Recommendation for a COUNCIL RECOMMENDATION on the economic, social, employment, structural and budgetary policies of Estonia
Date: 2026-06-03
Institutions: European Commission, Reform and Investment Task Force
Subjects: Estonia, budget policy, defence expenditure, economic policy, economic recovery, economic reform, employment policy, energy policy, social policy, stability pact

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   EUROPEAN COMMISSION  Brussels, 3.6.2026  COM(2026) 206 final  Recommendation for a COUNCIL RECOMMENDATION on the economic, social, employment, structural and budgetary policies of Estonia   {SWD(2026) 206 final}  
 
Recommendation for a 

COUNCIL RECOMMENDATION 

on the economic, social, employment, structural and budgetary policies of Estonia  

THE COUNCIL OF THE EUROPEAN UNION, 

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

Having regard to Regulation (EU) 2024/1263 of the European Parliament and of the Council 
of  29 April 2024  on  the  effective  coordination  of  economic  policies  and  on  multilateral 
budgetary  surveillance  and  repealing  Council  Regulation  (EC)  No  1466/97  (1),  and  in 
particular Article 3(3) thereof, 

Having regard to the recommendation of the European Commission, 

Having regard to the resolutions of the European Parliament, 

Having regard to the conclusions of the European Council, 

Having regard to the opinion of the Employment Committee, 

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

Having regard to the opinion of the Social Protection Committee, 

Having regard to the opinion of the Economic Policy Committee, 

Whereas: 

(1) 

Regulation  (EU)  2024/1263  specifies  the  objectives  of  the  economic  governance 
framework,  which  aims  at  promoting  sound  and  sustainable  public  finances, 
sustainable  and  inclusive  growth  and  resilience  through  reforms  and  investments,  as 
well  as  preventing  excessive  government  deficits.  The  Regulation  stipulates  that  the 
Council  and  the  Commission  conduct  multilateral  surveillance  in  the  context  of  the 
European Semester in accordance with the objectives and requirements set out in the 
Treaty  on  the  Functioning  of  the  European  Union  (TFEU).  The  European  Semester 
includes, in  particular, the formulation and the surveillance of the implementation  of 
country-specific recommendations. 

(2) 

On  16 July 2025,  the  Commission  adopted  its  proposal  for  a  regulation  establishing 
the European Fund for economic, social and territorial cohesion, agriculture and rural, 
fisheries and maritime, prosperity and security for the period 2028-2034 and amending 
Regulation (EU) 2023/955 and Regulation (EU, Euratom) 2024/2509 (2). The proposal 

1  Regulation (EU) 2024/1263 of the European Parliament and of the Council of 29 April 2024 on the effective 
coordination  of  economic  policies  and  on  multilateral  budgetary  surveillance  and  repealing  Council 
Regulation (EC) No 1466/97 (OJ L, 2024/1263, 30.4.2024, ELI: http://data.europa.eu/eli/reg/2024/1263/oj). 
2  Proposal for a Regulation of the European Parliament and of the Council establishing the European Fund for 
economic,  social  and  territorial  cohesion,  agriculture  and  rural,  fisheries  and  maritime,  prosperity  and 
security for the period 2028-2034 and amending Regulation (EU) 2023/955 and Regulation (EU, Euratom) 

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(3) 

(4) 

(5) 

(6) 

aims to increase the effectiveness of Union funding by reducing the fragmentation of 
the  financial  architecture  and  to  support  Member  States  in  the  coordination  of  their 
economic policy in line with Article 175 TFEU. 

On  25 November 2025,  the  Commission  adopted  an  opinion  on  the  2026  draft 
budgetary  plan  of  Estonia.  On  the  same  date,  on  the  basis  of  Regulation  (EU)  No 
1176/2011,  the  Commission  adopted  the  2026  Alert  Mechanism  Report,  in  which  it 
did  not  identify  Estonia as  one  of  the  Member  States  for  which  an  in-depth  review 
would  be  needed.  The  Commission  also  adopted  a  recommendation  for  a  Council 
recommendation on the economic policy of the euro area (3), a recommendation for a 
Council recommendation on human capital in the European Union, and a proposal for 
the  2026  Joint  Employment  Report,  which  analyses  the  implementation  of  the 
Employment  Guidelines  and  the  principles  of  the  European  Pillar  of  Social  Rights. 
The Council adopted the Recommendation on the economic policy of the euro area (4) 
on  21 April 2026  and  the  Joint  Employment  Report,  and  the  Recommendation  on 
human capital on 9 March 2026. 

On  29 January 2025,  the  Commission  published  the  Competitiveness  Compass,  a 
strategic  framework  that  aims  to  boost  the  Union’s  global  competitiveness  over  the 
next  five  years.  It  identifies  the  three  transformational  imperatives  of  innovation, 
decarbonisation  and  competitiveness,  and  security  as  critical  pillars  for  sustainable 
economic  growth.  The  European  Semester  is  aligned  with  the  Competitiveness 
Compass,  ensuring  that  Member  States’  economic  policies  are  consistent  with  the 
Commission’s  strategic  objectives,  creating  a  unified  approach 
to  economic 
governance that fosters sustainable growth, innovation and resilience across the Union. 

