonia. Labour productivity in 2016 was close 
to the EU average in the capital regions of Põhja-
Eesti  (at  89%  of  the  EU  average),  while  ranging 
between  48%  and  56%  of  the  EU  average  in  the 
remaining  NUTS3 
regional 
competitiveness  index  in  Estonia  is  low,  at  53.9 
(Annoni, Dijkstra, 2019)(47).    

regions.  The 

south-east  Estonia 

More  pronounced  regional  challenges  are 
observed in two regions: in Ida-Viru county and 
in 
(see  Box 3.4.2  and 
Section 3.5). In order to better address the needs of 
these regions, in 2018 the government approved a 
new  development  programme 
Ida-Viru 
(€15 million  under  the  national  budget  for  2019–
2022)  and  for  south-east  Estonia  (€3.2 million 

for 

(47)  The EU Regional Competitiveness Index varies between 0 

and 100 (best performing EU region).   

(48)  Maakondlike  arenduskeskuste  võrgustiku  strateegia  2017-
2025  seirearuanne  2019,  Maakondlike  Arenduskeskuste 
Võrgustik 

42 

Unemployment rate (%), 2017Population aged 25-64 with tertiary education (%)Early leavers from school and training (%) NEET (%)AROPE (%)Cities5.851.38.210.822.1Towns and suburbs6.536.314.81620.4Rural areas5.731.31417.529.5                                                           
 
  
 
                                                           
3.4. Competitiveness reforms and investment 

restructuring 
systems.  The  analysis  of 
framework  was 
for 
stakeholder’  consultation.  The  review  of  the  early 
warning systems is ongoing.  

finalised  and  presented 

the 

E-Estonia  is  the  main  driver  of  transparency 
and  efficiency  in  the  public  sector.  The  country 
ranks  [2nd]  in  the  EU  in  digital  public  services 
(European  Commission  2019). 
It  has  well-
developed e-government and e-health systems, and 
all central government services and  municipalities 
provide services online. The country has one of the 
highest  shares  (93.1%)  of  e-government  users  in 
Europe,  indicating  citizens’  high  trust  in  the 
system.  Furthermore,  99%  of  public  services  are 
available  online  24/7.  In  December  2018,  the 
government  approved  the  concept  of  moving 
towards  a  more  seamless  government.  The  goal 
was  to  kick  off  with  15  life  event/business-event 
services  that  will  be  offered  proactively  for 
citizens.  Compared  to  current  e-services,  the  new 
seamless services will function proactively and are 
more user-centred. 

the 

such  as 

initiatives 

further  support 

New  technological  solutions  in  the  government 
sector  can 
the  country’s 
development.  Estonia  is  ranked  23rd  globally  in 
the  UN  e-Government  Development 
Index. 
Machine  learning  is  used  in  the  government’s 
operations  and  its  delivery  of  public  services 
integrated 
through 
government  data  exchange  portal.  Ways 
to 
capitalise  on  former  digital  investments  include 
using  artificial  intelligence  in  public  services,  for 
example to detect icy roads using satellite imagery, 
or improving the e-tax system. Estonia announced 
that  by  June  2020  it  will  prepare  legislation 
allowing  the  use  of  fully  autonomous  information 
systems  in  all  areas  of  life.  The  national  2019-21 
artificial intelligence strategy has already been put 
in place, making the public sector the frontrunner. 
the  Financial 
The  Ministry  of  Finance  and 
Supervisory 
considering 
are 
implementing a regulatory sandbox for the Fintech 
industry, where certain regulatory requirements are 
temporarily waived, so that enterprises can deploy 
their 
in  real-life  market 
conditions.  This  approach  holds  considerable 
promise  for  companies,  but  also  for  regulators, 
who  can  draw  experience  for  future  regulatory 
approaches.  

innovative  solutions 

Authority 

in  2007 

Local  governments  play  a  decreasing  role  in 
implementing public investments in Estonia and 
therefore  also  in  regional  policy  making.  Total 
public  sector  investment  decreased  from  6.0%  of 
GDP in 2007 to 5.5% of GDP in 2018, mainly due 
to  a  decrease  in  local  government  investments. 
While 
local  governments  executed 
investments worth 2.1% of GDP, this fell to 1.5% 
of  GDP  by  2018  (the  rest  being  executed  by  the 
central  government,  worth  about  4%  of  GDP). 
While  this  may  also  indicate  a  centralisation  of 
investment execution, it could also signal the lack 
of  financing  of  municipal  functions  (see  also 
Section 3.1). 

3.4.4.  INSTITUTIONAL QUALITY 

Despite  the  favourable  business  environment, 
some  challenges  persist.  Estonia  is  among  the 
best  performing  economies  in  the  World  Bank 
Doing business report, but between 2018 and 2020 
its  ranking  was  slightly  downgraded  due  to  faster 
reforms  in  other  countries.  Resolving  insolvency 
and  protecting  minority  shareholders  remain  the 
most  critical  points 
(European  Commission, 
2018b; European Commission, 2019a). In addition, 
the ambitious ‘zero-bureaucracy’ project identified 
a  large  number  of  administrative  burdens  and 
implementation  of 
bottlenecks.  However, 
measures 
is  still 
to 
ongoing.  Moreover,  the  available  knowledge  and 
evidence  are  not  fully  used  in  the  policy  making 
process. 
public 
consultations  have  not  been  properly  carried  out 
for  important  policy  initiatives  such  as  pensions 
reforms.  

these  challenges 

assessment 

Impact 

tackle 

and 

the 

draft 

legislation.  The 

Estonia  is  still  in  the  process  of  revising  its 
insolvency 
revised 
bankruptcy law has been prepared by the Ministry 
of  Justice  and  is  awaiting  adoption.  Work  has 
started  on  drafting  the  law  for  restructuring,  debt 
restructuring  and  debt  discharge  (including  the 
transposition  of  the  Restructuring  and  Insolvency 
Directive).  The  Ministry  of  Justice  commissioned 
an analysis of the impact of the Restructuring and 
Insolvency  Directive  on  the  existing  Estonian 
restructuring  framework  since  it  is  supposed  to 
bring  significant  changes  to  it.  Currently,  Estonia 
is  implementing  a  two-phase  structural  reform 
support programme   project with the World Bank 
on  preventive  restructuring  and  on  early  warning 

43 

3.4. Competitiveness reforms and investment 

procurement  criteria  will  be  introduced  for  the 
central  government  sector,  furniture,  cleaning 
products  and  services,  copying  and  graphic  paper 
and  computers  and  monitors.  Green  public 
procurement is periodically monitored through the 
official  electronic  public  procurement  website  (e-
procurement  Estonia).  In  2018,  there  were  7,854 
public procurements in Estonia, of which only 3% 
included  green  criteria.  The  value  of  public 
procurement  is  a  little  over  €2  billion,  which 
makes  up  10.3%  of  GDP  and  26.1%  of  the  State 
budget.  

to 

room 

include 

improve 

assurance 

significantly 

A  recent  assessment  showed  that  Estonia  still 
has 
its 
environmental  governance  performance.  While 
Estonia  performs  well  on  public  participation  and 
access  to  justice,  several  weak  points  remain.  
These 
and 
compliance 
interventions  that  authorities  undertake  to  ensure 
that  economic  and  other  activities  comply  with 
environmental  rules.  This  is  a  lack  of  online 
information  on  inspections,  and  public  awareness 
initiatives  to  help  citizens  submit  environmental 
alerts. In addition, the potential of geo-spatial data 
and  earth  observation  is  not  fully  used  in  support 
of  environmental  compliance.  Environmental 
governance  is  one  of  the  elements  that  help  to 
reach SDG 16 justice and strong institutions.  

