Source: EURLEX
Language: en
Format: md

**COMMISSION OF THE EUROPEAN COMMUNITIES**

Brussels, 15.07.1997
COM(97) 2006 final

##### **Commission Opinion** **on Estonia's Application** **for Membership of the European Union**

###### **Contents**

**A. INTRODUCTION** **Page**

**a) Preface**

The Application for Membership
The Context of the Opinion
The Context of the Opinion

**b) Relations Between the** **European** **Union and Estonia**

Historical and Geopolitical Context
Estonia's Position Concerning the European Union
Contractual Relations

The Pre-Accession Strategy
Trade Relations

General Evaluation

**m**

**B.** **CRITERIA FOR MEMBERSHIP**

**1.** **Political Criteria**

**1.1 Democracy and the Rule of Law**

Parliament and Legislative Powers: Structure
Functioning of Parliament
The Executive: Structure

Functioning of the Executive
The Judiciary: Structure
Functioning of the Judiciary
**1.2 Human Rights and Protection of Minorities**
Civil and Political Rights
Economic, Social and Cultural Rights
Minority Rights and the Protection of Minorities
**1.3 General Evaluation**

**2.** **Economic Criteria**

**2.1 The Economic Situation**

Background
Liberalisation

Stabilisation of the Economy
Structural Change
Financial Sector

Economic and Social Development
**2.2 The Economy in the Perspective of Membership**
Introduction

The Existence of a Functioning Market Economy
The Capacity to Cope with Competitive Pressure and Market Forces
Prospects and Priorities
**2.3 General Evaluation**

**3.** **Ability to Assume the Obligations of Membership**

**3.1 Internal Market Without Frontiers**

The Four Freedoms

    - General Framework

    - Free Movement of Goods

    - Free Movement of Capital

    - Free Movement of Services

    - Free Movement of Persons

    - General Evaluation

Competition
3.2 **Innovation**

Information Society

Education, Training and Youth
Research and Technological Development
Telecommunications

Audio-visual

**3.3 Economic and Fiscal Affairs**

Economic and Monetary Union
Taxation

Statistics

**3.4 Sectoral Policies**

Industry
Agriculture
Fisheries

Energy
Transport
Small and Medium Enterprises
**3.5 Economic and Social Cohesion**

Employment and Social Affairs
Regional Policy and Cohesion
**3.6 Quality of Life and Environment**
Environment

Consumer Protection

**3.7 Justice and Home Affairs**

**3.8 External Policies**

Trade and International Economic Relations

Development
Customs

Common Foreign and Security Policy
**3.9 Financial Questions**
Financial Control

Budgetary Implications

**4.** **Administrative Capacity to Apply the** _**Acquis**_

**4.1 Administrative Structures**

**4.2 Administrative and Judicial Capacity**
**4.3 General Evaluation**

**C.** **SUMMARY AND CONCLUSION**

**Annexes**

Composition of Parliament
Single Market: White Paper Measures
Statistical Data

**A. INTRODUCTION**

**a) Preface**

**The Application for Membership**

Estonia presented its application for membership of the European Union on 24
November 1995, and the Council of Ministers decided on 4 December 1995 to
implement the procedure laid down in Article 0 of the Treaty, which provides for
consultation of the Commission.

That is the framework in which the Commission submits the present Opinion,
responding to the request of the European Council in Madrid in December 1995 to
present the Opinion as soon as possible after the conclusion of the Intergovernmental
Conference, which commenced in March 1996 and concluded in June 1997.

**The Context of the Opinion**

The Estonian application for membership is being examined at the same time as
applications from nine other associated countries. Estonia's accession is to be seen as
part of an historic process, in which the countries of Central and Eastern Europe
overcome the division of the continent which has lasted for more than 40 years, and
join the area of peace, stability and prosperity created by the Union.

The European Council in Copenhagen in June 1993 concluded that:

"The associated countries in Central and Eastern Europe that so desire shall become
members of the Union. Accession will take place as soon as a country is able to
assume the obligations of membership by satisfying the economic and political
conditions. Membership requires:

   - that the candidate country has achieved stability of institutions guaranteeing
democracy, the rule of law, human rights and respect for and protection of
minorities;

   - the existence of a functioning market economy, as well as the capacity to cope
with competitive pressure and market forces within the Union;

   - the ability to take on the obligations of membership, including adherence to
the aims of political, economic and monetary union.

The Union's capacity to absorb new members, while maintaining the momentum of
European integration, is also an important consideration in the general interest of both
the Union and the candidate countries".

This declaration spelled out the political and economic criteria for examining the
accession requests of the associated countries of Central and Eastern Europe.

The European Council in Madrid in December 1995 referred to the need, in the
context of the pre-accession strategy, "to create the conditions for the gradual,
harmonious integration of the applicant countries, particularly through:

   - the development of the market economy,

   - the adjustment of their administrative structure,

   - the creation of a stable economic and monetary environment".

In its Opinion, the Commission analyses the Estonian application on its merits, but
according to the same criteria as the other applications, on which it is delivering
Opinions at the same time. This way of proceeding respects the wish, expressed by the
European Council in Madrid, to ensure that the applicant countries are treated on an
equal basis.

In addition to the individual Opinions the Commission is presenting separately to the
Council, in the framework of its communication "Agenda 2000", a general assessment
of the accession requests, and its recommendations concerning the strategy for
successful enlargement of the Union. At the same time, it is presenting an evaluation
of the impact of enlargement on the Union's policies.

The Contents of the Opinion

The structure of the Opinion takes account of the conclusions of the European Council
in Copenhagen. It:

   - describes the relations up to now between Estonia and the Union, particularly
in the framework of the association agreement;

   - analyses the situation in respect of the political conditions mentioned by the
European Council (democracy, rule of law, human rights, protection of
minorities);

   - assesses Estonia's situation and prospects in respect of the economic
conditions mentioned by the European Council (market economy, capacity to
cope with competitive pressure);

   - addresses the question of Estonia's capacity to adopt the obligations of
membership, that is the _acquis_ of the Union as expressed in the Treaty, the
secondary legislation, and the policies of the Union;

   - makes finally a general evaluation of Estonia's situation and prospects in
respect of the conditions for membership of the Union, and a recommendation
concerning accession negotiations.

In assessing Estonia in respect of the economic criteria and its capacity to assume the
_acquis,_ the Commission has included a prospective assessment; it has attempted to
evaluate the progress which can reasonably be expected on the part of Estonia in the
coming years, before accession, taking account of the fact that the _acquis_ itself will
continue to develop. For this purpose, and without prejudging the actual date of
accession, the Opinion is based on a medium-term time horizon of approximately five

years.

During the preparation of the Opinion, the Commission has obtained a wealth of
information on Estonia's situation from the Estonian authorities, and has utilised
many other sources of information, including the member states and numerous
international organisations.

**b) Relations Between the European Union and Estonia**

**Historical and Geopolitical Context**

Estonia shares its eastern border with Russia and its southern border with Latvia. It

has an area of 45,000 km and a population of 1.5 million. Across the Finnish Gulf
and the Baltic Sea Estonia has had historically close links to Finland and Sweden.

From the early 13th century Estonia experienced seven centuries of foreign rule, by
Denmark, the German Teutonic Knights, Poland, Sweden and from 1710 Russia. The
19th century brought an era of national awakening and development of civic society.
Estonia declared its independence on 24 February 1918, and successfully defended it
against Soviet forces. On 2 February 1920 the Estonian-Russian Peace Treaty was
signed in Tartu.

The Republic of Estonia became a member of the League of Nations in 1921. The
Estonian Constitution established Estonia as a democratic parliamentary republic,
where supreme legislative power was exercised through the 100-member Parliament,
the Riigikogu. During the 1930s an authoritarian regime was established which led to
the adoption of a new Constitution in 1937. Estonian society and economy as well as
the national culture developed rapidly. The economy was comprehensively
reorganised and reoriented towards the United Kingdom, Germany and the Nordic
countries. Estonia was annexed by the Soviet Union in June 1940, then occupied by
Germany in 1941-44.

After the war Soviet rule was re-established, though not recognised by most Western
States. It was accompanied by mass deportations and settlement of Russians. In
March 1991 a referendum gave clear support to restoration of Estonia as an
independent republic. Independence was declared in August 1991. The last Russian
military forces withdrew from Estonia in August 1994.

After the re-establishment of independence a further referendum in June 1992 gave
support to a new constitution, and the first parliamentary elections were held in

September 1992. Since then, despite frequent changes of government coalition, there
has been consensus on development of a liberal market economy.

**Estonia's Position Concerning the European Union**

Since restoring independence in 1991, Estonia has actively pursued a policy aimed at
strengthening political, economic and social ties with the European Union and
anchoring its security and stability in trans-Atlantic security structures. Estonia
applied for EU membership on 28 November 1995.

The strong determination of Estonia to achieve European integration and accession to
the EU was underlined by President Men, in his speech at the French Institute of
Foreign Relations on 13 February 1997:

"Once the European Union has set the applicants for membership a definite threshold,
it is in the interest of Estonia like any other European country to meet those criteria in
all respects. We do not need concessions, which would dilute the essence of the
Union and make it similar to many impotent world organisations. Estonia, even
though she has a taste of blood in her mouth, already meets a lot of legislative and
economic requirements set by the European Union. According to an EBRD
assessment Estonia is one of the fastest and most successful reformers among the
post-communist states And it is not only economic criteria I am talking about. In
the year 1997 we can again enjoy a sweet privilege in Estonia that we were deprived
of for such a long time: we live in an open society where there is constitutionally
guaranteed freedom, where the military are strictly under civilian control and where a
viable non-governmental sector prospers. Democracy functions in Estonia."

**Contractual Relations**

Diplomatic relations between the European Communities and Estonia were
established on 27 August 1991. A Trade and Co-operation Agreement was signed on

11 May 1992 and entered into force in 1993. At present, the basis of the contractual
relationship between the EU and Estonia is the Free Trade Agreement which was
signed on 18 July 1994 and entered into force on 1 January 1995. This preferential
agreement abolishes duties and quantitative restrictions between Estonia and the
European Community, with the exception of Estonian exports into the EU of some
specified products (agricultural products and fisheries) for which preferential
treatment is granted. The Free Trade Agreement further comprises provisions
concerning payments, competition and other economic provisions, including
approximation of legislation.

A Europe Agreement between the European Communities and Estonia was signed on

12 June 1995. Estonia ratified the Agreement on 1 August 1995. It will enter into
force on completion of ratification by all EU Member States.

Once it enters into force, the Europe Agreement will be the legal basis for relations
between Estonia and the Union. Its aim is to provide a framework for political

dialogue, promote the expansion of trade and economic relations between the parties,
provide a basis for Community technical and financial assistance, and an appropriate
framework to support Estonia's gradual integration into the Union. The institutional
framework of the Europe Agreement provides a mechanism for implementation,
management and monitoring of all areas of relations. Sub-committees examine
questions at a technical level. The Association Committee, at senior official level,
provides for in-depth discussion of matters and often solutions to problems arising
under the Europe Agreement. The Association Council, at Ministerial level, examines
the overall status of and perspectives for relations and provides the opportunity to
review Estonia's progress on preparation for accession.

**The Pre-Accession Strategy**

_Implementation of the Free Trade Agreement and_ _the_ _White Paper_

The Free Trade Agreement is fully functioning, according to the agreed timetable. A
new Protocol entered into force on 1 April 1997 allowing for Pan-European
cumulation of rules of origin. Implementing rules on undertakings and state aid have
been prepared and agreed. In order to make the necessary adaptations following the
enlargement of the Union in 1995 as well as the conclusion of the Uruguay Round,
autonomous measures were adopted by the Community for agricultural products,
processed agricultural products and fishery products. An additional Protocol has been
prepared to incorporate these measures in the Agreement. Other main issues discussed
in the context of the Free Trade Agreement are: approximation of legislation and preaccession strategy, macro-economic issues, customs cooperation, certification and
standardisation issues and trade issues. No serious issues of conflicting views have
occurred.

The Commission's White Paper of 1995 on the Internal Market set out the legislation
which the candidate countries would need to transpose and implement in order to
apply the _acquis,_ and identified elements essential to the implementation of the single
market (known as Stage I measures) which would need priority attention. In response
to the White Paper the Government drew up in June 1996 an Activity Plan for Joining
the European Union. This document includes a detailed list of all legislative
initiatives necessary for the implementation of the _acquis._ For each legal act, the Plan
states the main responsible ministry, the state of the existing legislation as well as
tentative deadlines for the approximation work. The Government Activity Plan
currently includes all Stage I measures, and the incorporation of Stage II measures is
being established.

Comprehensive measures in anticipation of membership have been taken, and
administrative structures have been established to ensure coordination of integration
policy. A Ministerial Commission, chaired by the Prime Minister, formulates the
general policy and submits proposals for the government. It is supported by a Council
of Senior Civil Servants and an Office of European Integration, which reports directly
to the Prime Minister. A European Affairs Committee has been established in the
Parliament.

The EC/Estonia Free Trade Agreement functions well. No disagreements over
implementation have arisen. Its functioning already takes Estonia some of the way
towards the enhanced level of cooperation with the EU which will be required when
the Europe Agreement comes into force.

_Structured Dialogue_

Estonia has participated in" the Structured Dialogue since the Cannes European
Council in June 1995.

_Phare_

Technical and financial assistance from the EU to Estonia commenced under the 1991

Tacis programme and has since 1992 been extended through the Phare programme.
During the period 1992-1997, Phare provided over 152 MECU to Estonia. The
allocation in 1997 is 32 MECU (excluding Cross Border).

The main targets have been establishment of the legal and institutional framework,
strategy formulation in key areas of the reform programme and support for export
promotion, infrastructure development as well as restructuring and privatisation and
third pillar issues.

Phare has had a particular impact on privatisation of enterprises and land, as well
reform of the tax administration and customs.

_Participation in Community Programmes_

Estonia will become eligible to participate in Community programmes from the entry
into force of the Europe Agreement. It has already applied to participate in: Socrates,
Leonardo, SAVE II, LIFE, Raphael, Kaleidoscope, MEDIA II and Ariane. It has
earmarked budgetary funds to cover its financial obligations.

Trade Relations

Since 1991 the trade pattern of Estonia has swiftly changed from an almost exclusive
orientation towards the CIS to a strong integration with the EU. Following the
accession of Finland, Sweden and Austria as well as the entry into force of the Free
Trade Agreement between the Community and Estonia, 54% of Estonia's exports
were directed to the EU in 1995, while 66% of Estonia's imports originated in the EU.

Estonia's most important trading partners within the EU are Finland (29.2% of
imports and 18.4% of exports), Germany and Sweden . Estonia's imports from the EU
consist mainly of machinery and electrical equipment, agricultural products and
textiles . Estonia's main exports into the EU are wood products and textiles.