In  2026,  the  European  Semester  for  economic  policy  coordination  continues  to 
develop  alongside  the  final  stage  of  Recovery  and  Resilience  Facility  (RRF) 
implementation  (5).  Recovery  and  resilience  plans,  along  with  cohesion  policy 
funding, have been essential for delivering on the policy priorities under the European 
Semester, as the plans were required to effectively address all or a significant subset of 
challenges identified in the relevant country-specific recommendations issued in recent 
cycle, and programmes funded by the European cohesion policy were required to take 
country-specific recommendations into accounts. As the RRF approaches the end of its 
lifetime,  it  remains  essential  to  sustain  the  reforms  and  investments  supported  and 
implemented  under  the  RRF,  in  particular  those  that  contribute  to  addressing 
challenges identified in the country-specific recommendations. 

On  3 June 2026,  the  Commission  published  the  2026  country  report  for  Estonia.  It 
assessed  Estonia’s  progress 
country-specific 
recommendations  and  took  stock  of  Estonia’s  implementation  of  the  RRP.  On  the 
basis  of  that  analysis,  the  country  report  identified  the  most  pressing  challenges 
Estonia  is  facing.  It  also  assessed  Estonia’s  progress  in  implementing  the  European 
Pillar  of  Social  Rights  and  in  achieving  the  Union  headline  targets  on  employment, 

addressing 

relevant 

the 

in 

2024/2509 - COM(2025) 565 final. The proposed Regulation is currently the subject of negotiations with the 
co-legislators. 

3  OJ C, C/2026/2434, 28.4.2026, ELI: http://data.europa.eu/eli/C/2026/2434/oj. 
4  OJ C, C/2026/2434, 28.4.2026, ELI: http://data.europa.eu/eli/C/2026/2434/oj. 
5  Regulation (EU) 2021/241 of the European Parliament and of the Council of 12 February 2021 establishing 
ELI: 

18.2.2021, 

Recovery 

Facility 

(OJ 

and 

57, 

17, 

p. 

L 

the 
http://data.europa.eu/eli/reg/2021/241/oj). 

Resilience 

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(7) 

(8) 

(9) 

skills  and  poverty  reduction,  as  well  as  progress  in  achieving  the  United  Nations 
Sustainable Development Goals. 

On  21  January  2025,  the  Council,  upon  the  assessment  and  recommendation  of  the 
Commission, adopted a Recommendation endorsing the national medium-term fiscal-
structural  plan  of  Estonia  (6).  The  plan  covers  the  period  from  2025  until  2028  and 
presents  a  fiscal  adjustment  spread  over  four  years.  The  Council  recommended  the 
following  maximum  growth  rates  of  net  expenditure:  7.1%  in  2025,  5.1%  in  2026, 
3.6%  in  2027  and  3.2%  in  2028,  which  correspond  to  the  maximum  cumulative 
growth rates calculated by reference to the base year of 2023 of 9.2% in 2025, 14.8% 
in 2026, 18.9% in 2027 and 22.6% in 2028. 

from 

recommendation 

Russia’s  war  of  aggression  against  Ukraine  and  its  repercussions  constitute  an 
existential  challenge  for  the  European  Union.  The  Commission  has  invited  Member 
States  to  request  the  activation  of  the  national  escape  clause  of  the  Stability  and 
Growth Pact in a coordinated manner to support the EU efforts to achieve a rapid and 
significant  increase  in  defence  spending  (7)  and  this  proposal  was  welcomed  by  the 
European Council of 6 March 2025. Following the request of Estonia, on 8 July 2025 
the  Council,  upon  a 
the  Commission,  adopted  a 
Recommendation  allowing  Estonia  to  deviate  from  the  recommended  maximum 
growth  rates  of  net  expenditure  (8).  The  period  when  the  national  escape  clause  is 
activated  (2025-2028)  allows  Estonia  to  reprioritise  government  expenditure  or 
increase  government  revenue  so  that  lastingly  higher  defence  expenditure  would  not 
endanger fiscal sustainability in the medium term. 
On  30 April 2026,  Estonia  submitted  its  2026  Annual  Progress  Report  (9)  on 
adherence  to  the  recommended  maximum  growth  rates  of  net  expenditure  and  the 
implementation  of  reforms  and  investments  responding  to  the  main  challenges 
identified  in  the  European  Semester  country-specific  recommendations.  The  Annual 
Progress  Report  also  reflects  Estonia’s  biannual  reporting  on  the  progress  made  in 
implementing  its  recovery  and  resilience  plan  in  accordance  with  Article  27  of 
Regulation (EU) 2021/241. 