The  use  of  public  procurement  in  support  of 
strategic  objectives  is  still  limited.  Although 
Estonia  has  a  highly  developed  e-procurement 
system and the EU directives have been transposed 
into national law, the high use of price as the only 
or major award criterion means that the potential to 
achieve  policy  objectives  as  regards  greening  of 
the economy and in social and innovation policies 
remains  untapped.  The  proportion  of  procedures 
awarded only on the basis of lowest price was 88% 
in  2018.  Additionally,  the  relatively  high  number 
of  procedures  with  single  bidders  indicates  lower 
competition and poses risks to the efficiency of the 
process.  This  deprives  public  buyers  from  having 
more  options,  and  getting  better  value  for  money. 
Professionalisation  of  contracting  authorities  is 
still  insufficient  for  efficiently  tackling    these  and 
supporting 
public 
strategic 
procurement. Efforts in this direction would result 
level  of  awareness,  knowledge, 
in  a  higher 
to  new 
related 
experience  and  capabilities 
technologies and market developments.  

role 

the 

of 

Green  public  procurement  can  help 
to 
significantly lower the negative impact of public 
spending  on  the  environment  and  support 
sustainable  development 
goals.  Currently, 
environmentally-friendly  requirements  are  only 
mandatory  for  vehicles.  Mandatory  green  public 

44 

3.4. Competitiveness reforms and investment 

Box 3.4.4: Regional disparities 

In  recent  years,  the  gap  in  economic  and  social  development  between  Estonia’s  regions  has  widened.  In 
particular,  the  economic  progress  helping  the  north-east  (Ida-Viru)  and  south-east  (Kagu-Eesti)  catch  up 
with  the  Estonian  average  has  stalled  (European  Commission,  2019[a]).  These  two  regions  have  faced 
challenges in aligning with the national average due to their economic and demographic structure, as well as 
their  situation  on  the  periphery.  Problems  have  intensified  over  the  years  due  to  the  declining  and  ageing 
population, high poverty rates and increased pressure on public services such as healthcare, education and 
social  services.  Both  regions  each  have  each  specific  development  needs,  and  helping  them  grow  could 
unlock the economic potential for the whole country.  

Ida-Viru county is the third largest and most industrial county in Estonia, and is dominated by the oil shale 
and  chemical  industries.  Together,  those  industries  accounted  for almost  half  of  the  county´s  GDP  in  2017 
and  indirectly  provided  20,000  workplaces  (see  Section  3.5).  At  the  same  time,  the  unemployment  rate  is 
twice that of the rest of Estonia, at around 10% due to low business activity. Environmental degradation and 
the  fact  that  a  large  part  of  the  population  has  skills  limited  to  the  oil  shale  sector  make  Ida-Viru  less 
attractive  for  investment.  This  gives  rise  to  market  and  policy  failures  common  to  post-industrial  regions, 
notably in access to finance and in workforce mobility. A successful transition of the oil shale sector is the 
challenge  not  only  for  the  region,  but  also  for  the  whole  country,  as  the  oil  shale  industry  is  an  important 
contributor  to  the  budget,  energy  security  and  employment.  Measures  to  increase  investment  in  innovative 
sectors  and  to  improve  the  business  environment  to  create  jobs  and  have  people  with  the  right  skills  are 
essential,  but  may  not  be  sufficient.    Consideration  could  be  given  to  using  the  existing  infrastructure  for 
development of other types of industry.  

South-east  Estonia  is  the  most  remote  region  in  the  country;  it  has  limited  industry  and  is  dependent  on 
agriculture, forestry and tourism. The region is characterised by a high share of companies with fewer than 
10 employees, low private investment and job creation rates.  Although it is relatively remote  from urban 
centres,  the  availability  of  public  transport  is  limited,  and  the  quality  of  the  road  network  is  poor  due  to 
underinvestment in road upgrading and maintenance. Gravel roads account for 45% to 50% of all roads (see 
Section 3.4.1).  

The  protracted  transition  in  both  regions  comes  with  a  social  cost.  The  lack  of  jobs  and  low  salaries 
contribute  to  the  high  relative  poverty  rate,  which  ranged  from  29%  to  38%  in  2018,  compared  to  the 
national average of 21.7%. In 2019, unemployment in both regions was above the country’s average and the 
number of job vacancies was lower than elsewhere in Estonia (1). Poverty traps in these regions have been 
closely  linked  to  the  high  share  of  disabled  people  among  the  total  population (2).  Given  the  continued 
depopulation, the local authorities have difficulties in ensuring service delivery to citizens.  

As  flagged  in  Sections  3.1  and  3.3,  several  ongoing  and  future  reforms,  such  as  the  reform  of  local 
government  financing,  the  Work  Ability  reform,  anticipated  reform  of  integrated  social  and  healthcare 
services, and the rolling out of policies to address skills gaps, can help to address development challenges in 
these regions. While Estonia designed specific measures for the regions regarding business development and 
jobs creation, their uptake and effectiveness have been relatively low.  

The  government initiative to provide tailored and simpler business support measures  for the north-east and 
south-east regions could help to unlock innovation and business development. To increase the attractiveness 
of these regions for investments and skilled labour, additional measures are necessary to improve connectivity 
(roads  quality  and  access  to  high-speed  internet).  Involving  the  county  municipalities’  associations  in  the 
early  stages  of  the  preparation  of  sectorial  investment  plans  would  be  important  in  addressing  the  specific 
development  needs  of  the  regions  across  the  sectors.  Reinforcing  the  county  development  centres  to  assist 
municipalities and companies to prepare and implement projects could  
help them catch up with the rest of the country more quickly. 

The  Regional  development  strategy  2014-2020  and  the  regional  programs  provide  financing  to  the  regions 
which are lagging behind, but significantly stronger interventions would be important. The lack of sufficient 
collaterals is restricting access to finance and holding back not only companies’ investments but also people’s 
investments into energy efficient housing, leading to the low value of the real estate. Setting up a guarantee 
scheme  to  compensate  of  the  lack  of  collaterals  is  one  of  many  possible  measures  that  could  improve  the 
regions’ development opportunities. Additional measures and resources could be useful.  

45 

 
 
3.4. Competitiveness reforms and investment 

Estonia  does  not  have  tax  incentives  for  investments  in  these  regions.  Combined  efforts  from  all  public 
authorities  would  be  necessary  to  attract  important  and  sustainable  investments.  In  addition,  these  efforts 
would need to be supported by providing the necessary social and transport infrastructure.  

In  South-East  Estonia,  region-specific  support  could  be  useful  to  improve  communication  connections  and 
promote distant working and learning.  

(1)  In Q3 2019 job vacancy rate in Ida-Viru county was 3% and in Põlva county 0.3%. 
(2)  Ida-Viru 18%, increasing to close to 25% in Põlva 

46 

 
 
 
 
  
3.5.  ENVIRONMENTAL SUSTAINABILITY 

Estonia  faces  increasing  macroeconomic  and 
social  costs  from  extensive  reliance  on  carbon-
intensive energy in  key sectors of the economy. 
While  energy  production  has  a  high  carbon 
content,  the  problem  is  compounded  by  the  high 
energy  intensity  of  buildings  and  transport.  In 
2017,  Estonia  was  one  of  the  most  carbon  and 
energy  intensive  economy  in  the  EU,  and  in  per 
capita terms, the total CO2 emissions amounted to 
nearly  twice  the  EU  average (49).  Such  a  high 
carbon  intensity  reflects  the  importance  of  the  oil 
shale  sector.  Oil  shale  accounts  for  75%  of 
Estonia’s  electricity  generation.  In  total,  about 
80%  of  Estonia’s  energy  mix  is  from  fossil  fuels, 
and only 18% of gross inland energy consumption 
energy  production  comes  from  renewable  energy 
In  2017,  energy-related  emissions 
sources. 
accounted  for  89%  of  Estonia’s  total  greenhouse 
gas  emissions,  and  emissions 
from  carbon-
intensive  oil  shale  represented  69%  of  energy-
terms  of  energy 
related  CO2  emissions.  In 
consumption,  residential  buildings  (heating  and 
electricity)  account  for  33%  of  final  energy 
consumption, and transport accounts for 29% (see 
Graph 5.3.1).  

Graph 3.5.1:  Final energy consumption by sector 2008-2017 

Source: European Commission 

Estonia  will  likely  miss  its  national  greenhouse 
gas  emission  targets  for  2030 (50).  Current 

(49)  15  tonnes  of  CO2  equivalent  per  capita  compared  to  EU 

average of 8.7 tonnes 

(50)  These 

targets  are  covered  under 

the  effort  sharing 
legislation.  The  effort  sharing  legislation  covers  those 

a 

projections  based  on  existing  measures  show  that 
the country is likely to achieve the 2020 target. At 
the  same  time,  current  projections  based  both  on 
existing  and  additional  measures  illustrate  that 
Estonia will miss its effort sharing target for 2030 
by 
energy 
significant  margin.  While 
consumption  in  the  residential  sector  decreased 
between 2000 and 2015, it has risen again recently. 
The energy consumption of transport has increased 
compared to 2004. Overall, several sectors are not 
making  enough  effort  to  decarbonise. Action  to 
improve  energy  efficiency  in  buildings  and  the 
transport  sector  has  been  insufficient  and  has  not 
led  to  significant  improvements  (see  sections  on 
transport  and  energy).  Estonia  is  planning  to 
update  its  2017  General  Principles  of  Climate 
Policy  guidance  to  incorporate  findings  from  the 
recently commissioned study ‘Analysis to increase 
the  Estonian  climate  ambition  by  2050’.  In  this 
way,  Estonia  is  seeking  to  align  its  long-term 
policy vision with concrete ways to reach the 2030 
effort sharing target.   