Estonia has a growing trade with other candidate countries, mainly Latvia. A Free
Trade Agreement with Latvia and Lithuania covers trade in all goods including, from

1 January 1997, also agricultural products. Estonia aims at membership of the Central
European Free Trade Association (CEFTA).

**General Evaluation**

Relations with the EU have developed well since Estonia regained its independence.
There have been no disagreements over implementation of the Free Trade Agreement
and free trade has virtually been achieved. Cooperation will be further enhanced when
the Europe Agreement with Estonia enters into force.

**B.** **CRITERIA FOR MEMBERSHIP**

**1.** **Political Criteria**

The European Council in Copenhagen decided on a number of "political" criteria for
accession to be met by the candidate countries in Central and Eastern Europe. These
countries must have achieved "stability of institutions guaranteeing democracy, the
rule of law, human rights and respect for and protection of minorities".

In carrying out the assessment required in this connection, the European Commission
has drawn on a number of sources of information: answers given by the Estonian
authorities to the questionnaire sent to them by Commission staff in April 1996,
bilateral follow-up meetings, reports from Member States' embassies and the
Commission's delegation, assessments by international organisations (including the
Council of Europe and the OSCE (Organisation for Security and Cooperation in
Europe), reports produced by non-governmental organisations, etc.

The following assessment involves a systematic examination of the main ways in
which the public authorities in each of the candidate countries are organised and
operate, and the steps they have taken to protect fundamental rights. It does not
confine itself to a formal description but seeks to assess the extent to which
democracy and the rule of law actually operate.

This assessment relates to the situation in June 1997. It does not examine in detail any
changes which have taken place in the past or which may come about in the future,
though it generally takes account of any stated intention to reform a particular sector.
The situation of the government is mentioned here only in passing: it will be
examined in greater depth in chapter 4.

**1.1** **Democracy and** **the** **Rule of Law**

Under the new Constitution adopted by referendum in June 1992, Estonia is a
parliamentary democracy. The institutions function correctly, the various powers
being mindful of the limits of their competence and willing to cooperate with each
other.

Parliament and Legislative Powers: Structure

The Parliament - the Riigikogu - is unicameral and comprises 101 members elected
for four years according to a proportional representation system (a minimum score of
5% is needed to qualify for seats). No provisions exist for any specific representation
of the minorities, though six members of the party representing the Russian-speaking
minority have held seats in Parliament since 1995.

The President of the Republic can dissolve Parliament in three circumstances, namely
if a government bill is thrown out by the Riigikogu, if the latter defeats the Prime

Minister or the Government, and if it fails to adopt the budget within two months of
the start of the budget year.

Members of Parliament enjoy the conventional immunities. The opposition's role in
the institutions and its participation in its workings are recognised in Estonia, in
particular when parliamentary committees of enquiry are set up. Four such
committees are currently active, two of them dealing with corruption and monitoring
the secret services. These committees comprise an equal number of government and
opposition members. Three of the committees are chaired by opposition MPs.

A genuine multi-party system exists in Estonia (seven electoral coalitions and nine
political parties fielded candidates at the last elections in 1995). While establishing
parties may be easy, it should be noted that non-citizens cannot become members of
them. Political parties receive funds from the State budget on the basis of their
representation in Parliament. Each parliamentary group is allocated offices and staff
free of charge.

Parliament exercises the legislative power and shares the right of initiative with the
President of the Republic (only as regards amendments to the Constitution) and the
Government. The President of the Republic can ask the Riigikogu for a second
reading. If Parliament votes the same way as before, the President can refer the matter
to the National Court. The President has done so six times and been vindicated on five

of these occasions. Some matters are the exclusive domain of the regulatory power
and Parliament has no right to delegate its legislative power to the Government, even
on a temporary basis.

Parliament can decide to organise référendums on any subject it deems fit.

**Functioning of Parliament**

The elections in September 1992 and March 1995 were free and fair, resulting, in the
latter case, in a change of government (see annex for the results of the last elections in
March 1995).

Parliament functions satisfactorily, its prerogatives are respected, and the opposition
plays a full part in its work.

**The Executive: Structure**

The President of the Republic is elected by a two-thirds majority of Parliament for a
four-year term. If he/she cannot command that majority in the first two ballots, a third
ballot takes place, with the representatives of the local authorities (273 persons)
voting along with the members of the Riigikogu. The President has the standard duties
of head of State.

The Prime Minister is appointed by the President but must receive Parliament's
endorsement before he/she can form a government, which must not comprise more
than 14 ministers. At the Prime Minister's request, the President has the power to

dismiss ministers (under Articles 78 and 90 of the Constitution), who are also
individually accountable to Parliament.

Administratively, the country is divided into 15 districts ("maakond") headed by
Governors appointed for five-year terms by the government. Governors have the task
of coordinating the work of the various government departments in the districts and
overseeing that of the local authorities. The Governors' work is financed directly by
the State budget.

Estonia has only one level of local authority, the municipality (of which there are 254,
comprising 45 cities/towns and 209 rural municipalities), responsible for
administering the main public services locally. Their governing bodies are elected
directly by universal suffrage every three years. Local authorities have budget
autonomy and tax-raising powers. Their work is overseen by both the governors and
the "Chancellor of the Law".

Estonia introduced a civil service code which guarantees government officials'
employment in January 1996. The public's right to information on the
administration's decisions is guaranteed by Article 44 of the Constitution, which gives
citizens access to the administration's documents, except those of the secret services.

The army, secret services* and police are under the control of the civil authorities, as
demonstrated by the President's dismissal of the Commander-in-Chief of the armed
forces in late 1995.

Functioning of the Executive

The central institutions of the State function correctly.

Local authorities in Estonia enjoy a large measure of autonomy.

Estonia's public service has a shortage of qualified personnel, in particular in the legal
field, and suffers from competition from the better-paid private sector.

The police's effectiveness has sometimes been called into question given the rise in
organised crime and in the fight against corruption. Major efforts are currently being
made to reorganise and modernise the force.

The secret services fall under the control of a parliamentary committee of enquiry.

The Judiciary: Structure

The independence of Estonia's judiciary system is guaranteed. Judges are appointed
for life by the President of the Republic on a proposal from the National Court and
can only be dismissed if they are found guilty of a crime. Subject to the approval of
the President of the Republic, the National Court is competent to hear complaints
against magistrates of lower courts while Parliament hears complaints against judges
of the National Court on referral by the "Chancellor of the Law".

**10**

The department of public prosecutions continues to fall under the authority of the
Minister of Justice under the 1993 Law.

Administrative acts are scrutinised by the "Chancellor of the Law", who is elected by
Parliament for seven years on a proposal from the President of the Republic. The
"Chancellor of the Law" checks the constitutional conformity of government
measures and local authority acts and can intervene where he deems they are
unconstitutional. Where the authority refuses to amend them, he can refer the matter
to the National Court.

Estonia has no ombudsman. A government bill introducing one is currently being
considered.

Vetting for constitutionality is the task of the National Court, Estonia's supreme
judicial authority, which hears appeals against the judgments of the lower courts and
acts as Constitutional Court. Its President is elected by Parliament on a proposal from
the President of the Republic. Its members are appointed by the President of the
National Court himself. Matters can be brought before it by the President of the
Republic, the "Chancellor of the Law" or private citizens. The National Court
scrutinises laws for conformity with the Constitution and treaties.

**Functioning** of **the** Judiciary

The major difficulties facing the justice system relate to uncertainty regarding the law
applying in many areas of legislation and the inexperience of the magistracy (90% to
95% of judges have been replaced since independence).
In Estonia's institutions the National Court plays an important role in upholding
democracy and the rule of law. Petitions addressed to it are rising in number, even
though most of them are groundless.

**1.2** **Human Rights and the Protection of Minorities**

Estonia has set in place a number of regulations to ensure observance of human rights
and the rights of minorities. Various international conventions are also applicable,
above all the European Convention on Human Rights and its main additional
protocols. In accordance with Article F of the TEU, this collection of texts forms part
of the _acquis:_ any country wishing to join the Union must have ratified them.

Estonia, which has been a member of the Council of Europe since May 1993, ratified
the European Convention on Human Rights and most of its additional protocols (with
the exception of Protocol 6 on the death penalty) in April 1996. It has also granted
private individuals the right to appeal to the European Court of Human Rights if they
consider that their rights under that Convention have been violated.

Among other international conventions protecting human rights and minorities,
Estonia has ratified the Convention against the use of torture and the framework
convention on minorities. It has not signed the European Social Charter. It has ratified

**11**

the main conventions on human rights concluded under the aegis of the United
Nations.

Under Article 123 of the Constitution, properly ratified treaties take precedence over
national law.

**Civil and Political Rights**

Access to the judicial system is to a large extent guaranteed in Estonia. Although the
Criminal Code provides for legal aid, it is not always available in practice.

Capital punishment has not been abolished in Estonia, where the last execution was
carried out in September 1991. The President of the Republic has declared a
moratorium on the application of the death penalty and the Minister of Justice has
undertaken to abolish it before 1 February 1998. In November 1996, the Estonian
Government also adopted a new draft penal code, since presented to the Riigikogu,
that makes no provision for the death penalty.

Protection against arbitrary arrest appears to be guaranteed in so far as police custody
is limited to 48 hours, after which any further detention must be decided by a court.

All citizens over 18 years old can vote in national elections. However, local elections
are open to all persons legally resident in Estonia though only Estonian citizens can
stand as candidates.

Freedom of association is guaranteed, as demonstrated by the large number of
associations (4 000 associations and 200 foundations existing currently). While noncitizens may not join political parties, they are free to belong to associations.

Freedom of assembly is also guaranteed.

Freedom of expression is shown by a free and vigorous press (cf. the role played by
the press in denouncing illegal telephone-tapping, which led to the fall of the
Government in October 1995). Pluralism in the audio-visual media is ensured by the
existence, alongside the public radio station and the public television channel, of 29
private radio stations and five private TV channels (two national and three local). A
Radio and TV Broadcasting Council runs the public channels and appoints their

managers.

The right to property is enshrined in the Constitution (Article 32) and former owners
have received compensation for property expropriated under the Communist regime,
although some complaints have been filed on the level of compensation granted. The
courts also closely respect the right to property, as is shown for example by the
decision of the National Court in 1995 to condemn the Government's nationalisation

of property formerly held by the Soviet authorities, which they considered should be
returned to the original owners.

Respect for privacy is guaranteed by the requirement for a warrant to be issued by a
public prosecutor or a judge before any search can be made.

**12**

**In February** **1997** **Estonia ratified the Geneva Convention on refugees and Parliament**
**adopted a law implementing the Convention in the country. This major step forward**
**puts an end to the previous situation in which asylum seekers were treated as illegal**
**immigrants and** **frequently** **detained under harsh conditions.**

**Some cases of** **ill-treatment,,** **suffered in particular by prisoners remanded in custody,**
**have been recorded. Estonia has undertaken a modernisation programme, which is**
**coming up against the relatively meagre financial resources available.**

**Economic. Social and Cultural Rights**

Article 28 of the Constitution recognises the right **to** a minimum income **and** social
security.

Trade union freedoms are guaranteed without **restriction** in Estonia, **where** two
national federations unite most union members. Almost 30% of workers are members

of a trade union.

The right to strike is recognised by Article 29 **of** **the** Constitution, but is **prohibited** in
the civil service (State and local authorities), the armed forces, the justice system, the
emergency services and in the private sector when negotiations' are under way on a
collective agreement or its validity.

Freedom of education and religion are guaranteed in Estonia.

**Minority Rights and the Protection of Minorities**

When it comes to assessing the situation of minorities in Estonia, a distinction should
accordingly be made between rights and protection attendant on membership of an
ethnic and cultural community irrespective of the nationality held, and differences in
personal status deriving from the fact of not holding Estonian citizenship. In this
respect, the definition of the concept of minority adopted by Estonia in its declaration
when depositing the act of ratification of the Council of Europe's framework
convention on minorities is not relevant and the situation of non-citizens also needs to

be taken into consideration in this assessment.

Around 35% of the population of Estonia consists of minorities, including noncitizens, made up of 28% Russians, 2.7% Ukrainians and 1.5% Belorussians. The
minorities live mainly in Tallinn and the north-eastern quarter of the country (NarvaSillamae region), where they may account for up to 95% of the total population
(Narva). Of that 35%, a group of 23% (numbering around 335 000, mainly of Russian
origin) are not Estonian citizens, 8% having chosen Russian nationality and 13%
former Soviet citizens now without any nationality. The Soviet Union's post-1945
policy of encouraging the settlement of Russian speakers in Estonia is largely
responsible for the present situation (88.2% Estonians and 8.2% Russians in the 1934
census, compared with 74.6% Estonians and 20.1% Russians in 1959, and 64.7%
Estonians and 27.9% Russians in 1979).

**13**

Under the Law of April 1995, applicants for Estonian nationality must sit an
examination to test their command of the Estonian language and their knowledge of
the country's history and institutions.

Since 1992, approximately 90.000 applicants have acquired Estonian nationality.
Under the new naturalisation procedure introduced by the Law of April 1995, the
number of naturalisations per year has fallen (around 7 000 should be naturalised in
1997 according to the Estonian authorities' forecasts). The number of candidates also
seems relatively low. At this rate, a large percentage of Estonia's population will
continue to remain foreign or stateless for a long time.

This situation can be explained by several factors. The examination system has often
been held responsible, its difficulty being blamed for the small number of applicants.
The cost of enrolling for the examination is also relatively high. In addition, the rule
whereby candidates must wait one year after submitting their applications for
naturalisation until they can sit the test is an obstacle which is perhaps no longer
entirely justifiable given the small number of applications currently in the pipeline.
Not having Estonian nationality may also have been seen as an advantage in certain
cases (no liability for compulsory military service in Estonia), which may help to
explain the small number of applications.

The Estonian authorities have introduced some improvements. New rules applying
since 1 January 1997 have made it easier to pass. At all events, the success rate
recorded (between 80 and 90%) seems satisfactory. Since 1995 too, the written
examination in Estonian has been waived for elderly persons and they no longer sit
the oral test.

The main weakness in the present system lies in the inadequate resources available for
Russian speakers to learn Estonian in order to sit the naturalisation test. In areas where
Russian speakers are in the majority, the number of teachers of Estonian is very low
and the cost of enrolling for courses is high. Much effort is still required in this area if
the rate of naturalisations is to be kept up in the future. Since 1996 the PHARE
programme has provided support for measures undertaken by the Estonian
Government (a programme costing ECU 1.4 million was launched in December
1996).

The Estonian authorities should consider means to enable stateless children born in

Estonia to be naturalised more easily, particularly with a view to the impending entry
into effect of the European Convention on nationality agreed within the Council of
Europe.