(10)  Real  GDP  growth  in  2025  was  0.6%  and  HICP  inflation  stood  at  4.8%.  The 
Commission  Spring  2026  Forecast  projects  real  GDP  to  grow  by  1.6%  in  2026  and 
1.7% in 2027, and HICP inflation to stand at 4.4% in 2026 and 2.9% in 2027. 
(11)  Based  on  data  provided  by  Eurostat  (10),  Estonia’s  general  government  deficit 
increased  from  1.1%  of  GDP  in  2024  to  2.0%  of  GDP  in  2025.  The  increase  in  the 
deficit  in  2025  mainly  reflects  stronger  expenditure  dynamics,  in  particular  public 
investment  on  large  infrastructure  projects,  such  as  Rail  Baltica.  Based  on  policy 
measures  known  by  the  cut-off  date  of  the  forecast,  the  Commission  Spring  2026 
Forecast projects a deficit of 4.5% of GDP in 2026 and of 4.8% of GDP in 2027. The 

6  Council  Recommendation  of 21 January 2025  endorsing  the  national  medium-term  fiscal-structural  plan  of 

Estonia (OJ C/2025/652, 10.2.2025, ELI: http://data.europa.eu/eli/C/2025/655/oj). 

7  Communication from the Commission, 'Accommodating increased defence expenditure within the Stability 

and Growth Pact’, Brussels, 19.3.2025, C(2025) 2000 final. 

8  Council Recommendation of 8 July 2025 allowing Estonia to deviate from the maximum growth rate of net 
expenditure  as  set  by  the  Council  under  Regulation  (EU)  2024/1263  (Activation  of  the  national  escape 
clause), (OJ C/2025/3970, 20.8.2025, ELI: http://data.europa.eu/eli/C/2025/3964/oj).  

9  The  2026  Annual  Progress  Reports  are  available  on:  https://economy-finance.ec.europa.eu/economic-and-

fiscal-governance/stability-and-growth-pact/preventive-arm/annual-progress-reports_en. 

10  Eurostat-Euro Indicators, 22.4.2026. 

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increase in the deficit in 2026 mainly reflects a decrease in revenue in particular due to 
the personal income tax reform (transition to a universal tax-exemption system) and an 
increase in expenditure mainly on the back of defence spending reaching 5% of GDP, 
and  of  investment  projects  such  as  Rail  Baltica.  The  increase  of  the  deficit  in  2027 
mainly reflects weaker revenue dynamics. 

(12)  Based  on  the  Commission’s  estimates,  the  fiscal  stance  (11),  which  includes  both 
nationally  and  EU  financed  expenditure,  was  contractionary,  by  0.5%  of  GDP,  in 
2025. It is projected to be expansionary, by 2.8% of GDP in 2026, and contractionary, 
by 0.3% of GDP in 2027. 

(13)  Based on data provided by Eurostat (12), Estonia’s general government debt increased 
from  23.5%  of  GDP  at  the  end  of  2024  to  24.1%  of  GDP  at  the  end  of  2025.  The 
increase  in  the  debt  ratio  in  2025  mainly  reflects  the  government  deficit.  Based  on 
policy  measures  known  at  the  cut-off  date  of  the  forecast,  the  Commission  Spring 
2026 Forecast projects the debt-to-GDP ratio to increase to 26.9% by the end of 2026 
and  further  to  30.5%  by  the  end  of  2027.  The  increases  in  2026  and  2027  mainly 
reflect high and sustained budget deficits and positive stock-flow adjustments in 2027. 

(14)  Based  on  Eurostat  data,  total  general  government  defence  expenditure  in  Estonia 
amounted  to  4.2%  of  GDP  in  2025,  corresponding  to  an  increase  of  2.1  percentage 
points  of  GDP  compared  to  the  reference  year  2021.  According  to  the  Commission 
Spring  2026  Forecast,  it  is  projected  at  5.0%  of  GDP  in  2026,  corresponding  to  an 
increase of 3.0 percentage points of GDP compared to 2021. 

(15)  The  Union  continues  to  face  risks  of  energy  supply  disruptions  and  elevated  price 
volatility,  exacerbated  by  geopolitical  tensions  which  affect  global  oil  and  gas 
markets.  Experience  from  the  2022–2023  energy  crisis  has  shown  that  broad  and 
untargeted  measures  entail  large  fiscal  costs  and  are  socially  and  economically 
inefficient. Since the outbreak of the war in the Middle East in February 2026, Estonia 
adopted  a  fiscal  policy  measure  to  mitigate  the  impact  of  high  energy  prices  on 
households and firms (13). Namely, it postponed the fuel and electricity excise tax rate 
increases from 2026 to 2027. According to the Commission Spring 2026 forecast, the 
fiscal  cost  of  this  measure  is  projected  to  amount  to  approximately  0.1%  of  GDP  in 
2026. 