Estonia  has  long  been  highly  dependent  on  the 
oil  shale  sector.  On  average,  the  oil  shale  sector 
amounts to about 4% of GDP and adds about 1% 
annually to budget revenues. At the same time, the 
oil shale industry is largely responsible for Estonia 
being the biggest generator of hazardous waste per 
capita  in  the  EU.  Oil  shale  mining  produces  70% 
of  Estonia’s  non-hazardous  waste  and  oil  shale 
combustion and processing account for 90% of the 
country’s  hazardous  waste,  nearly  all  of  which  is 
deposited  in  landfills.  The  century  of  oil  shale 
mining and burning activities has left Estonia with 
contaminated 
sites  and  poor  environmental 
conditions  in  the  mining  area.  Pollution  from  oil 
shale  based  production  has  resulted  in  health 
problems  affecting  residents  in  Ida-Viru  county.  
The  contribution  of  energy  generation  and  the 
mining  sector  (mainly  from  Eesti  Energia)  to  the 
budget masks significant national and EU spending 
to  improve  the  environmental  situation  in  landfill 
disposal  sites  and  address  the  socio-economic 
consequences of Ida-Viru county’s dependency on 
oil shale. The Just Transition Fund, as proposed by 
the  European  Commission,  could  contribute  to 
the   limiting  the  potential  impact  of  the  energy 
transition  in  Ida-Viru  region  (see  Annex  D  for 
dedicated investment guidance for the Fund). 

greenhouse gas emissions that are not regulated in the EU 
emissions trading system.  

47 

02004006008001,0001,20008091011121314151617Thousand tonnes of oil equivalent (TOE)Industry sectorTransport sectorOther sectors - commercial and public servicesOther sectors - households 
    
                                                           
                                                                                   
3.5. Environmental sustainability 

CO2  emissions  per  km  from  new  passenger  cars 
and  the  use  of  trains  in  passenger  transport. 
Estonia’s  consumption  of  energy  in  the  housing 
sector  is  significantly  higher  than  in  many  of  the 
neighbouring  Nordic  and  Baltic  countries  with  a 
similar  climate.  As  the  buildings  stock  is  rather 
old,  the  energy  demand  for  heating  per  surface 
area  in  residential  buildings  is  among  the  highest 
in  the  EU  (International  Energy  Agency,  2019). 
Even though investments to better insulate  houses 
have  been  made  in  recent  decades,  other  factors 
such  as  more  and  larger  dwellings,  and  more 
appliances  per  dwelling  have  actually  led  to 
increased  energy  consumption  in  housing  on  the 
whole (Odyssee-Mure, 2018). 

for 

low 

income  households 

Moving  towards  more  sustainable  transport 
and  housing  can  bring  considerable  savings,  in 
particular 
(see 
Section 3.3).  Studies  show  that  improving  the 
energy  efficiency  of  buildings  can  reduce  total 
heating  demand  by  half 
(MEAC,  2017b). 
However,  the  less  energy  efficient  buildings  in 
Estonia are owned by people with limited financial 
resources  and  more  difficult  access  to  credit.   
While  loan  guarantees  and  grants  are  available  to 
improve 
renovating  old 
efficiency, 
buildings requires significant own resources under 
current  measures  and  is  not  attainable  for  many 
low  or  even  medium  income  households,  in 
particular in rural areas where real estate values are 
low. Similarly, the ability of low income earners to 
invest in new, energy efficient cars and thus enjoy 
the  potential  fuel  savings  is  limited.  In  addition, 
the transport demand of the rural population is not 
met.  The  transition  would  require  identifying 
market  failures  impeding  access  to  schemes  that 
support investment in energy efficiency. 

energy 

transition 
the 

A  comprehensive  circular  economy  strategy 
could  help  Estonia 
towards 
in 
negative 
reduce 
decarbonisation, 
environmental impacts of the oil shale industry 
and  boost  the  economy.  The  national  circular 
economy  strategy  and  action  plan  are  under 
preparation  and  are  expected  to  be  finalised  in 
2021. Until then Estonia is lacking an overarching 
strategy  for  the  circular  economy.  Using  the 
potential of the circular economy is a fundamental 
step  towards  achieving  climate  targets.  A  recent 
study on How the circular economy tackles climate 
change 
Foundation, 
2019) suggests  that  the  circular  economy  is  a 

Macarthur 

(Ellen 

Decarbonising the energy sector would improve 
Estonia’s  competitiveness  and  contribute  to 
achieving  sustainable  development  goals  7  and 
12.  The  prices  of  energy  in  the  EU  reflect  the 
environmental  costs  via  the  EU  emission  trading 
system.  Combined  with  changes  in  the  global 
crude  oil  prices  in  recent  years,  the  high  carbon 
intensity  of  energy  production  caused  the  loss  of 
competitiveness  of  the  oil  shale  sector,  adding  to 
the 
(see 
Section 3.4).  Reducing  the  reliance  on  oil  shale 
energy 
the  economy’s 
competitiveness  in  the  medium  term.  This  makes 
wider  deployment  of  domestic  renewable  energy 
and  growth-enhancing  environmental  investment 
crucial.  

the  middle-income 

intensity  can 

risk  of 

improve 

trap 

Graph 3.5.2:  Final energy consumption by sector in 2017 

Source: European Commission, based on Eurostat data 

2018b; 

Having  less  carbon  intensive  transport  and 
more  energy  efficient  housing  sectors  will 
require  considerable 
investment.  Estonia’s 
transport sector has a large negative environmental 
footprint  due  to  the  stock  of  relatively  old  cars 
(European  Commission, 
European 
Commission,  2019a),  the  most  environmentally 
unfriendly  new  vehicle  fleet  in  the  EU  and  high 
dependence on fossil fuels (98%). Around 65% of 
road  vehicles  run  on  diesel  and  33%  on  gasoline, 
while  railways  are  underdeveloped  and  also 
operate  mainly on diesel. This  makes Estonia one 
of the worst performers on the relevant sustainable 
development  goals  7,  12  and  13.  On  a  related 
sustainable development goal 9, Estonia is equally 
among  the  worst  performers  in  the  EU  as  regards 

48 

16.3%28.6%16.8%33.6%4.7%IndustryTransportCommercial and public servicesHouseholdsAgriculture, forestry and fishingOthers (not elsewhere specified)   
3.5. Environmental sustainability 

2017 (53).The  related  oil  shale  processing  industry 
employs  around  10,000  people,  accounting  for 
23%  of  the  county’s  total  employment.  Around 
20,000  people  are  indirectly  impacted  by  the 
transition process (in logistics, services,  etc.). The 
number of jobs in the oil shale sector is decreasing 
and a further drop is expected thanks to efficiency 
gains in the mining sector and to the restructuring 
of  the  electricity  and  oil  industries.  Ida-Viru 
county’s capacity to absorb efficiently the phasing 
out  of  oil  shale  could  be  limited  because  the 
employment  rate 
the 
is  already 
Estonian  average (54)  and  many  residents  lack 
Estonian language skills, limiting their options for 
finding a job in other Estonian regions. 

lower 

than 

losses 

A transition to a more energy efficient economy 
offers  opportunities  for  more  innovation  and 
better  jobs,  but  the  social  costs  have  to  be 
factored  in.  It  is  estimated  that  middle-skilled, 
middle-paying  jobs  will  be  created  which  will 
somewhat  mitigate  the  current  job  polarisation 
(European  Commission,  2019e).  The  reduction  in 
the oil shale sector’s activity might also yield some 
health benefits. Estonia is planning to mitigate the 
job 
industries  by 
building  sources  of  renewable  energy  production, 
and  through  investments  and  measures  to  foster 
in 
entrepreneurship.  Additional 
upskilling  and  reskilling,  and  re-evaluating  social 
assistance and active labour market policies will be 
key  to  the  success  of  the  transition  for  the  people 
employed in carbon-intensive sectors. The number 
of  jobs  in  the  oil  shale  sector  is  decreasing 
indicating  that  the  transition  is  already  under  way 
and adding further pressure to act. 

in  carbon-intensive 

investments 

(53)  Based on Ministry of  Finance data, 14.9.2019 Letter  from 
the Ministry of Economic Affairs and Communications, the 
Ministry of the Environment and the Ministry of Finance to 
Mr Frans Timmermans. 