The 1993 Law lays down clear rules on the status of "non-citizens". "Foreigners'
passports" are being issued and should resolve some practical difficulties, in particular
as regards freedom of movement.

The Estonian authorities have systematically issued temporary residence permits
(valid for five years) to all foreigners, including residents in Estonia prior to

**14**

1 July 1990. Issue of permanent residence permits would have had a much more
positive impact and would have carried more practical benefits, such as the right to
invite family members or friends to Estonia. However, the Estonian authorities have
undertaken to renew such permits automatically on expiry and the "Government has
tabled an amendment in Parliament to the law on foreigners so some can be given
permanent residence permits as from 1998.

Foreigners are subject to some restrictions: Estonian citizenship is necessary to sit on
the boards of some companies or to belong to a political party. While only Estonians
can be civil servants under the Law of January 1995, transitional provisions have been
adopted to allow non-nationals to keep their posts while applications for naturalisation
are in progress (e.g. in the police force). Lastly, non-citizens do have the right to vote
in local elections, a right enjoyed in few countries in Europe today and which
effectively contributes towards the integration of non-citizens and the protection of
their rights.

On the whole, the rights of the Russian-speaking minority (both with Estonian
nationality and without) are observed and safeguarded. Furthermore, no major
problems affect relations between Estonians and the Russian minority.

There are no rules granting minorities special representation in Parliament. However,
six members belonging to the party representing the interests of the Russian-speaking
minority sit in the Riigikogu. Similarly, under the voting rights granted to foreigners
in local elections, the Russian minority has representatives on the elected councils of
the towns where it makes up a sizeable percentage of the population (e.g. 16 of the 64
town councillors in Tallinn). In July 1993, a round table bringing together
representatives of all the minorities was set up to consider matters affecting them. The
Law of October 1993 authorises minorities to set up autonomous institutions to
preserve their culture and traditions. The present Estonian Government has also
appointed a Minister for inter-ethnic relations.

National languages can also be used in the courts and in dealings with the
administration in districts where the minority represents a majority of the local
population. The Russian minority also has a large number of media using its national
language as a vehicle (three dailies and two weeklies in Tallinn, three radio networks,
including a public one, and many Russian-language broadcasts on State and private
TV channels).

In the field of education, Estonia offers teaching in Russian at all levels funded by the
State. This system, planned only up to the year 2000, should be maintained without
time limit in the future. The shortage of teachers of Estonian, in particular in areas
where Russian speakers are numerous, remains crucial and is likely to obstruct the
present plans of the Ministry of Education to increase the number of courses taught in
Estonian in schools for the minorities. The Government is currently considering a
programme under which schoolchildren in schools where teaching is in Russian can
be helped to reach the level of skill in Estonian required for entry to public tertiary
education.

**15**

**1.3** **General Evaluation**

**Estonia's political institutions function properly and in conditions of stability. They**
**respect the limits on their competencies and cooperate with each other. Elections in**
**1992** **and** **1995** **were free and fair, and in the latter case led to an alternation of power.**
**The Opposition plays a normal part in the operation of the institutions. Efforts to**
**improve the operation of the judicial system and** **to** **intensify the fight against**
**corruption need to be sustained.**

**There are no major problems over respect for fundamental rights. But Estonia needs**
**to take measures to accelerate naturalisation procedures to enable the Russian-**
**speaking non-citizens to become better integrated into Estonian** **society.**

**Estonia presents the characteristics of a democracy, with stable institutions**
**guaranteeing the rule of law and human rights.**

**16**

**2.** **Economie** **Criteria**

In examining the economic situation and prospects of Estonia, the Commission's
approach is guided in particular by the conclusions of the European Council in
Copenhagen in June 1993, which stated that membership of the Union requires
"the existence of a functioning market economy, as well as the capacity to cope
with competitive pressure and market forces within the Union".

This part of the Opinion therefore gives a concise survey of the economic
situation and background, followed by a review of Estonia's progress in key
areas of economic transformation (liberalisation of the price and trade system,
stabilisation of the economy, structural change, reform of the financial sector) as
well as its economic and social development. It concludes with a general
evaluation of Estonia in relation to the criteria mentioned by the European
Council and a review of prospects and priorities for further reform.

**2.1 The Economic Situation**

Background

Estonia, with a population of 1.5 million, had in 1995 a gross domestic product
(GDP) of about 6 billion ECU (expressed in purchasing power parity); the size of
its population was 0.4 percent of that of the Union, while the size of its economy
was only 0.1 percent. GDP per head was about 23 percent of the EU average in
purchasing power terms. Average monthly wages at the end of 1995 were
estimated at 179 ECU.

Estonia has been an observer to the GATT since June 1992 and requested
accession in March 1994. Its application to become a member of the WTO is
currently being examined.

_Progress in Economic Transformation_

In the inter-war period, Estonia was an independent state, and highly integrated
in the world economy. In 1940, the country was forcibly annexed by the Soviet
Union and subsequently central planning was introduced. Over fifty years of
Soviet rule destroyed Estonia's economic integrity. The resulting structure of the
economy was based on the inflow of labour, mainly from Russia, and on strong
trade and production links with the USSR. It changed the country from an
agricultural economy into one dominated by heavy industry. A relatively welldeveloped infrastructure, combined with a skilled labour force, prompted the
establishment of relatively sophisticated industries, making Estonia one of the
most advanced Republics of the USSR.

Pressure for economic and political independence was always present in Estonia.
It gained momentum in the 1980s and contributed to the approval of a law on

**17**

economic autonomy by the Supreme Soviet of the USSR in 1989. The law paved
the way for economic reforms in various areas, including price and wage
determination, fiscal policy and the financial sector. The economic
transformation reached a critical stage with the currency reform and the
introduction of a national currency in June 1992. Despite repeated changes in
government, the basic course of reform has remained unchanged so far. It is
based on a liberal economic policy, fostering competition and openness of the
economy, with a minimal degree of state intervention. The country has seen
rapid progress in domestic economic liberalisation, privatisation and the
introduction of a liberal external payments regime for both current and capital
transactions

As in other Soviet republics, state and, to a lesser extent, collective ownership
were the dominant forms of ownership in Estonia. Private entrepreneurship was
practically non-existent. After independence in 1991, the private sector has
developed very rapidly. Almost all small and large enterprises have been
privatised and the government has embarked upon an ambitious scheme for
selling the remaining state assets. The share of the private sector in GDP was
estimated at 70% in mid-1996.

_Foreign Direct Investment_

Foreign direct investment has been particularly strong, with amounts per capita
over the period 1989-1996 accumulating to 366 ECU (source: EBRD). However,
the performance of 1996 was far less satisfactory. Foreign direct investment
decreased to only 55 million ECU compared to 156 million ECU in 1995, and
from 5.6% of GDP in 1995 to 1.6% in 1996. There are two main reasons

explaining this fall: a change in the official classification which tightened the
conditions for defining FDI and the slow-down of the privatisation process.
Inflows of portfolio investment and foreign bonds issues by banks went up in
1996. Also, Estonian FDI abroad sharply increased last year, in particular in the
other Baltic countries and in Russia.

_Economic Structure_

Agriculture has traditionally been one of the most important sectors of the
Estonian economy. Today it accounts for 8% of the total Gross Value Added
(GVA) and employs 7% of the labour force. The food processing industry
contributes about one third of gross industrial output. Fishery is the third largest
food processing industry. In a bold move, trade tariffs were abolished completely
at the outset of the transition process - a radical application of the general
principle of free trade to agricultural policy.

The restitution of property rights on land has produced a number of relatively
unprofitable private farms, with an average area of about 23 hectares in 1996.
The average size of farms has been falling in recent years. In fact, despite some
mergers which have followed the initial restitution, it will take years to restore
efficient and competitive private farming.

The **industrial** sector grew rapidly during the Soviet era. In 1991, it accounted
for about 40% of GDP and over 30% of employment. The transformation from an
overly energy-intensive production structure, which heavily relied on CMEA
markets, to a pattern which is more in line with the country's natural endowments
and comparative advantage is still under way. Industrial production is estimated
to have contracted by more than 60% between 1992 and 1994, due to the
disruption of traditional trade links, the terms-of-trade shocks, and the imposition
of trade barriers by Russia. As a result, the share of industry in GVA has declined
to 23% in 1995. Industry's share of employment (excluding mining, energy and
construction) stood at 22.5% in 1996.

The services sector has been expanding at a very rapid pace and accounts for
about two-thirds of the total gross value added. Wholesale and retail trade," tourist
services, transport and communications are the most dynamic activities. Tourism
in particular has become very important for Estonia. In 1996 alone, 2.5 million
tourists visited the country, 67% of whom where Finnish. Most of the tourists
come for a one-day visit. Tourism receipts are extremely important for the
balance of payments: in 1995, the surplus on travel services represented 70% of
the surplus of services and 39% of the trade deficit. For the three first quarters of
1996, the figures were 75% and 41% respectively.

**Main indicators of economic structure**

_(all data for_ _1996_ _unless otherwise indicated)_

Population

GDP per head

_as % of_ _EU-15_ _average_

Share of agriculture in:
gross value added
employment

Gross foreign debt/GDP

Exports of goods & services/GDP

Stock of foreign direct investment*

_million_

_PPS-ECU(1995)_

_per cent_ _(1995)_

_per cent (1995)_

_per cent (1995)_

_per cent_

_per cent_

_billion ECU_

_ECU per head_

1.5

3900

23

7

6

73

0.6

366

_FDI stock converted at_ _end-1996_ _exchange rate of_ _1_ _ECU=$1.25299_

_Source: Commission services, national sources,_ _EBRD_

The share of small and medium-sized enterprises has increased rapidly,
especially in the export sector. Because of problems with the registration of
enterprises, all companies will have to renew their entries on September 1, 1997.
More than half of the entries in the old register, which will be replaced by the
Trade Register, concerned shell companies that were no longer operating. The

19

new requirements are expected to bring about a rise in the number of limited
liability companies and a decline in the number of share companies.

**Liberalisation**

_Price Regime_

Price liberalisation started in 1989 and was almost completed in 1992.
Remaining price controls affect land and forestry, oil shale, medicines and public
services. The prices of a limited number of services (e.g., rents and public
transport) are controlled at the municipal level. Administrative price regulations
apply to companies with monopoly power in such areas as the supply of energy,
water and sewerage services. Together these goods and services still make up
some 25% of the basket on which the consumer price index is calculated.
Administrative decisions, such as the lifting of price controls on alcoholic
beverages in December 1995, can therefore have a sizeable impact on month-tomonth inflation rates.

_Trade Regime_

Estonia proceeded to dismantle the very restrictive trade regime inherited from
the Soviet Union immediately after independence. The country has today one of
the most liberal trade regimes in the world. Import duties apply only to furs, and
excise taxes are levied only on cars, motorcycles, cycles and recreational boats.
However, introduction of protection on a limited number of agricultural products
is currently under consideration. This should not be considered as a change in the
liberal orientation of trade policy but rather as a response to the very specific
problems of the agricultural sector.

Quantitative restrictions have been completely abolished, as have import
subsidies. Export licenses are not restrictive, but serve only for statistical
purposes. Export tariffs have been removed completely, with the exception of
those on items of cultural value. There are no export subsidies, and the few
remaining export quotas were eliminated at the end of 1994.

Estonia has had observer status in the WTO (and before that in GATT) since June
1992. A working group to prepare for full membership has started its activity in
March 1994. A free trade agreement between Estonia and the EU has been in
force since January 1, 1995. Estonia has reached free trade agreements with the
EFTA countries, and has applied for membership to the Central European Free
Trade Agreement (CEFTA). It also has a number of other bilateral agreements.
Since 1 April 1996, a free trade agreement with its Baltic neighbours, Latvia and
Lithuania, is in force. On 1 January 1997, this agreement was extended to trade
in agricultural products. The objective is to establish a full customs union at a
later stage.

_Foreign Exchange Regime_

Since Estonia introduced a currency board (cf. below) in 1992, its, national
currency, the kroon, has been fully convertible for current account transactions.

**20**

This was formalised in 1994, when Estonia accepted the obligations of the IMF's
Article vm. The central bank guarantees conversion of kroon bank notes and
reserve deposits into DM, and vice versa, at a rate of 8 Estonian kroons for one
DM. Transactions in 13 other foreign currencies are supported. Individuals may
open currency accounts in domestic banks or abroad. By contract, most
repayments on loans from domestic banks are denominated in DM. The Law on
the Security of the Estonian kroon stipulates that Eesti Pank (the central bank)
has no right to devalue the currency. Such a decision can only be taken by
parliament, which is meant to reinforce the credibility of the exchange rate.

**Stabilisation of the Economy**

_Domestic_

After the sharp contraction of output which followed independence,- economic
recovery started in the second half of 1993. Estonia has experienced fairly fast
growth thereafter, reaching 4.3% in real terms in 1995. Preliminary figures for
1996 indicate that real growth should have been of the same magnitude.
However, a comprehensive assessment of the economic performance of the
country in the recent past is made particularly difficult by the infancy of the
statistical apparatus.

Since 1992, Estonia's economic policy has been remarkably consistent. To a
large extent, this reflects the consensus among policy-makers on the basic
features of a strategy aimed at modernisation and integration in the European..and
world economy. Also, it reflects the disciplines imposed by the currency board
system. Indeed, the currency board, introduced in June 1992, limits the scope for
the authorities to intervene in economic policy. Under this system the authorities
voluntarily give up discretionary control of the money supply, the exchange rate
is pegged, and the increase in base money needs to be fully matched by an
increase in foreign exchange reserves. Moreover, in the currency board system as
it has been adopted in Estonia, neither local authorities nor the central
government can borrow from the central bank. Central bank lending to
commercial banks is restricted to well-defined emergency situations.

**21**

1995

4.3

29.0

28.9

NA

-0.8

-5.1

10.3

5.6

Main economic trends

Real GDP growth rate _per cent_

Inflation rate

Annual average _per cent_
December on December _per cent_

Unemployment rate, end-year _per cent_

_QLO_ _definition)_
General government budget
balance _per cent of GDP_

Current account balance _per cent of GDP_

Debt/export ratio _per cent_

Foreign direct investment inflow _per cent of GDP_

_* Fourth quarter_

_Source: Commission services, national_ _sources,_ _EBRD_

1994

-1.8

47.7

41.7

7.6

1.3

-7.1

9.1

9.2

1996

4.0

23.1

14.8

10.2*

-1.6

-10.2

8.8

1.6

The currency board has worked well in ensuring exchange rate stability and in
reducing inflation. It has also contributed to fiscal discipline. Inflation came
down rapidly after the introduction of the currency board system. After a lull in
1995 and in the early months of 1996, which can be explained by deregulation
and increases in indirect taxation, consumer price inflation resumed its
downward path and has been falling rapidly since the end of 1996, reaching 9.1%
on a year-on-year basis in March 1997. Export prices have also risen moderately.