(16)  Based on the Commission’s calculations, net expenditure in Estonia grew by 2.0% in 
2025 and 5.7% cumulatively over 2024 and 2025. The net expenditure growth in 2025 
is below the recommended maximum growth rate. When considering 2024 and 2025 
together,  the  cumulative  growth  rate  of  net  expenditure  is  also  below  the 
recommended maximum growth rate. 

(17)  Based  on  the  Commission’s  calculations,  net  expenditure  in  Estonia  is  projected  to 
grow  by  12.0%  in  2026,  and  18.4%  cumulatively  over  2024,  2025  and  2026.  The 
projected  net  expenditure  growth  in  2026  is  above  the  recommended  maximum 

11  The  fiscal stance is defined as a  measure of the  annual change in the underlying budgetary position of the 
general government. It aims to assess the  economic impulse  stemming from fiscal policies, both those that 
are  nationally financed and those  that are  financed by the EU budget. The fiscal stance is measured as the 
difference between (i) the medium-term potential growth and (ii)  the change in primary expenditure net of 
discretionary revenue measures and including expenditure financed by non-repayable support (grants) from 
the Recovery and Resilience Facility and other Union funds. 

12  Eurostat-Euro Indicators, 22.4.2026. 
13  This reflects the situation at the cut-off date of the Commission’s Spring 2026 Forecast (4 May 2026). 

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growth  rate,  corresponding  to  a  deviation  of  2.8%  of  GDP  in  annual  terms.  When 
considering 2024, 2025 and 2026 together, the projected cumulative growth rate of net 
expenditure is also above the recommended maximum growth rate, corresponding to a 
deviation  of  1.5%  of  GDP  in  cumulative  terms.  However,  the  projected  deviation  is 
within  the  flexibility  of  the  national  escape  clause  based  on  current  projections  for 
defence spending. 

(18)  On  3  June  2026,  the  Commission  adopted  a  report  under  Article  126(3)  TFEU  (14). 
That  report  assessed  the  situation  of  Estonia  vis-à-vis  the  deficit  criterion,  as  its 
planned  general  government  deficit  in  2026  exceeds  the  reference  value  of  3%  of 
GDP.  The  report  concluded  that,  taking  into  account  all  the  relevant  factors  as 
appropriate, the deficit criterion is not fulfilled by Estonia. However, the Commission 
was  of  the  view  that  there  is  no  case  to  open  an  excessive  deficit  procedure  for 
Estonia,  as  the  Council  has  activated  the  national  escape  clause  for  Estonia  and  the 
projected  deficit  in  excess  of  the  reference  value  in  2026  is  fully  explained  by  the 
increase  in  defence  expenditure  since  2021,  based  on  the  Commission  Spring  2026 
Forecast.  In  light  of  this  and  after  considering  the  opinion  of  the  Economic  and 
Financial Committee as established under Article 126(4) TFEU, the Commission  has 
not proposed to open an excessive deficit procedure. 

(19)  Due  to  heightened  security  needs,  defence  spending  is  on  the  rise  in  Estonia.  It 
increased from 2% of GDP in 2021 to 4.2% in 2025 and is expected to exceed 5% of 
GDP  starting  in  2026.  Therefore,  it  is  important  that  Estonia  finds  stable  sources  of 
revenue  or  expenditure-decreasing  instruments,  that  can  support  the  financing  of  not 
only  spending  needs  for  defence  but  for  all  structural  spending  needs,  including 
healthcare and long-term care, in the medium to long term. 

(20)  The  general  government  tax  revenue  remains  four  percentage  points  below  the  EU 
average,  at  35.2%  of  GDP  in  2024,  against  39.4%  in  the  EU.  Since  2024,  several 
measures have been introduced  to  increase the revenue: the VAT rate  was increased 
twice, reaching 24% in 2025; personal and corporate income tax rates were raised to 
22%;  excise  duties  on  alcohol,  tobacco  and  energy  are  set  to  increase  annually  until 
2027/28;  and  a  new  motor  vehicle  tax  was  introduced  in  2025.  While  these  reforms 
help narrow the revenue gap with the EU average, they further increase the reliance on 
labour and consumption taxes, already above the EU average as a share of GDP. They 
also risk placing a disproportionate burden on lower-income groups and exacerbating 
income  inequality.  It  would  be  beneficial  to  broaden  the  tax  base  through  taxes  less 
detrimental to growth. For instance, by tapping into property taxation, which remains 
underutilised. Property taxation revenues in 2024 amounted to just 0.3% of GDP, well 
below the EU average of 1.8%, reflecting Estonia’s focus on taxing land rather than 
property. Phasing-in  a tax on vacant  residential  property would broaden the tax base 
while reducing  housing  shortages. Efforts  have  also  been made to  improve spending 
efficiency. However, most recent spending  reviews, the last one in 2025, have  had a 
rather  narrow  focus  in  areas  of  public  spending  such  as  museum  funding  or 
administrative procedures in the social sector. Furthermore, the link between spending 
reviews,  efficiency  gains  and  resource  reallocation  remains  limited.  Strengthening  it 
would  require  more  frequent  reviews  and  ensuring  that  the  resulting  savings  are 
clearly reflected in the budget and channelled towards priority areas. 