(54)  52% for women, 61% for men in Ida-Viru, 68% and 76% 
for all Estonia - Statistics Estonia, www.stat.ee, 2018 data.  

powerful  force  for  mitigating  climate  change. 
Emissions  in  material-intensive  industries  and 
value chains can be reduced by up to 56% through 
consistently applying circular economy principles. 
Moreover,  the  potential  of  the  circular  economy 
can  be  used  to  boost  economic  development  and 
employment (51).  

The  Estonian  National  Energy  and  Climate 
Plan  envisages  creating  a  competitive  low-
carbon  economy  and  reducing  greenhouse  gas 
emissions (52).  The  plan  sets  ambitious  objectives 
and  focuses  on  the  energy,  transportation  and 
industry  sectors.  However,  the  plan  does  not 
envisage  any  comprehensive  tax  measures,  which 
would  help  the  country  to  meet  those  objectives 
(see  Section 3.1.2).  Furthermore,  allowing  local 
governments  more  flexibility  to  establish  local 
environmental  taxes  and  other  measures  could 
support local community engagement and improve 
overall  results  (see  Section 3.1.2).  It  will  be 
important to offset the negative regional economic 
and  social  impacts,  including  energy  poverty  by 
ensuring  that  people  are  able  to  benefit  from  new 
opportunities. To this end, it would be important to 
develop  a  comprehensive  transformation  strategy, 
encompassing  economic  and  social  aspects  of  the 
industrial 
in  partnership  with  local 
authorities and other relevant partners. 

transition 

The  transition  process  in  Ida-Viru  county  is 
expected  to  severely  impact  local  communities 
that  are  dependent  on  oil  shale.  The  transition 
may  result  in  more  unemployment,  fewer  job 
opportunities, 
social 
challenges.  Mining,  oil  shale-based  electricity 
production  and  the  chemical  industry  made  up 
in 
around  45%  of  Ida-Viru  county’s  GDP 

skills  mismatches  and 

(51)  It  has  been  suggested  that  Estonia  is  the  EU  country  that 
would  benefit  most  from  circular  economy  activities  in 
terms  of  GDP  increase  and  labour.  Namely,  Estonia  can 
have  particularly  large  improvements  in  GDP  from  the 
improved trade balance driven by reduction in imports. The 
most  obvious  shift  in  employment  patterns  would  be 
between  job  losses  in  sectors  that  extract  and  process  raw 
materials,  such  as  oil  shale  industry,  and  job  increases  in 
that  offer  recycling  and  repairing  services. 
sectors 
Employment opportunities in the circular economy extend 
to small and medium-sized enterprises via the development 
of 
and 
entrepreneurship and increased development of the service-
based  economy. 
(European  Commission,  Cambridge 
Econometrics, Trinomics, and ICF, 2018) 

innovation 

increased 

logistics, 

reverse 

(52)  The  Commission  will  assess,  in  the  course  of  2020,  the 
final  National  Energy  and  Climate  lans  submitted  by 
Estonia on 20 December 2019.     

49 

                                                           
 
                                                           
ANNEX A: OVERVIEW TABLE 

Commitments 

Summary assessment (55)   

2019 country-specific recommendations (CSRs)  

CSR 1: 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 
the 
enforcement  of  the  anti-money  laundering 
framework.  

supervision 

effective 

and 

  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. 

Estonia has made Not Assessed in addressing CSR 1 

  The assessment of compliance with the Stability 
and Growth Pact will be included in the spring 
when final data for 2019 will be available. 

its  anti-money 

Limited progress was achieved in ensuring effective 
supervision  and  the  enforcement  of  the  anti-money 
laundering  framework.  Finantsinspektsioon  took  a 
number  of  steps  against  non-compliant  credit 
institutions.  However, 
laundering 
supervisory capacity remains limited both in terms of 
human resources and tools. This hampers its capacity 
to  carry  out  effective  supervision.  A  risk-based 
approach  to  supervision  has  not  yet  been  fully 
implemented.  As  the  introduction  of  legislation  to 
raise sanction levels has been delayed and is not yet in 
place,  fines  continue  to  be  neither  effective,  nor 
the 
proportionate  or  dissuasive.  This  hampers 

(55)  The  following  categories  are  used 

the  country-specific  recommendations:  
No progress: The Member State has not credibly announced nor adopted any measures to address the CSR. Below a number of 
non-exhaustive typical situations that could be covered under this, to be interpreted on a case by case basis taking into account 
country-specific conditions:  

to  assess  progress 

implementing 

in 

no  legal,  administrative,  or  budgetary  measures  have  been  announced  in  the  National  Reform  Programme  or  in  other  official 
communication  to  the  national  Parliament  /  relevant  parliamentary  committees,  the  European  Commission,  or  announced  in 
public (e.g. in a press statement, information on government's website);  
no non-legislative acts have been presented by the governing or legislator body; 
the  Member  State  has  taken  initial  steps  in  addressing  the  CSR,  such  as  commissioning  a  study  or  setting  up  a  study  group  to 
analyse possible measures that would need to be taken (unless the CSR explicitly asks for orientations or exploratory actions), 
while clearly-specified measure(s) to address the CSR has not been proposed. 

Limited progress: The Member State has:  
announced certain measures but these only address the CSR to a limited extent; 
and/or 
presented  legislative  acts  in  the  governing  or  legislator  body  but  these  have  not  been  adopted  yet  and  substantial  non-legislative 

further work is needed before the CSR will be implemented; 

presented non-legislative acts, yet with no further follow-up in terms of implementation which is needed to address the CSR. 
Some progress: The Member State has adopted measures that partly address the CSR  
and/or  
the Member State has adopted measures that address the CSR, but a fair amount of work is still needed to fully address the CSR as 
only  a  few  of  the  adopted  measures  have  been  implemented.  For  instance:  adopted  by  national  parliament;  by  ministerial 
decision; but no implementing decisions are in place.  

Substantial progress: The Member State has adopted measures that go a long way in addressing the CSR and most of which have 

been implemented.  

Full implementation: The Member State has implemented all measures needed to address the CSR appropriately.  

50 

 
                                                           
 
CSR  2:  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.  

  Address 

skills 

shortages 

foster 
innovation  by  improving  the  capacity  and 
labour  market  relevance  of  the  education 
and training system. 

and 

 

Improve  the  adequacy  of  the  social  safety 
net and access to affordable and integrated 
social services. 

A. Overview Table 

deterrent effect of supervisory measures, as shown by 
recent  cases.  Progress  as  regards  enforcement  also 
remains  limited.  Prosecutions  and  convictions  in 
money laundering cases remain limited. The exchange 
of information between the Financial Intelligence Unit 
and  law  enforcement  authorities  is  also  seldom 
proactive.  

  Estonia  has  made  some  progress  in  addressing 

CSR 2 

Some  progress  was  made  to  improve  the  labour 
market  relevance  of  both  higher  and  vocational 
education.  The  performance-based  funding  system  of 
universities  and  incentives  to  increase  enrolments  in 
certain  study  fields  are  helping  to  align  skills  supply 
to labour demand. The forecasting system OSKA has 
been  evaluated.  The  results  of  the  evaluation  will  be 
used  to  make  the  skills  supply  match  the  labour 
market  demand  at  each  level  of  the  education  and 
training  system.    A  number  of  regulations  helping 
implement  the  recommendation  entered  into  force 
since  June  2019,  notably  a  regulation  assessing  the 
quality of the conditions and procedure for vocational 
education on the principles, conditions and procedure 
for  support  for  the  activities  of  vocational  education 
institutions and an amendment to the regulation on the 
implementation procedure for apprenticeships. 

