REPORT FROM THE COMMISSION Estonia Report prepared in accordance with Article 126(3) of the Treaty on the Functioning of the European Union
Date: 2020-05-20
Institutions: Directorate-General for Economic and Financial Affairs, European Commission
Subjects: Estonia, budget deficit, budget policy, budgetary control, epidemic, gross domestic product, infectious disease, macroeconomics, public debt, stability pact

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 20.5.2020  COM(2020) 545 final  REPORT FROM THE COMMISSION Estonia  Report prepared in accordance with Article 126(3) of the Treaty on the Functioning of the European Union  
 
 
REPORT FROM THE COMMISSION 

Estonia 

Report prepared in accordance with Article 126(3) of the Treaty on the Functioning of 
the European Union 

1. 

INTRODUCTION  

On  20  March  2020,  the  Commission  adopted  a  Communication  on  the  activation  of  the 
general  escape  clause  of  the  Stability  and  Growth  Pact.    The  clause,  as  set  out  in  Articles 
5(1),  6(3),  9(1)  and  10(3)  of  Regulation  (EC)  1466/97  and  Articles  3(5)  and  5(2)  of 
Regulation (EC) 1467/97, facilitates the coordination of budgetary policies in times of severe 
economic downturn. In its Communication, the Commission shared with the Council its view 
that, given the expected severe economic downturn resulting from the COVID-19 outbreak, 
the  current  conditions  permit  activation  of  the  clause.  On  23  March  2020,  the  Ministers  of 
Finance of the Member States agreed with the assessment of the Commission. The activation 
of  the  general  escape  clause  allows  for  a  temporary  departure  from  the  adjustment  path 
towards  the  medium-term  budgetary  objective,  provided  that  this  does  not  endanger  fiscal 
sustainability in the medium term. For the corrective arm, the Council may also decide, on a 
recommendation  from  the  Commission,  to  adopt  a  revised  fiscal  trajectory.  The  general 
escape  clause  does  not  suspend  the  procedures  of  the  Stability  and  Growth  Pact.  It  allows 
Member States to depart from the budgetary requirements that would normally apply while 
enabling  the  Commission  and  the  Council  to  undertake  the  necessary  policy  coordination 
measures within the framework of the Pact. 

Data  notified  by  the  Estonian  authorities  on  31  March  2020  and  subsequently  validated  by 
Eurostat1 show that the general government deficit in Estonia reached 0.3% of GDP in 2019, 
while general government gross debt stood at 8.4% of GDP. According to the 2020 Stability 
Programme, Estonia plans a deficit of 10.1% of GDP in 2020, while debt is planned at 21.9% 
of GDP.  

The planned deficit for 2020 provides prima facie evidence of the existence of an excessive 
deficit as defined by  the Stability and Growth Pact. 

Against this background, the Commission has therefore prepared this report, which analyses 
Estonia’s  compliance  with  the  deficit  criterion  of  the  Treaty.  The  debt  criterion  can  be 
considered to be met as the debt ratio is below the Treaty reference value of 60% of GDP. It 
takes  into  account  all  relevant  factors  and  gives  due  consideration  to  the  major  economic 
shock linked to the COVID-19 pandemic.  

1 

https://ec.europa.eu/eurostat/documents/2995521/10294648/2-22042020-AP-EN.pdf/6c8f0ef4-6221-1094-

fef7-a07764b0369f 

1 

 
 
 
 
                                                            
Table 1. General government deficit and debt (% of GDP)  

2016 

2017 

2018 

2019 

-0.5  

-0.8 

-0.6 

-0.3 

2020 
COM 

8.3 

2021 
COM 

3.4 

10.2  

9.3 

8.4 

8.4 

20.7  

22.6 

Deficit 
criterion 

Debt 
criterion 

General 
government 
balance 
General 
government 
gross debt 

Source: Eurostat, Commission 2020 spring forecast 

2. 

DEFICIT CRITERION  

Based on the plans in the 2020 Stability Programme, Estonia’s general government deficit in 
2020 is expected to reach 10.1% of GDP, above and not close to the Treaty reference value of 
3% of GDP. The sharply rising deficit reflects the planned stimulus of 4.3% of GDP and the 
effects of the economic crisis. 

The planned excess over the Treaty reference value in 2020 is exceptional, as it results from a 
severe economic downturn. Taking into account the impact of the COVID-19 pandemic, the 
Commission spring 2020 forecast projects a contraction of real GDP in 2020 by 6.9%. 

The  planned  excess  over  the  3%  of  GDP  reference  value  is  not  temporary  based  on  the 
Commission  2020  spring  forecast,  which  projects  the  deficit  to  remain  above  the  reference 
value in 2021.  

In  sum,  the  planned  deficit  for  2020  is  above  and  not  close  to  the  3%-of-GDP  Treaty 
reference  value.  The  planned  excess  is  considered  to  be  exceptional  but  not  temporary  as 
defined by  the Treaty and the Stability and Growth Pact. Hence, the analysis suggests that 
prima facie the deficit criterion as defined by the Treaty and Regulation (EC) No 1467/97 is 
not fulfilled based on the Commission 2019 spring forecast and the Stability Programme. 

3. 

RELEVANT FACTORS  

Article 126(3) of the Treaty provides that, if a Member State does not fulfil the requirements 
under one or both of those criteria, the Commission has to prepare a report. That report must 
also  “take  into  account  whether  the  government  deficit  exceeds  government  investment 
expenditure  and  take  into  account  all  other  relevant  factors,  including  the  medium-term 
economic and budgetary position of the Member State”.  