Registered unemployment is quite low and rather stable. The number of
unemployed job-seekers that were registered at employment offices in February
1997 amounted to 4.4% of the labour force. The number of people entitled to
receive unemployment benefits is much smaller. The labour force has been
contracting, due to the emigration of part of the Russian population and the
reduction in the participation rates. However, when using the ILO definition,
unemployment is much higher, and reached 11.6% at the end of the first quarter
of 1997.

_External_

The external sector is characterised by an increasing trade deficit, which in 1996
exceeded 24% of GDP - a truly extraordinary figure (change in statistical
methodology in 1996 is partly responsible for a worsening in the overall
balance). The bulk of exports concern processed goods, and a very significant
shift has taken place from foodstuffs to electronics and computer equipment. One
third of exports is directly linked to imports, either in the form of processing or

**22**

in the form of transit trade. A strong surplus on the services balance has so far
mitigated the negative effect of the trade deficit on the current account - which
has nevertheless been in deficit since 1994. The surplus on services is largely,
and increasingly, due to the spending of Finnish tourists.

Foreign currency reserves increased considerably since the introduction of the
currency board. The basis was formed by the restitution of historical gold
reserves by Western central banks in 1991. At present levels, however, the
reserves cover less than three months of imports.

Estonia had no legacy of foreign debt from the former Soviet Union. At the end
of 1996 the stock of external debt amounted to about 239 million ECU,
approximately 6.4% of GDP. The debt-to-exports ratio remained almost constant
at a low level, as did the debt-to-debt-service ratio.

**Structural Change**

_Foreign Trade_

Dependence on the former Soviet market has been dramatically reduced, and
trade has been progressively reoriented to western markets. EU countries now
account for more than two thirds of Estonian trade. Finland has replaced Russia
as the main trade partner, Russia remains a major importer of Estonian goods,
although Russia has increased tariffs. A large part of the exports concerns
processed goods. In 1996, the continuing appreciation of the local currency
against other European currencies has led to a small reorientation of trade
towards other transition countries and non-European regions. For example,
exports to transition countries in eastern and central Europe increased from 14%
to 15.6% of total exports and the share of Asia in the Estonian trade also rose
significantly.

However, the export base is rather limited: the share of re-exports in Estonia's
exports is high (33.7% in 1996 and 45.9% in the first quarter of 1997). This
reflects Estonia's position as a transit centre and also as a favourable processing
base (essentially for the textile industry) because of its low labour costs. Wood
and wood products, processed food products and textile products constituted
more than 40% of all exports in 1996.

A large inflow of foreign direct investment and other capital has kept the overall
balance of payments in surplus up to now.

_Labour Market_

Employment has declined steadily since 1992, with major job losses
concentrated in industry and agriculture. However, a sharp reduction in the size
of the labour force (due to emigration by the Russian part of the population),
emigration of Estonian workers (mostly to Finland), and reduced participation
ratios have contributed to limit the impact on unemployment. The unemployment
rate is estimated to be close to 5%, but this does not include the part of the labour
force that is seeking work because it is only employed on a short-term basis. In

**23**

the context of a recent survey, and using the ILO methodology, unemployment
was estimated to represent 11.6% of the total labour force in the first quarter of
1997.

Employers contribute 33% of wages and salaries towards social security.
Employers are not allowed to pay wages under the minimum level applying to
full-time government employees. The minimum hourly wage is 4 kroon and the
minimum monthly wage is.680 kroon (45 ECU).

_Public Finances_

The centrepiece of the budgeting process in Estonia is the concept of balanced
budget at the level of the central government. So far this principle has been
respected.

The tax structure has undergone several modifications, VAT was first introduced
in 1992. Rates were modified in 1994, and VAT now is levied at 18%. Personal
and corporate income tax are levied at a flat 26% rate. A minimum tax-free
allowance is granted for personal income tax. The overall tax burden is estimated
at 34-36% of GDP. The share of taxes in the total wage bill is estimated to have
been 41% in the fourth quarter of 1995, of which 60% concerns social security
contributions.

Substantial decentralisation has been introduced after independence. One-third of
general government expenditure is spent by local authorities. In fact, under the
pressure of heavy spending by local authorities, the general government deficit in
1996 increased to an estimated 1. 6% of GDP, a departure over the previous
years' balanced budgets.

_Enterprise Sector: Privatisation and Enterprise Restructuring_

Privatisation has advanced fast, and by the end of 1996 practically all large
enterprises had been sold, with the exception of those in the transport,
telecommunication and energy sectors. The privatisation process is handled by
the Privatisation Agency and is based on the privatisation law passed in 1993.
Although the law provided for various forms of sales of assets, privatisation has
been carried out mostly through bids with preliminary negotiations, open to
foreign bidders. This strategy has favoured strategic investors over management
and employees, and it has helped to make Estonia very attractive to foreign direct
investment.

Small-scale privatisation was almost completed by the end of 1995. It has been
regulated by a law, passed in 1991 and amended in 1992, which allowed for
employee buy-outs and auctions. Privatisation vouchers have been issued to the
public. They can be used for the privatisation of housing and land, and for the
purchase of shares. Only limited trading of vouchers is allowed. Housing
privatisation was launched at the end of 1993. Most housing was expected to be
privatised against privatisation vouchers, but due to uncertainties over ownership
titles caused by the restitution process it has proceeded rather slowly. The

**24**

government is also committed to compensate, by restitution or with vouchers, all
owners of property in Estonia prior to 194p.

Future privatisation plans focus on utilities, including firms in **the** energy sector,
the part of the Estonian telecommunications company which has not yet been
privatised, railways and ports. The state has the intention to divest firms where it
still maintains minority stakes, such as Estonian Tobacco, Estonian Gas, and
others. Restructuring of privatised enterprises has been left to investors, mostly
through business plans submitted at the time of bidding.

Bankruptcy legislation was passed in 1992 and a large number of bankruptcy
procedures has been initiated, especially concerning agricultural co-operatives.

**Financial Sector**

A two-tier banking system, separating central bank functions from commercial
banking activities, was formally established in 1989, but became fully
operational only in 1992. The nature and extent of the central bank's activity are
determined by the monetary reform of 1992 which established a currency board
and confined its role to supervision and prudential regulation. The central bank is
completely independent from the government, although it is accountable to
parliament. Lending to the government is prohibited by law.

Under the currency board arrangement there is no room for discretionary
monetary policy. The central bank has neither monetary targets, nor credit
restrictions for banks, nor discount rates.

Estonia's financial system is dominated by the banking sector while the capital
market and non-bank financial institutions are much less developed. The
financial sector has already gone through a process of rationalisation. The
banking crisis of 1992, which was followed by several bank failures in the period
up to 1994, prompted the reorganisation of the sector. This has been followed by
a phase of consolidation, in which the involvement of the state in the banking
sector has been greatly reduced. At present, the sector comprises 13 domestic
banks, 1 branch of a foreign bank and 5 foreign banks' representative offices, but
the number of banks should decline further in the coming months as the industry
continues its consolidation; in fact, a new merger between two banks was
approved in April 1997.

Central bank supervision and prudential regulation have been reinforced. All
banks meet at present the capital adequacy standard. The Bank of Estonia
continues to gradually increase the minimum capital requirement for banks
(which will reach 75 million kroons at the end of 1997) in an effort to force a
consolidation of the banking system. A draft law on deposit insurance is being
prepared.

The total assets of the banking sector amounted to 22 billion kroons at the end of
1996. The share of non-performing loans in banks balance sheets dropped
considerably as asset quality and risk management improved. The improvement

**25**

in asset quality was more pronounced in banks with state participation than in the
private banks. At the end of March 1996 private companies made up 68 per cent
of the banking system loans. Although the segment of individual borrowers is
starting to increase, private companies remain the key borrowers. There was a
lengthening of the average maturity of bank loans to 2.7 years at the end of 1995.
This trend accelerated in 1996 and early 1997 as banks were able to obtain
longer-term resources, notably in foreign currencies. Loans to state enterprises
have been reduced from almost 30% of total outstanding loans in 1993 to less
than 4% in 1996. The modernisation and sophistication of the banking sector is
progressing continuously: 20-year housing loans have been introduced recently
while the number of credit cards has expanded strongly.

State ownership in the sector has declined considerably throughout the
restructuring process of the Estonian banking sector in the 1990s. At present the
state has some shareholdings in 2 credit institutions.. The government intends to
end its involvement in banks in the coming years. Branches of foreign banks can
be opened and operated under the same conditions that are stipulated for
domestic banks. At the end of 1995 direct foreign ownership was 29.2 per cent
and other foreign ownership 5.7 per cent.

The capital market and non-bank financial institutions are less developed
compared to the banking sector. The privatisation of state-owned companies
contributed to the emergence and development of the securities market. The
Tallinn Securities Exchange started its operations on 31 May 1996, providing
substantial improvements in the organisation of the secondary market. The first
public issue of shares was carried out in 1991. The capitalisation of the stock
market represented about 12% of GDP at the end of 1996. However, despite
recent progress (a number of corporate and municipal entities have raised funds
on the international capital markets), it remains difficult for local companies to
get access to long-term finance which is needed for long-term investment. As the
government budget has been in balance for the last three years, there are no
outstanding treasury bills. The main instrument actively traded on the money
market is the Bank of Estonia certificate of deposit whose issuance started in
1993.

**Economic and Social Development**

_Social Indicators_

Life expectancy rates have recovered from the initial worsening after 1989.
Although they remain considerably higher than in the EU, infant mortality rates
are no longer going up. The population has been declining since 1991. This is
mostly due to the emigration of part of the Russian-speaking minority, which in
1991 represented about 30% of the total population, but also to a negative natural
increase. The low unemployment benefits provide little incentive to register as
unemployed. A recent household survey suggest that 10% of the labour force
could be searching for a job. An increase in the retirement age by five years, to
be introduced over a ten-year period, has been agreed to counteract the decline in
the labour force. In 1995, the retirement age was 56 for women and 61 for men.

**26**

Education is fairly good. Almost 80% of the working population has higher
secondary education or more. Enrolment rates are comparable to those of most
European countries. Ten per cent of the total number of pupils today is in
university. Quality is high in specific areas, such as mathematics and science.

_**Regional and Sectoral**_ _**Differences**_

Business activity is liveliest in Tallinn and the north-western part of Estonia and
most depressed in the north- and south-eastern corners of the country.
Employment in north-eastern Estonia used to be heavily dependent on energy
generation, heavy industry and the Soviet military-industrial complex.
Unemployment in this region has risen sharply, probably to more than 15% of
the labour force after the closure of the factories involved. Unemployment in
the south-eastern region is also probably higher than 15%, but there it is due to
the decline in agricultural production, which is the main activity in southern
Estonia.

Small businesses flourish in the north-western part of the country, including a
wide area around Tallinn, and in the transit area to Russia. As a result of the
disappearance of heavy industry, long-term unemployment is high in both southeast and north-east Estonia. South-eastern households have the lowest income.

Six major regional programs were approved by the government in 1995,
modelled in part on the regional objectives of the EU. One* program is aimed in
particular at the integration of the Russian speaking population in East-Virumaa,
the most north-eastern region. A secondary objective of the same program is to
ensure the efficient use of natural resources (oil shale).

**2.2 The Economy in the Perspective of Membership**

**Introduction**

The European Council in Copenhagen in 1993 defined the conditions that the
associated countries in central and eastern Europe need to satisfy for accession.
The economic criteria are:

   - the existence of a functioning market economy;

   - the capacity to cope with competitive pressure and market forces within the
Union.

These criteria are linked. Firstly, a functioning market economy will be better
able to cope with competitive pressure. Secondly, in the context of membership
of the Union, the functioning market is the internal market. Without integration
into the internal market, EU membership would lose its economic meaning, both
for Estonia and for its partners.

**27**

The adoption of the _acquis,_ and in particular the internal market _acquis,_ is
therefore essential for a candidate country, which must commit itself
permanently to the economic obligations of membership. This irreversible
commitment is needed to provide the certainty that every part of the enlarged EU
market will continue to operate by common rules.

The capacity to take on the _acquis_ has several dimensions. On the one hand,
Estonia needs to be capable of taking on the economic obligations of
membership, in such a way that the single market functions smoothly and fairly.
On the other hand, Estonia's capacity to benefit fully from the competitive
pressures of the internal market requires that the underlying economic
environment be favourable, and that the Estonian economy have flexibility and a
sufficient level of human and physical capital, especially infrastructure. In their
absence, competitive pressures are likely to be considered too intense by some
sections of society, and there will be a call for protective measures, which, if
implemented, would undermine the single market.

The capacity and determination of a candidate country to adopt and implement
the _acquis_ will be crucial, since the costs and benefits of doing so may be
unevenly spread across time, industries and social groups. The existence of a
broad based consensus about the nature of the changes to economic policy which
membership of the Union requires, and a sustained record of implementation of
economic reforms in the face of interest group pressure reduce the risk that a
country will be unable to maintain its commitment to the economic obligations
of membership.

At the level of the public authorities, Membership of the Union requires the
administrative and legal capacity to transpose and implement the wide range of
technical legislation needed to remove obstacles to freedom of movement within
the Union and so ensure the working of the single market. These aspects are
examined in later chapters. At the level of individual firms, the impact on their
competitiveness of adopting the _acquis_ depends on their capacity to adapt to the
new economic environment.

**The Existence of** **a** **Functioning Market Economy**

The existence of a market economy requires that equilibrium between supply and
demand is established by the free interplay of market forces. A market economy
is functioning when the legal system, including the regulation of property rights,
is in place and can be enforced. The performance of a market economy is
facilitated and improved by macroeconomic stability and a degree of consensus
about the essentials of economic policy. A well-developed financial sector and an
absence of significant barriers to market entry and exit help to improve the
efficiency with which an economy works.

Estonia can be regarded as a functioning market economy. The good
macroeconomic performance observed over the past few years is the result of
rapid progress in economic liberalisation and privatisation. A new and rigorous
policy framework has been enshrined in law, and any loopholes tend to be closed

**28**

off rather quickly. The currency board system and the generally prudent stance
on fiscal policy, have helped to maintain internal equilibrium and to attract large
capital inflows.

Price setting has been liberalised to a large extent, in labour and capital markets
as well as in output markets. The imposition of hard budget constraints, by
cutting subsidies and putting a stop to easy credits to enterprises, and the rapid
privatisation have strengthened the role of market forces in investment and
production decisions. The liberal trade policy, openness to foreign investment as
well as the emergence of a strong banking sector ensure that market signals and
hard budget constraints are transmitted fairly rapidly unto the economy.