Some progress was made in improving the adequacy 
of  the  social  safety  net.  Since  April  2020,  the  base 
amount of pension will be increased by €7 in addition 
to the annual pension increase from indexation of €38. 
The  changes  to  the  second  pillar  are  expected  to 
reduce  the  future  sustainability  and  adequacy  of 
pensions.  Annual  increases  from  indexation  took 
place for subsistence benefit,  work ability allowance, 
unemployment 
unemployment 
insurance  benefit.  As  of  2020,  disabled  children’s 
benefits will be increased two- to threefold depending 
on  the  level  of  disability  to  maximum  €241  (from 
€80.55  in  2019).  The  changes  in  the  first  pillar 
pension  formula  will  take  effect  as  of  2021  and  will 
address  the  pension  adequacy  of  low-wage  earners. 
Limited  progress  was  made  in  providing  good 
quality  and  affordable  social  services.  There  is  an 

allowance, 

and 

51 

A. Overview Table 

agreement    on  the  concept  regarding  the    financing 
and  management  model  for  long-term  care  services. 
However,  a  new  framework  for  integrated  provision 
of  social  and  healthcare  services  has  yet  to  be 
designed and implemented. Some measures have been 
taken: for example, care homes have been made more 
energy efficient and  more accessible; social  transport 
improved  and  a  dementia  competence  centre  has 
developed. 

three  years  of  a  child’s 

Some  progress  As  of  July  2020,  paternal  leave  will 
increase from 10 days to 30 days. As of July 2020, the 
use  of  parental  leave  period  will  be  flexible  for  the 
first 
is 
developing  information  technology  tools  to  help 
employers to increase pay transparency and is running 
a  research  project  to  address  the  unexplained  part  of 
the gender pay.  

life..  Estonia 

the 

implementation  of 

Estonia  has  made  limited  progress  in  addressing 
CSR 3.  R&D  investments  by  the  private  sector  have 
remained low and have decreased further over the last 
years to 0.59% of GDP in 2018. Regarding investment 
in energy infrastructure, Estonia has made substantial 
the  Baltic 
progress,  as 
interconnection  project  is  proceeding  as  expected. 
Estonia  has  made  some  progress  with  regards  to 
investment in energy efficiency, but improving access 
of  low  and  medium  income  households  to  finance 
could  facilitate  further  improvements.  Estonia  has 
made  limited  progress  with  focusing  its  investment 
related  economic  policies  on  resource  efficiency  and 
no progress with respect  to sustainable transport.  

  Take  measures  to  reduce  the  gender  pay 
improving  wage 

including  by 

gap, 
transparency. 

CSR  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. 

Europe 2020 (national targets and progress)  

Employment  rate  target  set  in  the  NRP:  76% 
(20-64).  

The target was already reached in 2015 (76.5%) and it 
increased further to 79.5% in 2018. 

R&D  target  set  in  the  NRP:  3%  of  GDP,  of 
which 2% for the private sector.  

In 2018, expenditure on R&D reached 1.38% of GDP, 
the  private  sector.  Public 
of  which  0.59%  by 
expenditure increased to 0.79% of GDP in 2018 (from 
0.66% in 2017).  

National  greenhouse  gas  (GHG)  emissions 
target:    maximum  11%  increase  in  2020 
compared  with  2005  (in  sectors  not  included 

Provisional  GHG  emissions  data  for  2018  show  that 
Estonia currently emits 17% more GHG emissions in 
the  sectors  not  included  in  the  EU  emissions  trading 
system  than  it  did  in  2005.  Projections  with  existing 

52 

 
 
A. Overview Table 

in the EU emissions trading scheme) 

measures,  however,  indicate  that  Estonia  will  likely 
meet its 2020 target of an increase of at most 11% in 
the  GHG  emissions  from  sectors  not  included  in  the 
EU emissions trading system. 

2020 renewable energy target: 25%  

With  a  renewable  energy  share  of  30%  in  2018, 
Estonia is already above its 25% target for 2020.   

With  a  3.3%  share  of  renewable  energy  sources  in 
transport  in  2018,  Estonia  is  lagging  behind  the 
binding  10%  target  in  transport  to  be  achieved  by 
2020.  

In  2018,  Estonia’s  primary  energy  consumption 
increased  by  11%  to  6.2  Mtoe,  compared  to  2017. 
Final  energy  consumption  increased  by  3%  to  3.0 
Mtoe. 

Energy  efficiency,  2020  energy  consumption 
targets:  

Estonia's 2020 energy efficiency target is  6.5 
Mtoe 
energy 
in 
consumption  (2.8  Mtoe  expressed  in  final 
energy consumption)  

expressed 

primary 

Early  school/training  leaving  target:  9.5%  of 
the  18-24  year-olds  with  at  most  lower 
secondary education and who are currently not 
in further education or training.   

Estonia  is  moving  away  from  the  target,  the  rate 
deteriorated  to  11.3  in  2018  (from  9.7%  in  2017). 
Gender differences are significant. 

Tertiary  education  target:  40%  of  population 
aged 30-34.  

With 47.2% in 2018, Estonia is well above its national 
target. 

Target  for  reducing  the  number  of  people  at 
risk  of  poverty:  from  17.5%  in  2010  (income 
year) to 15% in 2020 (income year). 

Overall  at-risk-of-poverty  rate  increased  to  21.9%  in 
2018 (from 21% in 2017). 

53 

 
ANNEX B: COMMISSION DEBT SUSTAINABILITY ANALYSIS AND 

FISCAL RISKS 

54 

General government debt projections under baseline, alternative scenarios and sensitivity tests2018201920202021202220232024202520262027202820292030Gross debt ratio8.48.78.48.28.18.08.18.18.18.28.38.38.4Changes in the ratio (-1+2+3)-1.00.3-0.3-0.2-0.1-0.10.00.00.00.10.10.10.1of which(1) Primary balance (1.1+1.2+1.3)-0.5-0.2-0.1-0.2-0.3-0.3-0.4-0.4-0.4-0.4-0.4-0.4-0.4(1.1) Structural primary balance (1.1.1-1.1.2+1.1.3)-2.2-1.6-0.9-0.4-0.5-0.4-0.4-0.4-0.4-0.4-0.4-0.4-0.4(1.1.1) Structural primary balance (bef. CoA)-2.2-1.6-0.9-0.4-0.4-0.4-0.4-0.4-0.4-0.4-0.4-0.4-0.4(1.1.2) Cost of ageing0.10.0-0.1-0.10.00.00.00.00.0(1.1.3) Others (taxes and property incomes)0.00.00.00.00.00.00.00.00.0(1.2) Cyclical component1.71.40.70.20.20.10.00.00.00.00.00.00.0(1.3) One-off and other temporary measures0.00.00.00.00.00.00.00.00.00.00.00.00.0(2) Snowball effect (2.1+2.2+2.3)-0.8-0.5-0.4-0.4-0.4-0.4-0.3-0.4-0.3-0.3-0.3-0.3-0.3(2.1) Interest expenditure0.00.00.00.00.00.00.00.00.00.00.00.00.1(2.2) Growth effect-0.4-0.3-0.2-0.2-0.2-0.2-0.2-0.2-0.2-0.2-0.2-0.2-0.2(2.3) Inflation effect-0.4-0.3-0.3-0.2-0.2-0.2-0.2-0.2-0.2-0.2-0.2-0.2-0.2(3) Stock-flow adjustments-0.70.60.00.00.00.00.00.00.00.00.00.00.0Note: For further information, see the European Commission Debt Sustainability Monitor (DSM) 2019. c. For the long term, the risk category (low/medium/high) is based on the joint use of the S2 indicator and the DSA results. The S2 indicator measures the upfront and permanent fiscal adjustment required to stabilise the debt-to-GDP ratio over the infinite horizon, including the costs of ageing. The critical values used are 2 and 6 pps of GDP. The DSA results are used to further qualify the long term risk classification, in particular in cases when debt vulnerabilities are identified (a medium / high DSA risk category). EE - Debt projections baseline scenario[1]Thefirsttablepresentsthebaselineno-fiscalpolicychangescenarioprojections.Itshowstheprojectedgovernmentdebtdynamicsanditsdecompositionbetweentheprimarybalance,snowballeffectsandstock-flowadjustments.Snowballeffectsmeasurethenetimpactofthecounteractingeffectsofinterestrates,inflation,realGDPgrowth(andexchangerates in some countries). Stock-flow adjustments include differences in cash and accrual accounting, net accumulation of assets, as well as valuation and other residual effects.[2]Thechartspresentaseriesofsensitivitytestsaroundthebaselinescenario,aswellasalternativepolicyscenarios,inparticular:thehistoricalstructuralprimarybalance(SPB)scenario(wheretheSPBissetatitshistoricalaverage),theStabilityandGrowthPact(SGP)scenario(wherefiscalpolicyisassumedtoevolveinlinewiththemainprovisionsoftheSGP),ahigherinterestratescenario(+1pp.comparedtothebaseline),alowerGDPgrowthscenario(-0.5pp.comparedtothebaseline)andanegativeshockontheSPB(calibratedonthebasisoftheforecastedchange).Anadversecombinedscenarioandenhancedsensitivitytests(ontheinterestrateandgrowth)arealsoincluded,aswellasstochasticprojections. Detailed information on the design of these projections can be found in the FSR 2018 and the DSM 2019.[3] The second table presents the overall fiscal risk classification over the short, medium and long term. a. For the short-term, the risk category (low/high) is based on the S0 indicator. S0 is an early-detection indicator of fiscal stress in the upcoming year, based on 25 fiscal and financial-competitiveness variables that have proven in the past to be leading indicators of fiscal stress. The critical threshold beyond which fiscal distress is signalled is 0.46. b. For the medium term, the risk category (low/medium/high) is based on the joint use of the S1 indicator and of the DSA results. The S1 indicator measures the fiscal adjustment required (cumulated over the 5 years following the forecast horizon and sustained after that) to bring the debt-to-GDP ratio to 60 % by 2034. The critical values used are 0 and 2.5 pps of GDP. The DSA classification is based on the results of five deterministic scenarios (baseline, historical SPB, higher interest rate, lower GDP growth and negative shock on the SPB scenarios) and the stochastic projections. Different criteria are used such as the projected debt level, the debt path, the realism of fiscal assumptions, the probability of debt stabilisation, and the size of uncertainties. 0246810121416182020172018201920202021202220232024202520262027202820292030Debt as % of GDP -EEBaselineEnhanced lower GDP growth scenarioAdverse combined scenarioEnhanced higher interest rate scenario0102020172018201920202021202220232024(% of GDP)Stochastic debt projections 2020-2024 -EEp10_p20p20_p40p40_p60p60_p80p80_p90p50Baseline0246810121416182020172018201920202021202220232024202520262027202820292030Debt as % of GDP -EEBaselineHistorical SPB scenarioSGP scenario0246810121416182020172018201920202021202220232024202520262027202820292030Debt as % of GDP -EEBaselineHigher interest rate scenarioNegative shock on the SPBLower GDP growth scenarioBaselineHistorical SPBLower GDP growthHigher interest rateNegative shock on SPBStochastic projectionsRisk categoryLOWLOWLOWLOWLOWLOWDebt level (2030)8.411.48.88.713.6Debt peak year20192030203020302030Percentile rank66.0%70.0%Probability debt higher37.4%Dif. between percentiles3.3LOWLong termLOW(S2 = 0.8)S1S2Short termLOW(S0 = 0.2)DSALOWDebt sustainability analysis (detail)Medium termLOWLOW(S1 = -5.3) 
ANNEX C: STANDARD TABLES 