Those factors are further clarified in Article 2(3) of Regulation (EC) No 1467/97, which also 
provides  that  “any  other  factors  which,  in  the  opinion  of  the  Member  State  concerned,  are 
relevant in order to comprehensively assess compliance with the deficit and debt criteria and 
which the Member State has put forward to the Council and to the Commission” need to be 
given due consideration. 

2 

 
 
 
 
 
In  the current  situation, a key additional  factor to  take into  consideration regarding 2020 is 
the  economic  impact  of  the  COVID-19  pandemic,  which  has  a  very  substantial 
impact  on  the  budgetary  situation  and  results  in  a  highly  uncertain  outlook.  The 
pandemic has also led to the activation of the general escape clause. 

3.1. 

 COVID-19 pandemic  

The  COVID-19  pandemic  has  led  to  a  major  economic  shock  that  is  having  a  significant 
negative  impact  throughout  the  European  Union.  The  consequences  for  GDP  growth  will 
depend  on  the  duration  of  both  the  pandemic  and  of  the  measures  taken  by  national 
authorities and at European and global level to slow its spread, protect production capacities 
and  support  aggregate  demand.  Countries  have  already  adopted  or  are  adopting  budgetary 
measures  to  increase  the  capacity  of  health  systems  and  provide  relief  to  those  individuals 
and  sectors  that  are  particularly  affected.  Significant  liquidity  support  measures  and  other 
guarantees  have  also  been  adopted.  Subject  to  more  detailed  information,  the  competent 
statistical authorities are to examine whether those measures entail an immediate impact on 
the  general  government  balance  or  not.  Together  with  the  fall  in  economic  activity,  those 
measures will contribute to substantially higher government deficit and debt positions. 

3.2  Medium-term economic position  

Based on the Commission 2020 spring forecast, Estonia’s real GDP is projected to decline by 
about  7%,  followed  by  a  rapid  recovery  in  2021.  In  addition  to  the  shock  on  domestic 
demand, exports are expected to  suffer amid  declining  foreign demand.  The unemployment 
rate is projected to exceed 9% in 2020, up from 4.4% in 2019.  

The  Stability  Programme’s  macroeconomic  forecast  notes  high  uncertainty  regarding  the 
duration  of  the  pandemic  and  uncertainty  of  its  economic  impact.  The  programme  projects 
GDP  to  contract  by  8%  in  2020,  but  to  recover  in  2021,  under  the  assumptions  that  the 
emergency situation will last until the end of May 2020 and that thereafter a gradual pickup 
in  economic  activity  will  begin.  The  sharp  drop  in  GDP  is  a  mitigating  factor  in  the 
assessment of Estonia’s compliance with the deficit criterion in 2020. 

3.3 

 Medium-term budgetary position 

Estonia  was  recommended  on  13  July  2018  to  ensure  that  the  nominal  growth  rate  of  net 
primary  government  expenditure  does  not  exceed  4.1%  in  2019  (‘the  expenditure 
benchmark’),  corresponding  to  a  structural  adjustment  of  0.6%  of  GDP2.  Based  on  outturn 
data  and  the  Commission  forecast,  expenditure  growth    exceeded  that  benchmark,  with  a 
deviation of 1.7% of GDP in 2019, thus pointing to a significant deviation. The conclusion is 
also  confirmed  for  2018-2019  taken  together.  The  structural  balance  stayed  unchanged  in 

2 Council Recommendation of 13 July 2018 on the 2018 National Reform Programme of Estonia and delivering 
a Council opinion on the 2018 Stability Programme of Estonia (OJ C 320, 10.9.2018, p. 24). 

3 

 
 
 
 
 
 
                                                            
2019, thus pointing to some deviation of 0.3% of GDP in 2019, while pointing to significant 
deviation  over  2018-2019  taken  together.  The  overall  assessment  points  to  significant 
deviation  from  the  recommended  adjustment  path  towards  the  medium-term  budgetary 
objective in 2019. 

The  Stability  Programme  projects  that  the  deficit  of  10.1%  of  GDP  in  2020  will  decline  in 
2021, when the economy is expected to recover and most of the budgetary measures expire. 
The  structural  fiscal  position  is  projected  to  improve  from  a  deficit  of  5.2%  in  2020  to  a 
deficit 0.8% of GDP in 20213. The Stability Programme provides information on substantial 
measures  to  contain  the  pandemic  and  to  support  the  economy.  It  estimates  the  budgetary 
impact  of  these  direct  support  measures  at  4.3%  of  GDP  in  2020.  The  medium-term  fiscal 
outlook remains subject to high uncertainty. 

3.4 

Other factors put forward by the Member State  

On  12  May  2020,  the  Estonian  authorities  transmitted  a  letter  with  relevant  factors  in 
accordance with Article 2(3) of Regulation (EC) No 1467/97. The analysis presented in the 
previous sections already broadly covers the key factors put forward by the authorities.  

 4. 

CONCLUSIONS 

According  to  the  Stability  Programme,  Estonia’s  general  government  deficit  in  2020  is 
planned to increase to 10.1% of GDP, above and not close to the 3% of GDP Treaty reference 
value.  The  planned  excess  over  the  reference  value  is  considered  to  be  exceptional  but  not 
temporary.  

In line with the Treaty and the Stability and Growth Pact, this report also examined relevant 
factors.  

Overall, since the planned deficit is well above 3% of GDP,the excess is not temporary and 
taking  into  account  all  relevant  factors,  the  analysis  suggests  that  the  deficit  criterion  as 
defined in the Treaty and in Regulation (EC) No 1467/1997 is not fulfilled. 

3 As calculated by the Estonian authorities. 

4