14  Report from the Commission, prepared in accordance with Article 126(3) of the Treaty on the Functioning of 

the European Union, 3.62026, COM(2026)302 final. 

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(21)  The systematic, meaningful and timely involvement of local and regional authorities, 
social partners, civil society and other relevant stakeholders remains essential in order 
to  ensure broad ownership  for the successful  implementation  of the  Union’s funding 
instruments, as well as in the context of the European Semester.  

(22)  The implementation  of cohesion  policy programmes,  which encompass support from 
the  European  Regional  Development  Fund  (ERDF),  the  Just  Transition  Fund  (JTF), 
the  European  Social  Fund  Plus  (ESF+)  and  the  Cohesion  Fund  (CF)  in  Estonia,  is 
above the average pace at EU level, both in terms of project selection and payments. It 
is important to keep current momentum, while maximising the impact of investments 
on the ground. Estonia is already taking action under its cohesion policy programmes 
to  boost  competitiveness  and  growth.  Nevertheless,  some  areas  may  require  further 
strengthening,  including  those  relating  to  persistent  territorial  disparities,  economic 
diversification  and  just  transition.  While  overall  good,  effective  implementation  is 
challenged by the limited availability and use of regional data. It is essential to ensure 
that the new investments identified by Estonia in its mid-term review of the cohesion 
policy  funds,  notably  those  linked  to  the  five  priorities  identified  in  the  Mid-Term 
Review Regulation (15), are deployed rapidly and effectively. 

(23)  Persistent  regional  disparities hamper  convergence and growth in  Estonia. Economic 
activity,  high-value  public  services  and  skilled  labour  are  concentrated  around  the 
capital region. The remote and rural regions face structural challenges linked to sparse 
population,  demographic  decline,  connectivity  issues  and  access  to  basic  public 
services.  As  a  country  on  the  eastern  external  border  of  the  EU,  Estonia  faces 
additional challenges hindering its prospects for economic and social development as 
existing  structural  challenges  are  exacerbated.  Russia’s  war  of  aggression  against 
Ukraine  increases  security  pressures,  disrupts  cross-border  economic  activities  and 
decreases  investment  attractiveness  and  further  limits  access  finance.  Security 
concerns for people and critical infrastructure require investments in civil protection, 
preparedness and military mobility, which could provide opportunities for the regions’ 
economies,  while  adding  further  pressure  on  the  financing  of  public  services. 
Supporting economic diversification and strengthening  the resilience of  the region  is 
particularly  important  in  Ida-Viru  county,  which  is  undergoing  a  major  industrial, 
economic and social transformation as the oil shale-based industry is being phased out. 

(24)  Estonia faces several challenges related to research and innovation, access to finance, 
energy  efficiency  in  buildings,  renewable  energy  and  energy  security,  sustainable 
transport, labour and skills supply and social protection. 

(25)  Although Estonia’s overall innovation performance has steadily improved since 2017, 
business research and development (R&D) spending as a share of GDP remains below 
the EU average. At the same time, support to business R&D has increased markedly, 
with  direct  public  support  reaching  0.15%  of  GDP  in  2023,  above  the  EU  average. 
This includes new initiatives such as the national applied research centre, the TemTA 
programme  for  applied  research  and  technology  development,  performance-based 
incentives for science–business collaboration, and measures to strengthen intellectual 
property  management  and  technology  transfer.  However,  patenting  has  declined  and 
research–business  cooperation  remains  limited,  indicating  that  public  investment  in 

15  Regulation (EU) 2025/1914 of the European Parliament and of the Council of 18 September 2025 amending 
Regulations  (EU)  2021/1058  and  (EU)  2021/1056  as  regards  specific  measures  to  address  strategic 
challenges in the context of the mid-term review. 

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R&I is not yet sufficiently leveraged. Fragmentation between innovation support and 
broader  support  initiatives  for  small  and  medium-sized  enterprises  (SMEs)  reduces 
policy  effectiveness  and  weakens  the  translation  of  research  into  market  outcomes. 
Addressing  these  shortcomings,  including  by  ensuring  more  integrated  support 
frameworks and sustained investment in applied research and high-impact areas such 
as artificial intelligence, would help strengthen the commercialisation of innovation.  