Table C.1: 

Financial market indicators 

(1) Latest data Q3 2019. Includes not only banks but all monetary financial institutions excluding central banks. 
(2) Latest data Q2 2019. 
(3) Quarterly values are annualised. 
* Measured in basis points. 
Source: European Commission (long-term interest rates); World Bank (gross external debt); Eurostat (private debt); ECB (all 
other indicators). 

55 

201420152016201720182019Total assets of the banking sector (% of GDP)(1)106.3111.8113.9107.1100.7106.6Share of assets of the five largest banks (% of total assets)89.988.688.090.391.0-Foreign ownership of banking system (% of total assets)(2)95.194.293.474.172.752.3Financial soundness indicators:(2)              - non-performing loans (% of total loans)3.22.21.71.91.31.8              - capital adequacy ratio (%)41.835.434.430.631.027.0              - return on equity (%)(3)9.76.811.19.29.89.5Bank loans to the private sector (year-on-year % change)(1)4.59.39.52.15.86.8Lending for house purchase (year-on-year % change)(1)2.94.55.56.97.17.1Loan-to-deposit ratio(2)87.897.699.089.893.590.9Central bank liquidity as % of liabilities(1)0.30.40.40.50.30.0Private debt (% of GDP)115.4112.8112.4107.6101.5-Gross external debt (% of GDP)(2) - public7.97.06.96.25.97.0    - private48.345.042.543.843.942.0Long-term interest rate spread versus Bund (basis points)*------Credit default swap spreads for sovereign securities (5-year)*57.158.358.555.656.157.4 
 
  
 
 
C. Standard Tables 

Table C.2: 

Headline social scoreboard indicators 

(1) People at risk of poverty or social exclusion (AROPE): individuals who are at risk of poverty (AROP) and/or suffering from 
severe material deprivation and/or living in households with zero or very low work intensity. 
(2) Unemployed persons are all those who were not employed but had actively sought work and were ready to begin 
working immediately or within two weeks. 
(3) Gross disposable household income is defined in unadjusted terms, according to the draft 2019 joint employment report. 
(4) Reduction in percentage of the risk-of-poverty rate, due to social transfers (calculated comparing at-risk-of-poverty rates 
before social transfers with those after transfers; pensions are not considered as social transfers in the calculation). 
(5) Average of first three quarters of 2019 for the employment rate, unemployment rate and gender employment gap. 

Source: Eurostat 

56 

201420152016201720182019 5Equal opportunities and access to the labour marketEarly leavers from education and training (% of population aged 18-24)12.012.210.910.811.3:Gender employment gap (pps)7.77.98.27.37.88.0Income inequality, measured as quintile share ratio (S80/S20)6.56.25.65.45.1:At-risk-of-poverty or social exclusion rate(1) (AROPE)26.024.224.423.424.4:Young people neither in employment nor in education and training (% of population aged 15-24)11.710.89.19.49.8:Dynamic labour markets and fair working conditionsEmployment rate (20-64 years)74.376.576.678.779.579.8Unemployment rate(2) (15-74 years)7.46.26.85.85.44.4Long-term unemployment rate (as % of active population)3.32.42.11.91.31.1Gross disposable income of households in real terms per capita(3) (Index 2008=100) 101.0105.7109.4113.7::Annual net earnings of a full-time single worker without children earning an average wage (levels in PPS, three-year average)130481374114373:::Annual net earnings of a full-time single worker without children earning an average wage (percentage change, real terms, three-year average)2.955.175.21:::Public support / Social protection and inclusionImpact of social transfers (excluding pensions) on poverty reduction(4)23.222.324.927.326.8:Children aged less than 3 years in formal childcare19.421.430.227.128.3:Self-reported unmet need for medical care11.312.715.311.816.4:Individuals who have basic or above basic overall digital skills (% of population aged 16-74):65.060.060.0:: 
  
 
 
 
 
 
C. Standard Tables 

Table C.3: 

Labour market and education indicators 

* Non-scoreboard indicator 
(1) Long-term unemployed are people who have been unemployed for at least 12 months. 
(2) Difference between the average gross hourly earnings of male paid employees and of female paid employees as a 
percentage of average gross hourly earnings of male paid employees. It is defined as "unadjusted", as it does not correct for 
the distribution of individual characteristics (and thus gives an overall picture of gender inequalities in terms of pay). All 
employees working in firms with ten or more employees, without restrictions for age and hours worked, are included. 
(3) PISA (OECD) results for low achievement in mathematics for 15 year-olds. 
(4) Impact of socio-economic and cultural status on PISA (OECD) scores. 
(5) Average of first three quarters of 2019. Data for youth unemployment rate is seasonally adjusted. 
Source: Eurostat, OECD 

57 

Labour market indicators201420152016201720182019 5Activity rate (15-64)75.276.777.578.879.178.7Employment in current job by durationFrom 0 to 11 months15.214.815.616.617.9:From 12 to 23 months11.211.911.411.612.5:From 24 to 59 months20.320.921.219.618.3:60 months or over53.152.251.651.951.1:Employment growth* (% change from previous year)0.82.90.32.71.21.2Employment rate of women(% of female population aged 20-64)70.672.672.675.175.675.8Employment rate of men (% of male population aged 20-64)78.380.580.882.483.483.8Employment rate of older workers* (% of population aged 55-64)64.064.565.268.168.972.1Part-time employment* (% of total employment, aged 15-64)8.39.59.99.511.111.5Fixed-term employment* (% of employees with a fixed term contract, aged 15-64)3.13.43.73.13.53.2Transition rate from temporary to permanent employment(3-year average)62.555.745.037.538.2:Youth unemployment rate (% active population aged 15-24)15.013.113.412.111.911.2Gender gap in part-time employment5.37.26.47.17.98.2Gender pay gap(2) (in undadjusted form)28.126.925.325.6::Education and training indicators201420152016201720182019Adult participation in learning(% of people aged 25-64 participating in education and  training)11.612.415.717.219.7:Underachievement in education(3):11.2::::Tertiary educational attainment (% of population aged 30-34 having successfully completed tertiary education)43.245.345.448.447.2:Variation in performance explained by students' socio-economic status(4):7.8:::: 
  