The consensus on the basic features of the economic strategy, the consistency in
policy-making despite repeated changes in government as well as the
strengthening of the economic links with current EU member States have all
contributed to a favourable environment for investment and economic activity.
While the growing external imbalances are a serious cause for concern and need
to be addressed in order to maintain the credibility of the currency board system,
macroeconomic stability has strengthened the market mechanisms. Good
progress in the future implementation of the EC-Estonia Free Trade Agreement
should also help to complete the functioning of the market economy.

The Estonian legal system has its roots in the period of pre-war independence. It
is similar to German law, in particular where private law. is concerned. In
restoring and renewing the legal system, the laws enacted in EU Member States
have served as examples.

The prospect of EU integration has acted as a major impetus for gearing up the
process of administrative reform. The process is guided and co-ordinated by
government commissions at the level of ministers and top civil servants. It is
recognised that a large group of middle and lower ranking civil servants involved
in the implementation of the new laws and procedures will need more training to
adapt to the requirements of a more market-oriented public administration. The
authorities are also planning to significantly increase spending linked to
transposition of EU legislation and modernisation of Estonia's public
administration. The government is also keenly aware that the fiscal restraints on
the central government will need to be extended to the local authorities.
Commitment to reform and modernisation of the economy is not disputed among
Estonia's political forces.

The Capacity to Cope with Competitive Pressure and Market Forces

It is difficult, some years ahead of prospective membership, and before Estonia
has adopted and implemented the larger part of Community law, to form a
definitive judgement of the country's ability to fulfil this criterion. Nevertheless,
it is possible to identify a number of features of Estonia's development which
provide some indication of its probable capacity to cope with competitive
pressure and market forces within the Union.

**29**

This requires a stable macroeconomic framework within which individual
economic agents can make decisions in a climate of a reasonable degree of
predictability. There must be a sufficient amount of human and physical capital
including infrastructure to provide the background so that individual firms have
the ability to adapt to face increased competitive pressures in the single market.
Firms need to invest to improve their efficiency, so that they can both compete at
home and take advantage of economies of scale which flow from access to the
single market. This capacity to adapt will be greater, the more firms have access
to investment finance, the better the quality of their workforce, and the more
successful they are at innovation.

Moreover, an ' economy will be better able to take on the obligations of
membership the higher the degree of economic integration it achieves with the
Union ahead of accession. The more integrated a country already is with the
Union, the less the further restructuring implied by membership. The level of
economic integration is related to both the range and volume of goods traded
with member states. Direct benefits from access to the single market may also be
greater in sectors where there are a sizable proportion of small firms, since these
are relatively more affected by impediments to trade.

Estonia has made great progress to improve the capacity of the economy to cope
with competition and market forces within an enlarged Union. The rapid and
successful transition of the Estonian economy thus far is not merely a result of
making the right policy choices, and of following with resolve a clear mediumterm strategy of structural reforms. Estonia has always benefited from its
location between eastern and western Europe. The allocation of capital and
labour was less distorted than in other states of the former Soviet Union. This has

allowed exports of processed goods and of the light manufacturing industries to
expand rapidly, without the need to renew the capital stock completely. The
switch of exports markets from the East to the West has been facilitated by the
initial setting of the exchange rate and the maintenance of a favourable edge in
terms of unit labour costs. The prices of traded goods have risen much less than
the prices in the sheltered sector of the economy.

Estonia has a number of comparative advantages which should help the country
compete in the context of the Single Market. Light industries such as clothing,
textiles, wood and electrical construction are already expanding strongly»
although the restructuring of some of these sectors is far from being completed.
The wood industry in particular appears to be well placed to perform strongly in
the Single Market: wood is abundant (almost 48% of Estonia's territory is
covered with forests), FDI from Nordic countries is helping modernise the
production base, skilled labour is abundant and wages are still relatively low.
Exports of wood and furniture have been buoyant and the country had a
substantial trade surplus in these categories in 1996. The rapid modernisation of
this sector is an encouraging sign of Estonia's capacity to face the competitive
pressures of the single market.

Transport, travel and financial services represent other promising and relatively
strong sectors of the economy, which would perform well in the context of the

**30**

single market. The emergence of a healthy banking and financial services sector,
as well as its gradual consolidation and expansion in neighbouring countries, is a
positive indication of the capacity of Estonian managers to adapt to new
circumstances and take advantage of market opportunities. The niodemisation of
the transport infrastructures, with the help of multilateral lenders, should help
Estonia develop its activities as a transport hub and goods processing centre.

The degree of trade integration and the nature of trade with the Union suggests
that Estonia is well placed to cope with competitive pressures within the single
market. In 1996, the EU was the largest trading partner of Estonia in 1996,
accounting for 65% of imports and 51% of exports. Moreover, despite the
importance in value of exports of wood, furniture and textiles, exports have
become less concentrated and intra-industry trade is increasing. For example,
compared to the same period of 1995, EU imports of machinery and electrical
apparels have grown faster in the first six months of 1996 than EU exports of the
same products. During the same period, wood products and textiles have
remained constant as the percentage of EU imports from Estonia. Estonia industry
has succeeded in exporting other goods to the West (including electronic
products) because of improvements in quality standards and close business
relationships with western companies. Another positive indication is the growth
of Estonian exports on the competitive and dynamic markets of Asia, although
these exports still represent very small quantities.

However, the export base remains limited, and can be easily eroded if inflation
continues to be higher than in the countries which are the main importers of
Estonian goods. With the complete liberalisation of external trade, and the firm
commitment of the government to a fixed exchange rate, it would be difficult for
Estonian exporters to adjust to a fall in foreign demand. The external position of
Estonia therefore has to be regarded as rather vulnerable. It is clear that any
increase in real wages exceeding or preceding labour productivity improvements
in the open sector of the economy would risk to jeopardise the export position.

The continuation of foreign direct investment is crucial to the Estonian economy,
both as a means to finance the current account deficit under the currency board
system and as a means to renew the existing capital stock and diversify the
industrial base. Roughly one third of all Estonian firms is relying on foreign
capital. The share of foreign capital in these firms is 65%, on average, and most
of them are engaged in export activities. Despite the fall of 1996, there are good
reasons to believe that the inflow of capital will increase again in 1997 and 1998.
The entry of foreign banks on the Estonian financial market is cautiously
encouraged and the Estonian banks are gradually extending their range of
services.

Prospects and Priorities

The Estonian authorities are guided by some clear principles and a strong
commitment to integration in the European and World economy. The
strengthening of the private sector, in particular by the emergence of small and

**31**

medium-sized enterprises, is the main priority. As announced in early February
1997, the authorities intend to complete the privatisation of the industrial sector
and to start with the privatisation of large infrastructure companies. Privatisation
proceeds are primarily used to set up property reform, housing and environment
funds. The rigorous monetary and fiscal framework will be maintained and its
legal basis will be solidified. Other priorities of the government are the
development of the financial sector and of anti-monopoly safeguards and the
promotion of investment and exports.

Estonia has reached the stage where mainly land and infrastructure enterprises
are left to be privatised, but these last privatisation's are far from being
unproblematic. Progress in land reform has been slow and this has been an
obstacle to the privatisation of residential property, agricultural land and
undeveloped land which otherwise would be available for greenfield investment.
It has been legally possible for anyone to purchase land since 1991, but in
practice very little of the total land available has been privatised. The
government has had great difficulty in reconciling the rights of the original
owners with the interests of prospective investors. The programme of property
restitution has been unexpectedly lengthy and slow. Although the validity of
claims for the large majority'of properties has been resolved, property which has
actually been returned to legitimate owners, or vouchers issued as compensation,
covers only a very small part of the total. Fortunately, this is no longer holding
up the privatisation of existing enterprises, since the practice has been to lease
the land to the buyer of the physical capital pending the settlement of any
disputes. Nevertheless, it is far from clear how these disputes will be resolved in
the end.

Privatisation of public utilities is complicated because of their size and their
essentially monopolistic character. The government is now focusing on energy
providers, to be followed by railways, ports and telecommunication companies.
The first step is to split the state enterprises into companies that are ready to face
competition, and activities which should remain in state hands. The next step is
to put an effective regulatory framework in place for establishing prices. This is a
particular problem in the area of energy pricing, complicated by the necessity, for
environmental reasons, to switch from oil shale to natural gas and other
domestically unavailable sources of energy.

Although the whole process is not likely to be completed before the end of this
century, implementation has started with the 1997 privatisation programme.
According to the government's plan, the Estonian Railways will be divided into
four subsidiaries by September 1997, which will then be privatised separately.
Other monopolies and infrastructures companies put up for sale in 1997 include
Estonian Energy, Tallinn Port and Estonian Oil Shale Mining company.
However, the privatisation of infrastructure enterprises may take even longer
than that of energy companies, since it is unclear which parts should remain in
state hands.

A problem of a different nature is the autonomy of local authorities. They are
relatively free to spend their share of general government revenue, which is

**32**

largely collected at the level of the state. Up to 1996 local governments were
allowed to borrow abroad, whereas the central government was not. This
loophole in the law has been plugged, but this may lead to higher claims by local
authorities on general government revenue.

The. main risk on the macroeconomic side is that at some point in time it may
become difficult to finance the rising current account deficit. Indeed, in 1996, the
trade balance showed arising deficit, which surpassed the level of 20% of GDP.
Because the nominal exchange rate vis-à-vis the D-mark is kept unchanged, as
long as inflation in Estonia exceeds that in Germany, export price
competitiveness is continuously eroded on the markets with currencies linked to
the DM. Data on the evolution of the real effective exchange rate of the kroon
since July 1992 show a gradual but clear appreciation of the kroon. This is the
result of two opposite trends: a sharp real appreciation vis-à-vis Western trading
partners (although, more recently, the real exchange rate has depreciated against
the dollar), partially offset by a depreciation vis-à-vis the other Baltic republics
and former Soviet partners. To the extent that Estonia wants to reorient its trade
to the West, this may increasingly become a problem, as demonstrated by the
evolution of the structure of trade in 1996, when the share of the EU in total trade
stagnated. The export base is rather limited, and a relatively large part consists of
processed goods.

A deficit which is rapidly increasing should not necessarily be cause for
concern, especially as long as it reflects mainly investment activity and is not
accompanied by significantly higher inflation. In the case of Estonia, however,
the widening trade deficit is caused by a deceleration in export growth,
accompanied by an increase in imports involving a shift towards a greater
proportion of consumer goods. While the deficit was largely financed up to 1996
by the inflow of foreign direct investment, this was not the case in 1996.
Moreover, a large part of the deficit was financed by Finnish tourists spending
and by what could be interpreted as speculative capital flows, attracted by high
interest rates on kroon deposits. A sharp fall of tourism receipts as well as a
turnaround of international investors' positive views on Estonia's economic and
political stability would put a severe constraint on the overall balance of
payments and represent a source of weakness for the economy. On the other
hand, Estonian residents have heavily invested in government bonds of other
Nordic and Baltic countries.

Serious problems are present also in the farming sector, where output has been
declining steadily since independence. Rural interest groups blame excessive
laissez-faire policies for high unemployment and falling living standards in the
countryside. While it is true that domestic agriculture has faced very stiff
competition from external producers, it is important that if tariffs are introduced
they do not delay the necessary modernisation of the sector. In fact, there is a
need for sustained investment in agriculture and food-processing industries.
Moreover, land reform is still far from completed, and the land ownership
question remains open. This has adversely affected investment in the farm sector.

**33**

**2.3** **General Evaluation**

Estonia can be regarded as a functioning market economy. It has radically
liberalised foreign trade and privatised the public sector. Prices have been
liberalised to a very large extent. The currency board system and the prudent
fiscal stance have helped to reduce inflation. The legislative framework is
largely in place. However, land reform has been slow, and reform of the pension
system has not yet started,

Estonia should be able to make the progress necessary to cope with competitive
pressures and market forces within the Union in the medium term, provided in
particular that the export base is broadened. The setting of a low exchange rate
and low unit labour costs have facilitated the switch to light manufacturing
industry as a source of foreign reserves. The banking sector is healthy and
expanding strongly. Estonia has been a major recipient of foreign direct
investment, although the inflow has decreased recently. However, the export
base is rather narrow, and the need to finance the rising trade and current
account deficits is a matter of concern.

**34**

**3.** **Ability to Assume the Obligations of Membership**

The European Council in Copenhagen included among the criteria for accession "the
ability to take on the obligations of membership, including adherence to the aims of
political, economic and monetary union".

In applying for membership on the basis of the Treaty, Estonia has accepted without
reserve the basic aims of the Union, including its policies and instruments. This
chapter examines Estonia's capacity to assume the obligations of membership - that
is, the legal and institutional framework, known as the _acquis,_ by means of which the
Union puts into effect its objectives.

With the development of the Union, the _acquis_ has become progressively more
onerous, and presents a greater challenge for future accessions than was the case in the
past. The ability of Estonia to implement the _acquis_ will be central to its capacity to
function successfully within the Union.

The following sections examine, for each main field of the Union's activity, the
current and prospective situation of Estonia. The starting-point of the description and
analysis is a brief summary of the _acquis,_ with a mention of the provisions of the
Europe Agreement and the White Paper, where they are relevant. Finally, for each
field of activity there is a brief assessment of Estonia's ability to assume the
obligations of membership on a medium-term horizon.

**3.1** **Internal Market Without Frontiers**

Article 7a of the Treaty defines the Union's internal market as an area without internal
frontiers in which the free movement of goods, persons, services and capital is
ensured. This internal market, central to the integration process, is based on an openmarket economy in which competition and economic and social cohesion must play a
full part.

Effective implementation of the liberties enshrined in the Treaty requires not only
compliance with such important principles as, for example, non-discrimination or
mutual recognition of national regulations - as clarified by Court of Justice rulings but also concomitant, effective application of a series of common specific provisions.
These are designed, in particular, to provide safety, public health, environmental and
consumer protection, public confidence in the services sector, appropriately qualified
persons to practise certain specialist occupations and, where necessary, introduction or
coordination of regulatory and monitoring mechanisms; all systematic checks and
inspections necessary to ensure correct application of the rules are carried out on the
market, not at frontier crossings.

It is important to incorporate Community legislation into national legislation
effectively, but even more important to implement it properly in the field, via the
appropriate administrative and judicial structures set up in the Member States and
respected by companies. This is an essential precondition for creating the mutual trust
indispensable for smooth operation of the internal market.

**35**

This chapter must be read in conjunction with, inter alia, the chapters on social policy,
the environment, consumer protection and sectoral policies.

**The Four Freedoms**

A step-by-step approach is being taken to absorption of the _acquis_ by the applicant
countries:

 - The Association Agreement between the Community, its Member States and
Estonia was signed in June 1995 and is being ratified. With regard to the four
freedoms and approximation of legislation, the Agreement provides, in particular, for
immediate or gradual application of a number of obligations, some of them reciprocal,
covering, in particular, freedom of establishment, national treatment, free trade,
intellectual property and public procurement.