(26)  Availability  of  finance  is  a  major  investment  obstacle  for  19%  of  companies  in 
Estonia,  while  the  share  of  finance-constrained  firms  is  significantly  higher  than  the 
EU  average.  Estonian  businesses  rely  heavily  on  internal  financing,  reflecting 
structural  features  such  as  the  tax  system,  the  prevalence  of  SMEs  and  a  modest 
institutional investor base. Persistent gaps in SMEs’ access to finance continue to hold 
back  innovation,  commercialisation  of  research  and  the  uptake  of  resource-efficient 
technologies. While the integration of Baltic capital market infrastructure since 2017 
and  support  from  national  and  supranational  institutions  have  contributed  to  the 
development  of  the  capital  market,  private  equity  and  venture  capital,  financing 
constraints persist, exacerbated by the 2021 pension reform, which reduced the size of 
domestic  capital  markets  and  institutional  investment.  Although  instruments  such  as 
the  investment  account  regime,  targeted  guarantee  schemes,  and  new  financing 
agreements,  notably  with  the  European  Investment  Fund,  have  expanded  access  to 
the  rapid 
to  exceed  supply,  as 
finance,  demand  continues 
oversubscription of regional support calls. Improving access to finance, especially for 
SMEs outside major urban centres, including through targeted guarantees and a more 
integrated  innovation  and  business  support  framework,  would  help  mobilise 
investment, support scale-up, and accelerate the adoption of innovative and resource-
efficient technologies. 

illustrated  by 

(27)  Buildings  are  responsible  for  46.1%  of  energy  use  in  the  country,  with  final  energy 
consumption improvements in the residential sector stalling in Estonia between 2019 
and  2024.  Low  energy  efficiency  of  the  housing  stock  results  in  heating  costs 
consuming  a  high  share  of  disposable  incomes,  which  affects  vulnerable  groups 
particularly  hard.  Estonia  relies  mostly  on  grant-based  support  schemes  for 
renovations,  and  use  of  financial  instruments  remains  limited.  Increasing  availability 
of  financial  instruments  could  advance  decarbonisation  and  affordability  of  housing 
through lower heating costs in renovated dwellings. Establishing a clear path toward a 
decarbonized and energy efficient building stock will also help to tackle the need for 
climate adaptation and increasing overall crisis resilience. 

(28)  Estonia’s energy mix has shifted notably towards renewables, rising from 35% in 2023 
to 40% in 2024. However, although its share of the energy mix decreased importantly 
from 30% in 2023 to 25% in 2024, domestically sourced oil shale remains Estonia’s 
main  energy  source,  hindering  the  green  transition.  Although  daytime  prices  have 
fallen in recent years due to the increasing penetration of solar power in the electricity 
mix (67.9% of renewables in the net electricity generation in 2025, one of the highest 
in  the EU),  Estonia remains  vulnerable to  severe price spikes during  periods  of high 
demand.  While  Estonia’s  electricity  grid  was  successfully  synchronised  with  the  EU 
grid  in  February  2025,  other  synchronisation  projects,  notably  with  Latvia  and 
Finland, remain to be completed to support the transition and enhance energy security. 
Although Estonia’s first large-scale battery energy storage system came into operation 
in  2025,  the  construction  of  more  such  systems  is  essential  to  increase  the  country's 
energy  flexibility.  Work  to  strengthen  the  resilience  of  critical  energy  infrastructure 

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must  also  continue,  particularly 
surveillance. 

regarding  cybersecurity  and 

infrastructure 

(29)  Resource  productivity  in  Estonia  is  dragged  down  by  the  prominence  of  resource-
intensive  industries  and  considerable  reliance  on  oil  shale  (52.5%  of  the  gross 
available energy in Estonia in 2023). In 2024, Estonia generated EUR 1.15 per kg of 
material compared to the EU average of EUR 2.99. In terms of resource productivity 
measured  as  gross  domestic  product  (GDP)  over  domestic  material  consumption 
(DMC),  Estonia  is  still  among  the  worst  performers  in  the  EU  and  shows  a  slightly 
worsening  trend  –  the  index  value  in  2023  was  127.7  and  124.7  in  2024.  To  boost 
resource productivity, Estonia needs to shift away from oil shale, further support bio-
based  innovation  to  turn  resources  into  higher-value  applications  as  well  as 
development  and  uptake  of  resource-efficient  technologies  and  improve  circularity, 
which requires substantial investment. 

(30)  Estonia’s  transport  sector  continues  to  be  a  large  greenhouse  gas  emitter.  Road 
transport is responsible for 48% of Estonia’s effort sharing emissions in 2024, having 
increased by 27% since 2005. This is due to Estonia having a car fleet that is the oldest 
in  the  EU  as  well  as  an  above  EU  average  car  ownership  rate.  To  tackle  this  and 
implement its own Transport and Mobility development Plan 2021-2035, Estonia must 
implement  measures  to  encourage  a  shift  towards  the  use  of  sustainable  public 
transport.  To  that  end,  support  to  move  towards  integrated  solutions  and  improving 
multimodal  connection  and  services  for  passengers  is  essential,  as  is  further  rail 
electrification and the completion of Rail Baltica. Estonia’s transport infrastructure is 
vulnerable to climate change impact; this should be taken into account when planning 
new investments in the sector. 