 
 
C. Standard Tables 

Table C.4: 

Social inclusion and health indicators 

* Non-scoreboard indicator 
(1) At-risk-of-poverty rate (AROP): proportion of people with an equivalised disposable income below 60 % of the national 
equivalised median income. 
(2) Proportion of people who experience at least four of the following forms of deprivation: not being able to afford to i) pay 
their rent or utility bills, ii) keep their home adequately warm, iii) face unexpected expenses, iv) eat meat, fish or a protein 
equivalent every second day, v) enjoy a week of holiday away from home once a year, vi) have a car, vii) have a washing 
machine, viii) have a colour TV, or ix) have a telephone. 
(3) Percentage of total population living in overcrowded dwellings and exhibiting housing deprivation. 
(4) People living in households with very low work intensity: proportion of people aged 0-59 living in households where the 
adults (excluding dependent children) worked less than 20 % of their total work-time potential in the previous 12 months. 
(5) Ratio of the median individual gross pensions of people aged 65-74 relative to the median individual gross earnings of 
people aged 50-59. 
(6) Fixed broadband take up (33%), mobile broadband take up (22%), speed (33%) and affordability (11%), from the Digital 
Scoreboard. 
Source: Eurostat, OECD 

58 

201320142015201620172018Expenditure on social protection benefits* (% of GDP)Sickness/healthcare4.14.34.54.94.7:Disability1.81.71.81.91.8:Old age and survivors6.56.56.96.96.6:Family/children1.61.62.02.12.1:Unemployment0.50.40.40.50.4:Housing0.00.00.00.10.1:Social exclusion n.e.c.0.10.10.10.10.1:Total14.614.615.816.415.8:of which: means-tested benefits0.10.10.10.20.1:General government expenditure by function (% of GDP)Social protection11.911.812.813.213.0:Health5.05.15.45.25.0:Education6.05.66.05.85.8:Out-of-pocket expenditure on healthcare22.622.622.822.723.6:Children at risk of poverty or social exclusion (% of people aged 0-17)*22.323.822.521.218.817.9At-risk-of-poverty  rate(1) (% of total population)18.621.821.621.721.021.9In-work at-risk-of-poverty rate (% of persons employed)7.611.810.09.69.39.3Severe material deprivation rate(2)  (% of total population)7.66.24.54.74.13.8Severe housing deprivation rate(3), by tenure statusOwner, with mortgage or loan4.42.21.90.91.83.1Tenant, rent at market price5.18.14.36.15.64.1Proportion of people living in low work intensity households(4) (% of people aged 0-59)8.47.66.65.85.85.2Poverty thresholds, expressed in national currency at constant prices*296531513428375440434374Healthy life yearsFemales5.76.05.37.06.1:Males5.14.95.35.55.7:Aggregate replacement ratio for pensions(5)0.50.50.40.50.50.4Connectivity dimension of the Digital Economy and Society Index (DESI)(6):44.851.856.762.2:GINI coefficient before taxes and transfers*48.951.649.947.546.5:GINI coefficient after taxes and transfers*32.935.634.832.731.6: 
  
 
 
C. Standard Tables 

Table C.5: 

Product market performance and policy indicators 

*While the indicator values from 2003 to 2013 are comparable, the methodology has considerably changed in 2018. As a 
result, past vintages cannot be compared with the 2018 PMR indicators. 
1 Value added in constant prices divided by the number of persons employed. 
2 Compensation of employees in current prices divided by value added in constant prices. 
3 The methodologies, including the assumptions, for this indicator are shown in detail here: 
http://www.doingbusiness.org/methodology. 
4 Average of the answer to question Q7B_a. "[Bank loan]: If you applied and tried to negotiate for this type of financing over 
the past six months, what was the outcome?". Answers were codified as follows: zero if received everything, one if received 
75% and above, two if received below 75%, three if refused or rejected and treated as missing values if the application is still 
pending or don't know. 
5 Percentage population aged 15-64 having completed tertiary education. 
6 Percentage population aged 20-24 having attained at least upper secondary education. 
7 Index: 0 = not regulated; 6 = most regulated. The methodologies of the OECD product market regulation indicators are 
shown in detail here: http://www.oecd.org/competition/reform/indicatorsofproductmarketregulationhomepage.htm 
8 Simple average of the indicators of regulation for lawyers, accountants, architects and engineers. 
9 Aggregate OECD indicators of regulation in energy, transport and communications (ETCR). 
Source: European Commission; World Bank — Doing Business (for enforcing contracts and time to start a business); OECD (for 
the product market regulation indicators); SAFE (for outcome of SMEs' applications for bank loans). 

59 

Performance indicators201320142015201620172018Labour productivity per person1 growth (t/t-1) in %Labour productivity growth in industry4.817.20-3.523.242.426.83Labour productivity growth in construction-4.30-7.64-7.1728.598.2412.16Labour productivity growth in market services-2.380.791.24-1.211.844.37Unit Labour Cost (ULC) index2 growth (t/t-1) in %ULC growth in industry2.742.144.780.33-0.930.23ULC growth in construction6.985.786.19-5.48-2.66-3.77ULC growth in market services5.605.664.123.472.237.72Business environment201320142015201620172018Time needed to enforce contracts3 (days)455455455455455455Time needed to start a business3 (days)6.54.53.53.53.53.5Outcome of applications by SMEs for bank loans40.910.660.190.820.910.37Research and innovation201320142015201620172018R&D intensity1.711.421.461.251.281.40General government expenditure on education as % of GDP6.005.606.005.805.80:Employed people with tertiary education and/or people employed in S&T as % of total employment515151515153Population having completed tertiary education5323333343536Young people with upper secondary education6848382848583Trade balance of high technology products as % of GDP-0.31-0.33-0.35-0.49-0.67-0.51Product and service markets and competition2003200820132018*OECD product market regulation (PMR)7, overall:1.371.291.29OECD PMR7, retail:1.401.500.38OECD PMR7, professional services8:1.811.791.44OECD PMR7, network industries93.342.602.401.33 
  
 
 
C. Standard Tables 

Table C.6:  Green growth 

All macro intensity indicators are expressed as a ratio of a physical quantity to GDP (in 2010 prices) 
          Energy intensity: gross inland energy consumption (in kgoe) divided by GDP (in EUR) 
          Carbon intensity: greenhouse gas emissions (in kg CO2 equivalents) divided by GDP (in EUR) 
          Resource intensity: domestic material consumption (in kg) divided by GDP (in EUR) 
          Waste intensity: waste (in kg) divided by GDP (in EUR) 
Energy balance of trade: the balance of energy exports and imports, expressed as % of GDP. 
Weighting of energy in HICP: the proportion of 'energy' items in the consumption basket used for the construction of the HICP. 
Difference between energy price change and inflation: energy component of HICP, and total HICP inflation (annual % 
change). 
Real unit energy cost: real energy costs as % of total value added for the economy. 
Industry energy intensity: final energy consumption of industry (in kgoe) divided by gross value added of industry (in 2010 
EUR). 
Real unit energy costs for manufacturing industry excluding refining: real costs as % of value added for manufacturing sectors. 
Share of energy-intensive industries in the economy: share of gross value added of the energy-intensive industries in GDP. 
Electricity and gas prices for medium-sized industrial users: consumption band 500–20 00MWh and 10 000 -100 000 GJ; figures 
excl. VAT. 
Recycling rate of municipal waste: ratio of recycled and composted municipal waste to total municipal waste. 
Public R&D for energy or for the environment: government spending on R&D for these categories as % of GDP. 
Proportion of GHG emissions covered by EU emissions trading system (ETS) (excluding aviation): based on GHG emissions. 
(excl. land use, land use change and forestry) as reported by Member States to the European Environment Agency. 
Transport energy intensity: final energy consumption of transport activity including international aviation (kgoe) divided by 
gross value added in transportation and storage sector (in 2010 EUR). 
Transport carbon intensity: GHG emissions in transportation and storage sector divided by gross value added in transportation 
and storage sector (in 2010 EUR).   
Energy import dependency: net energy imports divided by gross inland energy consumption incl. consumption of 
international bunker fuels. 
Aggregated supplier concentration index: Herfindahl index covering oil, gas and coal. Smaller values indicate larger 
diversification and hence lower risk.   
Diversification of the energy mix: Herfindahl index covering natural gas, total petrol products, nuclear heat, renewable 
energies and solid fuels. Smaller values indicate arger diversification. 
* European Commission and European Environment Agency - 2018 provisional data. 
Source: European Commission and European Environment Agency (Share of GHG emissions covered by ETS); European 
Commission (Environmental taxes over labour taxes and GDP); Eurostat (all other indicators). 