- The Commission's 1995 White Paper (COM(95) 163 final), guidelines intended to
help the applicant countries prepare for integration into the internal market, gives a
closer definition of the legislation concerned. It identifies the "key measures" with a
direct effect on the free movement of goods, services, capital and persons and outlines
the conditions necessary in order to operate the legislation, including the legal and
organizational structures. Twenty-three areas of Community activity are examined,
dividing the measures into two stages, in order of priority, to provide a work
programme for the pre-accession phase. The Technical Assistance and Information
Exchange Office (TAIEX) was set up with the objective of providing complementary
and focused technical assistance in the areas of legislation covered in the White Paper.
A legislative database has recently been established by the Office.

- The applicant countries will have to transpose and implement all the _acquis._ The
"Action plan for the single market" submitted to the Amsterdam European Council
gives details of the priority measures necessary to make the single market work better
among the fifteen current Member States in preparation for introduction of the single
currency. This will inevitably entail development of the _acquis._

**General Framework**

Whatever their field of activity, undertakings must be able to operate on the basis of
common rules. These are important since they shape the general framework within
which economies operate and, hence, the general conditions of competition. They
include the rules on competition (on undertakings and State aid) and tax measures
discussed elsewhere in this opinion, the opening-up of public works, supply and
service contracts, harmonisation of the rules on intellectual property (including the
European patent), harmonisation of the rules on company law and accountancy,
protection of personal data, transfer of proceedings and recognition of judgments
(Article 220 EC Conventions).

**Descriptive Summary**

**56**

The Public Procurement Office under the Ministry of Economic Affairs is in charge of
managing and supervising the various aspects of public procurement policy, although
its enforcement powers are rather limited. The Law on Public Procurement came into
force on 1 January 1997.

The Estonian legislation for intellectual and industrial property is only to some extent
in accordance with Community requirements. The Estonian Patent Law is based on
the requirements of the Munich convention. Estonia is also preparing for accession to
the WTO/TRIPS Agreement (Trade Related Aspects of International Property Rights)
during 1997.

Company law is governed by the Commercial Code, which has undergone substantial
reform. A number of different kinds of enterprise are recognised by law, including
private and public limited companies. These form by far the majority of the
approximately 50.000 enterprises actually registered in Estonia. Generally speaking
there are no regulations dependent upon a company's size apart from certain
provisions relating to corporate governance. Public limited companies may issue
shares and there are measures to protect the interests of shareholders. Minimum
capital requirements are laid down by law. There is a basic level of protection for
creditors. Companies are required to publicise nationally any major decisions
affecting them. A Commercial Register is maintained which records the key
information about each company. The Register is open to the public.

The Law on Accounting (1995) provides the basic framework for the annual accounts
of companies, including standards, guidelines and recommendations. An Estonian
Accounting Board has been set up. Auditors are authorised by the Estonian Auditing
Board. Estonian Regulations on Auditing were issued in September 1994.

The Personal Data Protection Act entered into force in July 1996. A time limit of one
year was given by the law to administrations and undertakings to bring processing of
personal data into conformity with the Act. This law establishes the institutional
framework for the protection of personal data, including an independent supervisory
authority.

Current and Prospective Assessment

Legislation on Public Procurement complies to some extent with the acquis. However,
in some important fields it does not fulfil the Community requirements. This is the
case, for instance, as regards the utilities sector, the remedies system or the Stage II
measures of the Commission White Paper for the Single Market. The Law provides
for domestic preference clauses which will need to be abolished once the Europe
Agreement enters into force. It is clear that further amendments to the legislation are
needed, but the work is progressing well.

A considerable amount of legislative work is still needed in the field of intellectual
and industrial property in order to ensure full compliance with the Community acquis.
Drafts of Copyright Law and Trademark Laws are foreseen by the Estonian
authorities for 1997 in order to comply with the _acquis._ According to Estonian

**37**

authorities Patent Law is compatible with the Munich convention. Legislation is
foreseen for 1998 and 1999 for the protection of semi-conductors and border
enforcement.

Effective implementation and enforcement will remain a significant concern in the
medium term due to the lack of experience of the authorities involved and to the
current weakness of internal control and border enforcement mechanisms.

According to the information on company law provided by Estonia, the Commercial
Code already reflects the provisions of the Second, Third and Eleventh Directives and
most of the First and the Twelfth Directive. It is understood that efforts are currently
being made to bring the Commercial Code Completely in line with the First Directive.

Concerning Accounting the 1995 law is largely in line with the 4th Directive. The
Estonian Accounting Board will issue a guideline on consolidation based on
international standards as well as on the 7th Directive. A number of further standards

are under preparation. A law on auditing is under preparation, which will be designed
to transpose the 8th Directive. Certain transitional problems are in evidence relating to
the implementation in practice of the new rules, including a shortage of qualified
accountant and auditors and major efforts will be required if they are to be solved in
the medium term.

The law on the protection of personal data has clearly been inspired by the EC
framework Directive. However, it will need improvement to be fully in line with the
Directive. The Commission has no information concerning the implementation of the
law, in particular as far as the establishment of the independent supervisory authority
is concerned. Accession to Council of Europe Convention n° 108 for the protection of
personal data is not planned in the near future.

Conclusion

The process of approximation in the field of public procurement needs to be
strengthened. Further amendments will be needed to meet all the requirements of the
Public Procurement Directive. A considerable amount of legislative work will still be
necessary in the fields of intellectual and industrial property.

As far as company law is concerned, there would not appear to be any major problem
with Estonia's implementing the _acquis,_ although there is as yet no clear timetable for
the adoption of the remaining measures required to bring their legislation fully into
line.

In accounting, actions to achieve full conformity with the _acquis_ are programmed in
Estonia and seem realisable in accordance with the programme foreseen. In auditing,
the information provided does not provide a sufficient basis on which to make a
detailed assessment of conformity with the _acquis_ or Estonia's prospects of achieving
this in the medium term.

**38**

Estonia has made progress in the field of data protection. The implementation of the
1996 law will provide Estonia with useful experience, but further efforts are required
to bring the law fully in line with the EC framework Directive.

**Free Movement of Goods**

Free movement of goods can be achieved only by removing measures which restrict
trade - not only customs duties and quantitative restrictions but all measures with
equivalent, i.e. protectionist, effect, irrespective of whether or not they are specifically
aimed at domestic or imported products. Where technical standards are not
harmonised, the free movement of goods must be ensured by applying the principle of
mutual recognition of national rules and accepting the rule that national specifications
should be no more stringent than is required to achieve their legitimate objectives.
This rule was established in the _Cassis de Dijon_ judgment.

For the purpose of harmonisation, the European Community has developed the "New
Approach" which introduces an approach carefully balanced between government and
private autonomous bodies and in which Community legislation and European
standards play a distinct complementary role. Thus, instead of imposing technical
solutions, Community legislation is limited to establishing the essential requirements
which products must meet. Products manufactured in accordance with European
standards are presumed to meet such essential requirements,, but European standards
are not the only way to prove such conformity. The "New Approach" works in
conjunction with the "Global Approach" on product certification which governs the
apposition of the "CE Mark" on the product. For other products such as
pharmaceuticals, chemicals, motor vehicles, and food products, Community directives
follow the traditional regulatory pattern of providing fully detailed rules.

The free movement of goods also dictates that a number of Community harmonisation
measures be transposed into national law. Implementation of health and safety
harmonisation rules is particularly important and requires the establishment of
appropriate mechanisms and organisations, both for businesses and the authorities.

Two of the "horizontal" directives essential to smooth running of the single market
are the Directive on general product safety and the Directive on liability for defective
products. The regulations concerning general product safety are covered in the section
on consumer protection (see section 3.6).

The rules on agricultural products (compliance with veterinary and plant-health
standards) are explained in detail in the section on agriculture (see section 3.4).

**Descriptive Summary**

The liberal trade policy of Estonia, in general, means that very few restrictions are
imposed on the free movement of goods. No legislation on trade barriers or
quantitative restrictions is in force. No significant problems are foreseen concerning
the implementation of the Articles 8-35 of the Europe Agreement.

**39**

Except for some energy prices (electricity, gas, petrol), prices are freely determined in
the market. Licenses are needed for importation of alcohol, tobacco, cars,
pharmaceuticals, arms, precious metals, and metals. The principal objective of this
system is the protection of the consumer. The system does not differentiate on the
basis of the origin of the products and does not impose any quantitative restrictions.

In the fields of standardisation, conformity assessment and metrology a series of
legislative measures were adopted since 1993 to improve compatibility with the EU
system. A law on standardisation drawing the line between technical regulations and
voluntary standards was enacted by the end of 1996. Estonia has affiliate membership
of the European Centre for Standardization (CEN) and the European Centre for
Electromechanical Standardization (CENÉLEC) and will apply for European
Telecommunication Standardisation Institute (ETSI) membership in 1997.

**Current and Prospective Assessment**

The implementation of free trade in goods between Estonia and the EU is already
advanced. The licensing system will need to be reviewed and, if necessary, adjusted.
The implementation of a new system, in conformity with WTO (World Trade
Organization) rules, is foreseen during 1997.

According to the Estonian work programme for the approximation of technical
legislation; 1977 should be an important year for the alignment on White Paper
priority measures. However, little evidence is available of substantial legislative work
going on with respect to such priority measures, nor have indications been given on
approximation plans for the rest of White Paper measures. A number of New
Approach directives are planned for adoption by the end of 1997, and so is basic
legislation on foodstuffs and chemicals. Legislative alignment on pharmaceuticals
seems to proceed rather speedily, while in the automotive sector a type-approval
based on the EU system will become operational in 1997 following Estonia's
signature of the UN-ECE Agreement two years ago. It needs to be borne in mind, in
any case, that secondary legislation is often necessary in order to implement the
general legislative framework.

In the field of certification, Estonia is in principle ready to accept EC marking without
submitting products imported from the EU to additional conformity assessment
procedures.

It is not easy to assess the state of Estonia's legislation on product liability. Draft
legislation is under consideration but no timetable is available and Estonia has
indicated a need for technical assistance.

In the areas subject to national rules and not covered by Community harmonisation,
there is too little information available to assess whether Community legal principles
on the free movement of goods are properly applied in Estonia. The reporting
procedures which form part of the internal-market machinery are not yet operational
and so cannot be used in the pre-accession period. The most important instruments in
this connection are: Directive 83/189, requiring governments to report draft national

**40**

technical standards and regulations; Decision 3052/95 on measures derogating from
the principle of the free movement of goods; procedures by which complaints can be
submitted to the Commission; and Article 177 of the Treaty, enabling Member States
to ask for preliminary rulings from the Court of Justice. It is also" hard to assess
whether Estonia complies with the principle of mutual recognition; more information
is required on its national rules, and on administrative practices, which can have an
effect on product marketing.

**Conclusion**

The free movement of goods will not represent a serious obstacle to Estonia's
accession provided that the on-going law reform is continued and enforced, in
particular as regards standardisation and conformity assessment. The degree to which
Estonia will have a good record of legislative alignment by the end of the preaccession period is difficult to assess for the time being. Despite laudable
approximation efforts in the fields of standardisation and conformity assessment,
some doubts remain as to a substantial and speedy process of legislative alignment in
a number of technical fields.

The Estonian authorities will also have to ensure that in fields not covered by
harmonisation at Community level their national legislation is not likely to hinder
trade, in particular by checking whether the law in force is commensurate with the
goals sought.

**Free Movement of Capital**

The Europe Agreement establishes the principle of the free movement of capital
between Estonia and the EU. This, as far as the obligations of Estonia are concerned,
applies from the entry into force of the Europe Agreement as regards direct and
portfolio investment, commercial credits and financial loans made by companies
already established in Estonia and as regards branches and agencies of Community
companies (as well as the self-employed), gradually during the transitional period.

The White Paper highlights the link between the free movement of capital and the free
movement of financial services. It suggests a sequence of capital movements
liberalisation, starting from medium and long term capital movements and those
linked to commercial operations, to short term capital.

**Descriptive Summary**

Since the 1992 monetary reform, Estonia has pursued a liberal policy as regards
foreign exchange controls. Convertibility for current payments was introduced
simultaneously with the monetary reform. Estonia accepted formally the provisions of
Article VIII of the Articles of Agreement on 15 August 1994. Most capital
movements were liberalised in 1992. All foreign exchange controls were abolished in
1994, as confidence to monetary policy increased. At present, there are no foreign
exchange controls in Estonia and payments between Estonian and foreign entities as
well as currency conversions can be effected free of any restrictions.

**41**

Investments in real estate by non-residents is the only capital transaction for which
restrictions still apply. As a general rule, land and real estate can be acquired by nonresidents under license of the county-governor. In special cases (islands, border zones)
acquisition of land by non-residents and foreign legal persons is not permitted.

Since 1993 foreign direct investment has had an important role in the development of
the economy and the modernisation of enterprises. The volume of FDI made up to 9.8
% of GDP in 1993 and 9.3 % in 1994 . The total amount of FDI reached

approximately 600 MECU for the period 1990-1996. The share of FDI from EU
countries in total was 65.7 % in 1994 and 75.8 % in 1995. Industry trade and
transport were the sectors which attracted most FDI capital.

In regard to the physical cross-border transfer of means of payments measures were
taken in order to prevent money-laundering.

Current **and** Prospective Assessment

The degree of capital liberalisation already introduced by Estonia goes beyond the
obligations undertaken under the Europe Agreement. Estonia should have no
difficulties in removing the residual restrictions, concerning acquisition of real estate
by non-residents and assume the Community acquis in the area of capital movement
in the next few years.

**Conclusion**

The field of free movement of capital does not present any major obstacles for
accession in the medium term.

Free Movement of Services

The basis of the free movement of services is the prohibition of discrimination, in
particular on grounds of nationality, and rules on the alignment of divergent national
legislation. These rules often concern both the right of establishment, which comes
under the heading of the free movement of persons, and the freedom to provide
services. Their implementation implies the establishment of administrative structures
(banking control boards, audio-visual control authorities, regulatory bodies) and
greater cooperation between Member States in the area of enforcement (mutual
recognition arrangements).

A substantial amount of the legislation applicable to the free movement of services
relates to financial services. It also concerns the problems relating to the opening-up
of national markets in the sectors traditionally dominated by monopolies, e.g.
telecommunications and, to a certain extent, energy and transport. These subjects will
be dealt with in the sections of the Opinion specifically referring to them.

Descriptive Summary

**42**

Estonia's Banking sector experienced a crisis rather early on in the transition process
(1992-3). The Law on Credit Institutions came into effect in 1995 and was drafted on
the basis of the EC's Banking Directive. Banking supervision is being taken care of
by a department of the main Bank of Estonia, which is also responsible for the
prevention of money laundering.