(31) 

In light of the crucial role of human capital in enhancing the Union’s competitiveness 
and  strategic  autonomy,  in  2026  the  Council  recommended  that  Member  States  take 
action  to  urgently  address  human  capital-related  structural  challenges  in  the  areas  of 
skills  and  education,  which  hamper  competitiveness.  The  2026  country-specific 
recommendations  addressed  to  Estonia  can  contribute  to  the  implementation  of  the 
Council Recommendation on human capital in the Union. 

(32)  Estonia continues  to  face challenges in  strengthening its  skills  supply  and improving 
transitions into the labour market. Early school leaving (above 10% in 2025) continues 
to weigh on educational attainment, while youth unemployment (above 20% in 2025) 
and a high share of young people not in employment, education or training (11.2% in 
2025) point to persistent difficulties in school-to-work transitions. The age group 18-
24  is  particularly  exposed  to  in-work  poverty.  Vocational  education  and  training 
(VET)  and higher education play an important  role in  upskilling  for  growing  sectors 
with  high  labour  demand.  However,  VET  remains  insufficiently  attractive  overall, 
while  higher  education  faces  shortages  of  graduates  in  key  fields  such  as  science, 
technology,  engineering  and  mathematics  (STEM).  Wide  disparities  in  access  to 
upskilling  and  reskilling,  depending  on  age,  socio-economic  background  and 
education  level,  continue  to  constrain  the  skills  base,  particularly  in  regions 
transitioning towards higher value-added activities. Schools face growing diversity in 
student  needs,  including  rising  demand  for  additional  learning  support,  while 
significant teacher shortages, especially in STEM subjects and in Estonian as a second 
language,  pose  risks  to  education  quality  and  are  particularly  severe  in  rural  areas. 
Although  digital  skills  are  broadly  in  line  with  the  EU  average,  Estonia  has  not  yet 
reached the EU target of 80%, and many workers still lack adequate ICT and software 
skills,  while  demand  for  AI  and  digital  competences  is  expected  to  increase.  Skills 

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relevant for the green transition also remain in short supply as it is too early to see the 
impact  of  recent  measures,  including  those  supported  under  the  RRF.  Strengthening 
education-to-work  transitions,  expanding  targeted  upskilling  and  reskilling  initiatives 
(including  outreach  to  low-skilled  and  older  adults),  and  supporting  early  labour 
market  integration  of  young  people  would  help  improve  employment  outcomes. 
Collective  bargaining  coverage  and  trade  union  density  are  among  the  lowest  in  the 
EU and the tripartite social dialogue has weakened in recent years. Enhancing social 
dialogue  and  collective  bargaining,  including  through  tripartite  engagement  could 
contribute to addressing these challenges. 

(33)  Low  social  expenditure  and  gaps  in  social  protection  coverage  contribute  to  high 
poverty risks for vulnerable groups. The minimum income support remains relatively 
low, while overall social benefit expenditure remains below the EU average (17.8% of 
GDP in 2024, versus the EU average of 27.3%), limiting the poverty-reducing impact 
of  social  transfers.  Persons  with  disabilities,  including  those  in  employment,  face 
substantially higher poverty risks than the general population (working-age population 
with  disabilities  32.5%,  compared  with  15%  for  people  without  disabilities),  partly 
reflecting  relatively  low  disability  benefits.  Single-parent  households  are  also 
particularly  exposed to  poverty and housing cost  pressures.  A limited social  housing 
stock and housing affordability challenges further exacerbates poverty risks, especially 
among vulnerable groups. While Estonia’s planned housing policy for 2025–2035 is a 
positive step, its implementation should be monitored to assess its impact on housing 
affordability.  Reforms  to  the  minimum  income  system  aim  to  improve  the  adequacy 
and efficiency of subsistence benefits,  but  as these reforms  remain at  an  early stage, 
their  impact  is  yet  to  be  seen.  Despite  recent  reforms,  pension  adequacy  in  Estonia 
remains  a  challenge,  with  poverty  risks  among  older  people  remaining  among  the 
highest in the EU. Risks are particularly high for women and older people living alone, 
with the latter recording the highest risk of poverty or social exclusion in the EU. This 
is  linked  to  longer  life  expectancy,  household  composition  patterns  and  limited 
survivor  pension  coverage,  which  result  in  many  older  women  living  alone  with 
relatively  low  incomes.  Strengthening  benefit  adequacy  and  broadening  access  to 
social protection, as well as improving participation in additional pension pillars could 
reduce poverty risks. 