60 

Green growth performance201320142015201620172018MacroeconomicEnergy intensity kgoe / €0.370.340.310.330.30-Carbon intensity kg / €1.311.231.041.091.10-Resource intensity (reciprocal of resource productivity)kg / €2.272.162.031.972.152.27Waste intensity kg / €-1.27-1.35--Energy balance of trade % GDP-2.2-2.1-1.5-1.0-0.6-1.0Weighting of energy in HICP%14.4214.4313.6510.5811.6311.75Difference between energy price change and inflation p.p.7.4-4.6-4.1-5.1-2.94.2Real unit of energy cost% of value added17.916.616.716.7--Ratio of environmental taxes to labour taxesratio0.160.160.160.180.17-Environmental taxes% GDP2.62.62.73.02.92.7Sectoral Industry energy intensity kgoe / € 0.150.120.120.100.09-Real unit energy cost for manufacturing industry excl. refining% of value added13.612.512.612.8--Share of energy-intensive industries in the economy% GDP12.9413.4513.1213.1213.6714.12Electricity prices for medium-sized industrial users€ / kWh0.100.090.090.090.090.09Gas prices for medium-sized industrial users€ / kWh0.040.040.030.020.030.03Public R&D for energy % GDP0.010.010.020.000.000.00Public R&D for environmental protection% GDP0.040.040.050.020.010.01Municipal waste recycling rate%17.931.328.328.128.428.0Share of GHG emissions covered by ETS*%73.571.165.968.470.368.6Transport energy intensitykgoe / €0.600.590.620.630.60-Transport carbon intensitykg / €1.431.291.121.291.081.02Security of energy supplyEnergy import dependency%13.911.19.67.94.1-Aggregated supplier concentration indexHHI53.250.853.548.566.4-Diversification of energy mixHHI53.854.752.052.957.2- 
  
 
ANNEX D: INVESTMENT GUIDANCE ON JUST TRANSITION FUND 

2021-2027 FOR ESTONIA 

Building  on  the  Commission  proposal,  this  Annex  (56)  presents  the  preliminary  Commission  services’ 
views on priority investment areas and framework conditions for effective delivery for the 2021-2027 Just 
Transition  Fund  investments  in  Estonia.  These  priority  investment  areas  are  derived  from  the  broader 
analysis  of  territories  facing  serious  socio-economic  challenges  deriving  from  the  transition  process 
towards a climate-neutral economy of the Union by 2050 in Estonia, assessed in the report. This Annex 
provides  the  basis  for  a  dialogue  between  Estonia  and  the  Commission  services  as  well  as  the  relevant 
guidance  for  the  Member  States  in  preparing  their  territorial  just  transition  plans,  which  will  form  the 
basis for programming the Just Transition Fund. The Just Transition Fund investments complement those 
under  Cohesion  Policy  funding  for  which  guidance  in  the  form  of  Annex  D  was  given  in  the  2019 
Country Report for Estonia (57). 

The  North-eastern  region  (Ida-Viru  County)  of  Estonia  relies  heavily  on  the  oil  shale  sector,  which 
provides 75% of the Estonia’s energy production. The oil shale related sectors amounted to about 4% of 
Estonian  and  about  45%  of  county’s  GDP  and  generates  69%  of  the  Estonian  greenhouse  gas  (GHG) 
emissions.  

The  energy  and  oil  shale  industries  have  started  decarbonisation-related  restructuring  that  will  continue 
for the coming ten years and will have a significant impact in direct and indirect jobs at risk. The number 
of jobs in the oil shale sector is decreasing and a further drop is expected. The number of people who are 
indirectly impacted by the process is around 20,000. The demand for labour in the region is limited, and 
together with skills mismatches many people will be at risk of unemployment. The smart specialisation 
strategy  (58)  provides  an  important  framework  to  set  priorities  for  innovation  in  support  of  economic 
transformation.  Diversifying  regional  economic  activities  and  creating  new  business  opportunities  and 
upskilling  and  reskilling  would  therefore  be  essential.  Based  on  this  preliminary  assessment,  it  appears 
warranted that the Just Transition Fund concentrates its intervention on that region. 

To tackle these transition challenges, priority investment needs have been identified for the diversification 
of the local economy and ensuring necessary skills for those affected by the transition. Key actions of the 
Just Transition Fund could target in particular: 

 

 

 

productive  investments  in  SMEs,  including  start-ups,  leading  to  economic  diversification 
and reconversion; 

investments  in  the  creation  of  new  firms,  including  through  business  incubators  and 
consulting services; 

investments in the deployment of technology and infrastructures for affordable clean energy, 
in greenhouse gas emission reduction, energy efficiency and renewable energy; 

 

upskilling and reskilling of workers. 

To increase the resilience of the affected region and to alleviate potential negative social and economic 
impacts posed by the transition, investment needs therefore have also been identified. Key actions of the 
Just Transition Fund could target in particular: 

(56)  This Annex is to be considered in conjunction with the EC proposal for a Regulation of the European Parliament and of the 
Council  on  the  Just  Transition  Fund  2021-2027  (COM(2020)22  and  the  EC  proposal  for  a  Regulation  of  the  European 
Parliament and of the Council laying down common provisions on the European Regional Development Fund, the European 
Social Fund Plus, the Cohesion Fund, and the European Maritime and Fisheries Fund and financial rules for those and for the 
Asylum and Migration Fund, the Internal Security Fund and the Border Management and Visa Instrument (COM(2020)23) 

(57) SWD(2019) 1005 final 
(58) As defined in Article 2(3) of Regulation EU 1303/2013 (CPR) 

61 

 
                                                           
D. Investment guidance on Just Transition Fund 2021-2027 for Estonia 

 

 

 

 

 

 

 

investments  in  research  and  innovation  activities  and  fostering  the  transfer  of  advanced 
technologies; 

investments in digitalisation and digital connectivity; 

investments in regeneration and decontamination of sites, land restoration and repurposing 
projects; 

investments  in  enhancing  the  circular  economy,  including  through  waste  prevention, 
reduction, resource efficiency, reuse, repair and recycling; 

job-search assistance to jobseekers; 

active inclusion of jobseekers; 

technical assistance. 

62 

ANNEX E: PROGRESS TOWARDS THE SUSTAINABLE 

DEVELOPMENT GOALS (SDGS)  

Assessment of Estonia’s short-term progress towards the SDGs (59) 

Table E.1 shows the data for Estonia and the EU-28 for the indicators included in the EU SDG indicator 
set used by Eurostat for  monitoring progress towards the SDGs in an EU context (60). As the short-term 
trend at EU-level is assessed over a 5-year period, both the value at the beginning of the period and the 
latest available value is presented. The indicators are regularly updated on the SDI dedicated section of 
the Eurostat website. 

Table E.1: 

Indicators measuring Estonia’s progress towards the SDGs 

(59)  Data  extracted  on  9  February  2020 

from 

the  Eurostat  database 

(official  EU  SDG 

indicator 

set; 

see 

https://ec.europa.eu/eurostat/web/sdi/main-tables).  

(60)  The EU SDG indicator set is aligned as far as appropriate with the UN list of global indicators, noting that the UN indicators are 
selected for global level reporting and are therefore not always relevant in an EU context. The EU SDG indicators have strong 
links with EU policy initiatives. 

(Continued on the next page) 

63 

 
 
                                                           
 
  
 
E. Progress towards the Sustainable Development Goals (SDGs)  

Table (continued) 

(Continued on the next page) 

64 

 
 
 
   
 
E. Progress towards the Sustainable Development Goals (SDGs)  

Table (continued) 

(Continued on the next page) 

65 

 
 
 
   
 
E. Progress towards the Sustainable Development Goals (SDGs)  

Table (continued) 

(Continued on the next page) 

66 

 
 
 
   
 
E. Progress towards the Sustainable Development Goals (SDGs)  

Table (continued) 

Source: Eurostat 

67 

 
 
 
 
   
 
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