The market is fairly concentrated but market penetration is fairly low

Privatisation of commercial banks has been quick. It is planned to fully end State
ownership in banks in the coming years.

The Estonian Securities market is relatively new. The Securities Market Act dates
from 1993. The first public issue of shares was carried out in 1991 while the first
government bonds were issued in 1993. In 1994, the Estonian Central Register of
Securities was established and supervisory activities over the securities market were
launched. The Tallinn Stock Exchange began its activities operations in May 1996
and disposes of an electronic trading system.

All members of the Exchange must be legal persons registered in Estonia, having been
granted a securities intermediary licence by the Ministry of Finance, and holding
Tallinn Stock Exchange shares at the minimum equivalent of 400000 EEK (26000
ECU).

The insurance sector is regulated by the Insurance Act of 1992 which was drafted on
the basis of EU insurance legislation. However, it complies only to a certain degree
with the acquis. The insurance sector is monitored by the Insurance Supervisory
Authority which was set up in 1993 under the responsibility of the Ministry of
Finance.

Current **and** Prospective Assessment

The First Banking Directive, the Own Funds Directive and the Solvency Directive are
mostly incorporated into Estonian banking law. However, there are certain key
aspects which do not yet fulfil EU requirements. The Second Banking Directive, The
Annual Accounts and Consolidated Accounts Directive and the Large Exposures
Directive have also been partially implemented. There is no specified timetable for
full implementation of the Capital Adequacy Directive.

There is currently no legislation in force for bank deposit guarantee schemes.
However, a draft law has been submitted to Parliament and its adoption is expected
for October 1997. The Government will present to Parliament in September a new
law on credit institutions, which will deal with all the Stages I and II directives,
including money laundering with the exception of the Capital Adequacy .Directive.
Adoption is expected at the end of this year.

The Estonian legislation for Securities only to a limited degree covers the Community
acquis, with specific provisions for the acquisition or disposal of majority

**43**

shareholding in listed companies, insider dealing, and public offers of transferable
securities missing.

Also a licence regime and state supervision with regard to investment services other
than securities trading on the stock exchange is not available. Stage II measures of the
White Paper so far have not. been implemented yet in this field. As regards
enforcement, the Securities Inspectorate must be strengthened considerably in terms
of staff and other resources.' A draft Securities Market Act is under preparation for
submission to the Parliament before the end of 1997. In this connection fulfilment of

Stage I measures is foreseen for the public issue of securities, the legal status of the
stock exchange and insider training.

A revision of the existing Insurance Act is currently under preparation with a view to
increasing the minimum capital requirements and completing the privatisation. An
insurance supervision system responding to a free market system still needs to
developed.

**Conclusion**

Although the Estonian Banking system is based on a free market policy, apparently
stable and well supervised, in the context of EU accession there are still some
elements which either do not fully correspond to EU requirements or will need rather
significant amendment for full harmonisation.

In the field of Securities, the ongoing reform of legislation needs to be intensified in
order to fulfil EU requirements in the mid-term perspective. Special attention must be
given to the strengthening of the regulatory bodies.

On the assumption of an intensification of the current legal reform work it is not
expected that the insurance sector will present major problems for accession.

The financial services sector in Estonia is rather well developed. However, the
approximation process seems to be rather slow, both on the point of view of the
enactment of the appropriate regulations and of their actual implementation which
makes it difficult to integrate the EU financial market within reasonable delay. The
field of free movement of services is not expected to present any major obstacles to
accession in the medium-term.

**Free Movement** of **Persons**

The free movement of persons encompasses two concepts with different logical
implications in the Treaty. On the one hand, Article 7a in Part One of the Treaty on
'Principles' mentions the concept in connection with the establishment of the internal
market and implies that persons are not to be subject to controls when crossing the
internal frontiers between the Member States. On the other hand, Article 8a in Part
Two of the Treaty on 'Citizenship of the Union' gives every citizen of the Union the
individual right to move and reside freely within the territory of thé Member States,
subject to certain conditions. The abolition of frontier checks must apply to all

**44**

persons, whatever their nationality, if Article 7a is not to be meaningless. While the
rights deriving from Article 8a apply in all Member States, those stemming from
Article 7a have not yet been fully applied throughout the Union.

_**(a)**_ _**Free Movement of Union Citizens. Freedom of Establishment and Mutual**_
_**Recognition of Diplomas and**_ _**Qualifications**_

The Europe Agreement provides for the non-discriminatory treatment of workers that
are legally employed (as well as their families). It covers the possibility of cumulating
or transferring social security rights, and encourages Member States to conclude
bilateral agreements with Estonia on access to labour markets. From 1999, the
Association Council will examine further ways of improving the movement of
workers.

The White Paper considers the legislative requirements in order to achieve a
harmonious development of the labour market, whilst simultaneously preventing
distortions of competition.

The free movement of workers is one of the fundamental freedoms enshrined in the

Treaty; freedom to practise certain professions (e.g. in the legal and health fields)
may, however, be subject to certain conditions, such as qualifications. Depending on
the case, these may be dealt with through coordination or by applying the principle of
mutual recognition. Freedom of establishment is also guaranteed'under the Treaty and
covers the economic activity of self-employed natural persons and companies.

The free choice of place of residence may thus be subject to minimum conditions as to
resources and health insurance where the person does not exercise a profession in the
country concerned.

Descriptive Summary

Nationals of third countries can move to Estonia for residence or employment
purposes. For residence purposes, they can obtain residence permits for personal
reasons or for family reunification. Third country nationals who enter, stay and work
in Estonia illegally, without a valid visa, residence permit or combined residenceworking permit, as well as their employers, may be prosecuted according to the Code
of Administrative Offences.

The existing legislation concerning the education and training of dentists, doctors,
veterinary surgeons, architects, midwives and nurses, only to a limited extent take into
account the Community requirements regarding mutual recognition of professional
qualifications. Furthermore, enforcement structures are still mainly to be set up.

Current and Prospective Assessment

Estonian legislation will need to be prepared for the equal treatment of EU citizens
with nationals working in Estonia.

**45**

In order to fulfil the Community requirements regarding mutual recognition of
professional qualifications, a general Law on Professions is being prepared.
Finalisation of a draft is foreseen for the end of 1997. The curricula for dentists,
pharmacists, midwives and nurses are being reviewed and reformed in the light of the
Community requirements. The existing legislation only to some degree conforms with
the _acquis_ and a sustained and intensive continuation of the current reforms will be
needed to take up the _acquis_ in the medium term. The time schedules for possible
reforms of specific educational structures must, however, be carefully considered as
such reforms, by their nature, will take several years to implement.

**Conclusion**

The _acquis_ for free movement of persons does not in general present major problems
in terms of accession in the medium term. As regards mutual recognition of
professional qualifications, the preparation of the necessary legislative and
enforcement measures will need to be intensified in order for it to be in place in the
mid-term perspective.

_(b) Abolition of Checks on Persons at Internal Frontiers_

The free movement of persons within the meaning of Article 7a of the EC Treaty, i.e.
the abolition of checks on all persons, whatever their nationality, at the internal
frontiers has not yet been fully implemented in the Union. Doing away with checks on
persons is conditional on the introduction of a large number of accompanying
measures, some of which have yet to be approved and implemented by the Member
States (see separate section on Justice and Home Affairs). However, that objective has
been achieved by a limited number of Member States in accordance with the
Schengen Convention (seven Member States already apply it and another six are
working towards implementation).

The draft Treaty aims to make that objective easier to achieve within the Union by
including a new chapter on an area of freedom, security and justice and incorporating
the Schengen _acquis_ into the Union.

Estonia has stated its desire and readiness to fulfil the provisions of the Schengen
Agreement. It has begun preparations to this end and has sought assistance in this
connection from Member States, notably in regard to the strengthening of border
controls.

**General Evaluation**

1. Estonia's progress in the implementation of legislation relating to the White Paper
is summarised at annex. According to that table, Estonia considers that by 30 June
1997 it will have adopted national implementing legislation for 283 of the 899
directives and regulations in the White Paper. That figure covers provisions for which
Estonia considers it will have adopted implementing legislation or which it will have
checked for compatibility with Community rules and does not prejudge actual

**46**

compatibility as such, on which the Commission is not able at this stage to state an
opinion.

2. Estonia has made significant progress with the alignment of its legislation with
Community rules in most of the areas covered by this chapter. Legislation has been
adopted in full or in part to implement most of the measures according to the Estonian
authorities' assessment, though the Commission cannot at this stage express a position
on its total compatibility with Community law. However, considerable efforts are still
necessary to achieve full conformity with the _acquis,_ in particular in the areas of
public procurement, intellectual and industrial property and financial services.

The Estonian authorities are well aware of these requirements, and amendments to the
legislation or new texts are under preparation. Most of them should be adopted in the
next two years.

3. Despite the progress already achieved in the field of legislation, serious doubts
should be raised about the capacity of the Estonian administration to implement this
legal framework. For the time being, the Estonian administration still shows
significant weaknesses. However, these can be considered transitional given the
relatively high potential of the presently understaffed public administration.

As things currently stand, the Commission cannot yet express an opinion on the
capacity of companies, particularly small and medium-sized businesses, to implement
the _acquis._

4. Leaving aside certain specific aspects relating to agriculture, checks at the internal
frontiers of the Union can only be abolished once sufficient legislative harmonisation
has been achieved. This calls for mutual confidence,, based in particular on sound
administration (e.g. the importance of safety checks on some products at the place of
departure). As far as goods are concerned, the completion of the internal market on
1 January 1993 was only achieved by doing away with all the formalities and checks
performed by the Member States at the internal borders of the Union. In particular
these checks covered technical points (product safety), veterinary, animal-health and
plant-health matters, economic and commercial matters (e.g. prevention of
counterfeiting of goods), security (weapons, etc.) and environmental aspects (waste,
etc.). In most cases, the abolition of checks was only made possible by the adoption
and application of Community measures harmonising the rules on movement and
placement on the market (particularly as regards product safety) and, where
applicable, by shifting the place where controls and formalities are conducted to
within the Member States or their markets (in particular as regards VAT and excise
duties, veterinary and plant-health checks, and the collection of statistics). A section
of Estonia's present borders will become the Union's external frontier and this means
border checks will need to be stepped up (see separate section on Customs).

In view of the overall assessment that can be made of progress achieved to date and
the rate at which work is advancing in the various areas concerned, it is difficult at
present to put a time-scale on Estonia's ability to take over and implement all the

**47**

instruments required to abolish internal border checks and to transfer those checks to
the Union's external frontier.

5. Estonia has already adopted significant elements of the _acquis_ relating to the single
market. However, the Commission is not yet able to take a position on every measure
whose transposition has been reported by Estonia. Further progress will be needed
with regard notably to public procurement, intellectual and industrial property and the
financial services sector. In most areas, enforcement needs to be strengthened. A
particular effort will be necessary with regard to the strengthening of the
administration. In the medium term, provided current efforts are stepped up, Estonia
should have adopted and implemented most of the single market legislation and made
the necessary progress on the mechanisms of enforcement, in order to be able to
participate fully in the internal market.

**Competition**

European Community competition policy derives from Art. 3 (g) of the Treaty
providing that the Community shall have a system ensuring that competition in the
internal market is not distorted. The main areas of application are anti-trust and state
aid.

The Europe Agreement provides for a competition regime to be applied in trade
relations between the Community and Estonia based on the criteria of Articles 85 and
86 of the EC Treaty (agreements between undertakings/abuses of dominant position)
and in Article 92 (State aid) and for implementing rules in these fields to be adopted
within three years of the entry into force of the Agreement.

Furthermore, it provides that Estonia will make its legislation compatible with that of
the Community in the field of competition.

The White Paper refers to the progressive application of the above provisions and
those of the Merger Regulation (Regulation. (EEC) No 4064/89) and of Articles. 37
and 90 (Monopolies and Special Rights).

**Descriptive Summary**

The Estonian Competition Act came into force on 1 January 1994 and safeguards the
principles of a free market. It only contains very rudimentary provisions on restrictive
agreements and abuse of dominance, and does not contain any provisions for merger
control or provisions for granting block exemptions. Procedural aspects also need to
be reviewed.

The Competition Board was established in 1993 under the Ministry of Finance to
supervise the implementation of the Competition Act and the Act of Prices. The field
of state aid is monitored by the Budget Department of the Ministry of Finance in
cooperation with the Competition Board.

**48**

In order to be in line with the current and foreseeable situation regarding sectors
subject to the monopolies, Estonia has apparently started its policy of liberalising and
opening up to competition certain sectors such as telecommunications and postal
services.

The state aid inventory is not complete and some way from the methodology used by
the Commission in its aid survey.

**Current and Prospective Assessment**

The main weaknesses of the existing Competition Act will be removed with the
adoption in 1997 of the new Competition Act.

In various commercial sectors, systems of exclusive rights have been established and
will have to be progressively adjusted or abolished before accession. This, for
instance, is the case in telecommunication services, and air, railway and maritime
transport. Existing state monopolies would need to be discontinued before accession
in such areas as oil shale, electricity supply, and export of scrap metals.

A substantial effort must be made to establish a state aid inventory in accordance with
Community practice. The compatibility of the existing "Fund for state export aid" and
"Export credit fund" is very doubtful. Other aid measures constitute operating aids
which are only allowed under very strict conditions. Due to the lack of transparency, it
is unclear whether the conditions for the granting of operating aid are complied with.

In addition to the adoption of legislation sufficiently approximate to that of the
EC,credible enforcement of competition law requires the establishment of well
functioning anti-trust and state aid monitoring authorities. It requires moreover that
the judicial system, the public administration and the relevant economic operators
have a sufficient understanding of competition law and policy.

Conclusion

With the forthcoming adoption of the new draft Competition Act the progress in
approximation of legislation in the field of anti-trust is significant. Subject to the
introduction in the new draft text Competition Act of some amendments, the degree of
approximation in the state aid area would also be satisfactory.

As regards enforcement the Estonian Competition Board seems to be working rather
well and seems to be capable of enforcing the new Competition law when adopted.

However, considerable efforts will be necessary to fulfil the requirements as regards
state aid monitoring in the medium term, in particular in respect of transparency.
Close cooperation with the Commission in this field will be necessary.

It appears, moreover, that in certain exclusive and special rights exist which are not
compatible with the Community _acquis._ These problems should be addressed in the
near future.

**49**

**3.2** **Innovation**

**information** **Society**

**Present Situation**

The economic and social effects made possible by the combination of information
technology and telecommunications are great. In Estonia these possibilities were
neglected before 1990 although education generally was not. Today the education
sector has taken a leading role in promoting the Information Society. Trade data
for the information technology (IT) sector are lacking but the number of PCs per
100 inhabitants (5.5 in 1995) is high in relation to GDP per capita. The existence
of host computers on the Internet, as a relative measure of development towards the
information society (IS), suggests that Estonia exceeds the achievement today of
five EU countries. Perhaps taking a lead from the experience in Finland which one
of the EU's leading countries in this respect, the Government of Estonia has been
active in cooperating with EU initiatives and in promoting the use of Information
and Communication Technologies (ICTs) and particularly in the education sector.