(34)  Estonia continues  facing challenges regarding  access  and affordability of health care 
and long-term care, particularly in regions outside main urban centre areas and among 
vulnerable groups. While Estonia has undertaken reforms and investments to address 
health  workforce  shortages,  to  strengthen  primary  care  and  the  hospital  network  as 
well  as  promote  integration  of  health  care  and  social  services,  access  remains  a 
challenge.  Public  expenditure  on  health  and  long-term  care  is  well  below  the  EU 
average,  contributing  to  significant  unmet  needs,  high  out-of-pocket  payments  and 
limited availability of long-term care services, particularly home-based care, leading to 
continued  reliance  on  informal  care,  that  disproportionately  affect  lower-income 
groups  and  increases  poverty  risks  among  those  in  need  of  care.  Despite  quality 
guidelines,  access  to  social  services  varies  considerably  between  municipalities,  and 
rising waiting lists further constrain access. Significant inequalities in life expectancy 
and  healthy  life  years  persist  in  Estonia,  closely  linked  to  socio-economic  status, 
education, income and place of residence. The current social health insurance model is 
not financially sustainable in the long term, as expenditure is projected to grow faster 
than  revenues  due  to  ageing,  rising  demand  and  labour  market  changes.  It  remains 
crucial  to  continue  implementing  reforms  to  better  integrate  healthcare  and  social 

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(35) 

services,  prioritise  prevention  and  ensure  sustainable  funding,  to  address  workforce 
shortages and reduce disparities in access and affordability. 

In view of the close interlinkages between the economies of euro-area Member States 
and  their  collective  contribution  to  the  functioning  of  the  economic  and  monetary 
union,  in  2026  the  Council  recommended  that  the  euro-area  Member  States  take 
action, including through their RRPs, to implement the 2026 Recommendation on the 
economic  policy  of  the  euro  area.  For  Estonia,  the  recommendation  (1)  helps 
implement  the  first,  the  second  and  the  third  recommendations  on  the  euro  area, 
recommendation  (2)  helps  implement  the  fourth  recommendation  on  the  euro  area, 
recommendations (3) and (4) help implement the seventh recommendation on the euro 
area,  recommendation  and  the  recommendation  (5)  helps  implement  the  fifth 
recommendation on the euro area. 

HEREBY RECOMMENDS that Estonia take action in 2026 and 2027 to:  

1. 

2. 

3. 

4. 

Continue adhering to the maximum growth rates of net expenditure recommended by 
the  Council  on  21 January 2025,  while  making  use  of  the  flexibility  under  the 
national  escape  clause  for  higher  defence  expenditure.  Reinforce  defence  readiness 
while  ensuring  spending  efficiency  and  gradually  adapting  the  budget  to  sustain 
structurally higher defence spending. Ensure that any measures taken to mitigate the 
impact of the hike in energy prices are temporary, targeted at protecting vulnerable 
households or at addressing the needs of energy-intensive firms, preserve incentives 
for  energy  savings  while  ensuring  that  their  fiscal  cost  is  compatible  with  the 
commitments  under  the  EU  fiscal  framework.  Ensure  sustainable  financing  for 
spending  needs,  including  defence,  by  broadening  the  tax  base,  tapping  into  taxes 
that  are  less  detrimental  to  growth,  including  property  taxation,  and  directing 
spending to priority areas based on public spending reviews. 

Ensure continuity of reforms and investments implemented under the Recovery and 
Resilience  Facility.  Sustain  implementation  momentum  under  cohesion  policy 
programmes,  building,  where  appropriate,  on  the  reallocation  to  strategic  priorities 
and flexibilities  in the mid-term  review  of the cohesion  policy framework. Address 
the  unique  socio-economic,  security  and  civil  preparedness  challenges  affecting 
regions on the EU's external eastern border. 

Better leverage public investment in R&I and address obstacles to commercialisation 
of R&I. Improve access to finance, including for scaling up, especially for small and 
medium-sized  enterprises  and  companies  outside  main  urban  areas,  including  by 
integrating innovation and business support frameworks. 

Further  invest  into  energy  efficient  renovations,  including  through  financial 
instruments, to reduce energy demand and contribute to increasing the affordability 
of housing. Reduce overall reliance on  fossil fuels  and the share of oil shale in  the 
energy  mix  by  investing  in  renewable  energy  and  by  promoting  energy  storage. 
Increase  energy  security  and  resilience  against  hybrid  threats,  for  example  by 
ensuring the sufficient capacity of electricity interconnections and strengthening the 
grid  infrastructure’s  resilience.  Increase  the  use  of  sustainable  and  less  polluting 
transport,  by  accelerating  the  completion  of  Rail  Baltica,  and  by  facilitating  the 
integration of public transport systems. Raise resource productivity by supporting the 
uptake of resource-efficient technologies. 

5. 

Improve  skills  by  expanding  opportunities  for  low-skilled  and  older  adults  and 
strengthening  STEM  education  across  all  levels.  Reduce  early  school  leaving  by 

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addressing  teacher  shortages  and  supporting  learners  with  special  needs.  Improve 
employment of young  people through more effective  active labour market  policies, 
while paying particular attention to regional disparities. Strengthen social protection 
to  reduce  the  risk  of  poverty  among  vulnerable  groups  by  increasing  the  adequacy 
and  efficiency  of  the  benefit  system.  Improve  accessibility  and  affordability  of 
healthcare and long-term care, including to address regional disparities, by ensuring 
funding. 

Done at Brussels, 

For the Council 
The President 

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