**Conclusion**

Because of the positive approach to telecommunications liberalisation combined
with the excellence of efforts at national level in the national education sector,
Estonia can expect to realise the potentialities of the Information Society earlier than
the average CEEC and no later than many EU member states.

**Education. Training and Youth**

Articles 126 and 127 of the EC Treaty provide that the Community shall contribute to
the development of quality education and implement a vocational training policy
aimed at promoting the European dimension in education and at enhancing industrial
adaptation and the responsiveness of the labour market through vocational training
policies.

The Europe Agreement provides for co-operation in raising the level of education and
professional qualifications. The White Paper includes no measures in this field.

**Descriptive Summary**

Estonia's educational spending amounts to 5.7 % of GDP. Education takes 17.0 % of
the state budget.

There are 240,000 pupils, 27,000 students and 19,000 teachers in Estonia.

Estonia has six state universities, one private university, and 20 higher vocational
education institutions (12 of which are private).

**50**

Estonia is currently undertaking reforms at all levels of the systems of education and
training in order to further adapt the country to the needs of a democratic society
based on a market economy. This is necessary, not only to achieve progress in regard
to key economic factors (such as productivity and the quality of production,
competitiveness on the international markets, development of the private sector,
labour mobility, and unemployment), but also to ensure the democratic functions of
society.

No nationally agreed comprehensive vocational training policy exist at the moment
but vocational training importance is increasing in national policy.

A vocational education and training department was established by the restructuring
of the Ministry of Education which took place at the beginning of 1996.

The Tempus programme has contributed to the achievement of the goals of higher
education reform and created the basis for cooperation with the EU higher education
institutions.

About 14,2 % of the total population of Estonia is aged between 15 and 25. The law
on youth is currently being developed, which aims to improve conditions for young
people, stimulate active participation in the process of démocratisation of civil
society, and to provide the conditions for voluntary service activities for young
people. Some Estonian youth organisations have been participating in European
youth activities since 1995, as a first step towards participation of Estonia to this

programme.

Current and Prospective Assessment

In order, to achieve a comprehensive upgrading of the education and training systems,
considerable investments in curriculum-reform, teacher training, text books,
equipment and buildings will be needed. Due to the financial constraints, this process
is likely to take a number of years to achieve.

Despite achievements, reforms are still at the very beginning and there remains much
to do before the vocational system can be considered in accordance with EU and
Member States requirements.

Estonia's participation in Community programmes will have positive effects on the
people concerned and represent a good preparation for integration in Community

programmes.

Conclusion

In the perspective of accession, no major problems should be expected in these fields.

Research and Technological Development

**51**

Research and Technological Development (RTD) activities at Community level, as
provided for by the Treaty and in the Framework Programme, aim at improving the
competitiveness of European industry, the quality of life, as well as supporting
sustainable development, environmental protection, and other common policies.

The Europe Agreement will provide for co-operation in these areas, notably through
participation in the Framework Programme. The White Paper includes no direct
measures in this field.

**Descriptive Summary**

The Estonian Research and Development Council is the main Estonian institution
responsible for implementing science and technology policy, managing strategic
government programmes and planning, co-ordinating and financing all state funded
activities. Competitive mechanisms for research funding have been introduced. The
current science expenditures represents 0.7% of GDP in 1994.

In addition to the universities, Estonia has 32 state research institutions. The research
is mostly state-funded, and concerns both basic and applied research (figures for basic
research fell below 50% of the budget in 1995).

Estonia's long term priorities are:

- to bring financing up to the average European Union level,

- to orient priorities towards those of the Community.

In the short term, Estonia is aiming to:

- ensure that the state budget allocations for research are kept at the level of 2 % of
expenditures,

- substantially increase state budget expenditure on technological innovation,
predominantly via the Innovation Foundation under the Ministry of Economic
Affairs.

Regular cooperation with the European Community started in 1992 with the 3rd
Research and Technology Development Framework Programme. So far, cooperation
was mainly concentrated on COPERNICUS (Specific Programme for Cooperation
with CECs and NIS) and remains rather low for participation in the 4th Framework
Programme. Estonia is a member of COST (European cooperation in the field of
scientific and technical research).

Since 1992, the statistics in this field are compatible with OECD standards.

Current and Prospective Assessment

Important changes and improvements have already taken place in this sector. A big
effort has been made in the improvement of the internal structure, liberalisation,
financial support. Human resources and potential remain strong despite the cutbacks.

**52**

Nevertheless, it is necessary to improve the level of innovativeness in the economy
generally and in industry and to reinforce the links of research institutes with industry
and small and medium enterprises.

Estonia is prepared to play an active role in the European research and technological
development and allocate the funds to this activity. It has declared its intention to be
fully associated to the 5th Framework Programme.

**Conclusion**

In the perspective of accession no major problems are expected in this field.
Accession would be of mutual benefit.

**Telecommunications**

The objectives of EC telecommunications policy are the elimination of obstacles to
the effective operation of the Single Market in telecommunications equipment,
services and networks, the opening of foreign markets to EU companies and the
achievement of universally available modern services for EU residents and
businesses. These are achieved through harmonisation of the standards and
conditions for service offerings the liberalisation of the markets for terminals,
services and networks and the adoption of necessary regulatory instruments. The
Directives and policies needed to achieve this have now been established, but the
liberalisation of public voice telephony and operation of related infrastructure will
be deferred for a year or two after 1998 in certain member states.

The Europe Agreement provides for cooperation aimed at enhancing standards and
practices towards EC levels in telecommunication and postal policies,
standardisation, regulatory approaches and the modernisation of infrastructure. The
White Paper focuses on the approximation of regulation, networks and services,
followed by further steps ensuring gradual sector liberalisation.

**Descriptive** Summary

Until 1991, the national communications networks were part of the Soviet networks
so that, for instance, all international lines were routed via Russia. The Estonian
network was entirely automatic, but consisted largely of electrical engineering
equipment. Since regaining independence, the development of telecommunications in
Estonia has been characterised by a general growth in capacity and an improvement of
quality. The telephone penetration rate was expanded to 30 per 100 by the end of
1996 although the waiting list remains large.

A telecommunications law was enacted in 1991 which provides the basis for a policy
of liberalisation and licensing. A concession agreement was negotiated with foreign
investors in the national operating company. The concession gives the company,
which is 49% foreign owned, a monopoly of switched telephone until the end of the
year 2000.

**53**

**Current and Prospective Assessment**

_Degree of Liberalisation_

The Government has adopted a pro-competitive policy for the telecommunications
sector in 1992 and partially privatised the state-owned operating company Eesti
Telecom (ET). This joint venture, consisting of ET (51%), Telecom Finland (24.5%)
and Telia (24.5%) a monopoly for long distance and international voice telephony
until the year 2001 and also has a licensed mobile telephone network using the panEuropean standard (GSM).

Tariff rebalancing has begun and although, the country already has a relatively high
penetration of lines, universal service, as required by the _acquis,_ remains to be
achieved. Although other infrastructures (CATV, internal road, rail electricity) are
allowed to compete with the public network, no application for a licence "has so far
been made. Thus there is no competition in this area. The local market is already
open to new entrant operators but there is only one small company operating. There
are 10 mobile operators, (1 analogue, 1 using NMT 450, 4 using GSM and 4 using
DCS 1800) and also 5 operators offering paging services. Satellite communication
services and value added services can be offered without licence as long as no
connection to the public network is needed.

_Approximation to EC Law_

The regulatory authority (the Inspectorate of Telecommunications) is functioning
within a ministry where the responsible minister also exercises ownership rights over
the principal operator. About half of EU law has been transcribed into Estonian law. A
new communications law is planned for the end of 1997 which will allow a more
effective separation of the regulatory and policy body from any operating company
and will enable the Government to administer a pro-competitive policy successfully
law. The Government plans to comply with the _acquis_ by the year 2000. On the basis
of progress to date, Estonia has the administrative capacity as long as it continues to
use technical assistance programmes to meet its objectives.

_Infrastructure_

The principal policy objective of the Government has been to boost investment in
the expansion and modernisation of the public telecommunications networks and to
improve the quality of services available

Like the two other Baltic States, the Estonian telecommunications network was an
extension of the USSR network. The original network equipment was obsolete and
modernisation was necessary. Between 1991 and 1996 the telephone network grew
from 22.1 to 30.0 lines per 100 inhabitants (compared to an average of 43.9 lines /
100 inhabitants in Greece, Portugal and Ireland). Modernisation is under way and
at the end of 1995, 20% of the network was digitised (compared to a current
average of 62.4% for Greece, Portugal and Ireland). The objective is to reach 48%
by 2000 and to cut waiting times to a few weeks.

**54**

**The number of cellular users at the end of 1996 was about 4.1 per 100 inhabitants**
**which is well above the average for CEECs. Growth in mobiles is very fast since**
**the new operators commenced operations during 1995. There is competition in**
**both** **data** **services and satellite services. There were 22 cable TV subscriptions per**
**100 households in 1995.**

_**Competitiveness**_ _**of**_ _**the Sector**_

**With** **10** **employees /** **1000** **lines in** **1995,** **the productivity of the public network**
**operator is low compared to an average for Greece, Portugal and Ireland of 6.2**
**employees/1000** **lines but high relative to other applicant countries (12.1). Although**
**the GDP/capita is sixth among the applicant countries the ratio in terms of purchasing**
**power is second. The current revenue per line, perhaps just sufficient to maintain the**
**service, has to be significantly increased to allow for the required** **investment.**

**The current waiting time for a new connection is about three years and at today's rate**
**"of** **network expansion it will take a few more years before even basic telephone**
**service will be universally available.**

**Conclusion**

**Estonia has moved quickly to liberalise the telecommunications field and has a good**
**chance of complying with the acquis communautaire in the medium term provided**
**that the current efforts to transpose laws are continued and measures to liberalise are**
**reinforced. Greater competitiveness of the public operator must be achieved if the**
**sector is to attract investment and face up to competition.**

**Audio-visual**

**The audio-visual** _**acquis**_ **aims, in the context of** **the** **Internal Market, for the provision**
**and free movement of audio-visual services within the EU as well as the promotion of**
**the European programme industry. The Television Without Frontiers Directive, which**
**is applicable to all broadcasters regardless of the modes of transmission (terrestrial,**
**satellite, cable) or their private or public nature, contains this** _**acquis,**_ **setting down**
**basic rules concerning transfrontier broadcasting. The main points are: to ensure the**
**free movement of television broadcasts throughout member states; to promote the**
**production and distribution of European audio-visual works (by laying down a**
**minimum proportion of broadcasting time for European works and those by**
**independent producers); to set basic standards in the field of television advertising; to**
**provide for the protection of minors and to allow for the right of reply.**

**The Europe Agreement provides for co-operation in the promotion and modernisation**
**of the audio-visual industry, and the harmonisation of regulatory aspects of audio-**
**visual policy.**

**The Television Without Frontiers Directives is a Stage I measure in the White Paper.**

**55**

**Descriptive Summary**

The legal framework for the audio-visual sector is determined by the 1994 Law on
Broadcasting.

There are currently two national television broadcasters and three local television
stations. Private broadcasters need a licence to operate, issued by the Ministry of
Culture.

**Current and Prospective Assessment**

The audio-visual sector in Estonia is attempting to re-establish itself after major
upheavals in recent years, and is characterised by rapid growth and constant change.
Its ability properly to adhere to the _acquis_ presupposes an upgrading of the capacity of
the programme-making industry to meet the important challenges of an adapted
regulatory framework.

Analysis of the existing legislation reveals a number of deficiencies, including
questions of freedom of reception, promotion of European works, advertising rules
and the protection of minors. Legislation is being prepared to amend the Broadcasting
Law. The draft represents useful progress toward alignment with the _acquis._

**Conclusion**

Provided that the necessary legislative measures are pursued with sufficient urgency
and that they are accompanied by the necessary structural adaptations of the industry,
Estonia should be able to meet EU requirements in the medium term.

**56**

**3.3.** **Economie** **and Fiscal Affairs**

**Economic and Monetary Union**

By the time of Estonia's accession, the third stage of EMU will have commenced.
This will mark important changes for all Member states, including those that dp not
participate in the euro area. All Member states, including the new ones, will
participate fully in the economic and monetary union. Their economic policies will be
a matter of common concern and they will be involved in the 'coordination of
economic policies (national convergence programmes, broad economic guidelines,
multilateral surveillance, excessive deficit procedure). They will be required to respect
the stability and growth pact, to renounce any direct central bank financing of the
public sector deficit and privileged access of public authorities to. financial
institutions, and to have completed the liberalisation of capital movements.

Accession means closer monetary and exchange rate co-operation with the European
Union. This will require strengthening structural reforms in the area of monetary and
exchange rate policies. Member states not participating in the euro area will be able to
conduct an autonomous monetary policy and participate in the European System of
Central Banks (ESCB) on a restricted basis. Their central banks have to be
independent and have price stability as primary objective. Monetary policy has to be
conducted with market-based instruments and has to be "efficient" in transmitting its
impulses to the real economy. Therefore, reforms need to be pursued to tackle factors
that hinder the efficiency of monetary policy, such as the lack of competition in the
banking sector, the lack of development of financial markets and the problem of "bad
loans" in the banking sector. Finally all Member states shall treat their exchange rate
policy as a matter of common interest and be in a position to stabilise their exchange
rates in a mechanism yet to be decided.

As membership of the European Union implies acceptance of the goal of EMU, the
convergence criteria will have to be fulfilled by Estonia, although not necessarily on
accession. While the fulfilment of the convergence criteria is not a precondition for
EU membership, they remain key points of reference for stability oriented
macroeconomic policies, and must in time be fulfilled by new member states on a
permanent basis. Hence the successful conclusion of systematic transformation and
market oriented structural reforms is essential. Estonia's economic situation and

progress has already been analysed in preceding chapters of this Opinion.

**Current and** Prospective Assessment

The Estonian Central Bank enjoys a high degree of independence. Its Governor is
appointed with the participation of the Central Bank Board and the government is
excluded from the appointment procedure. In addition, the Central Bank is
independent from the government in conducting its monetary policy. The formal
objective of the Bank is the stability of the national currency and the Law on the
Central Bank is already compatible with the Treaty provisions of explicit full
prohibition of central bank budget deficit financing. In practice, since 1992 Estonia

**57**

has operated under a currency board. Under the currency board arrangement, the
central bank has a very limited scope for discretionary monetary policy and budget
deficit financing.

Monetary policy in Estonia has been successful in bringing inflation down to single
digit levels. It has been strictly followed the rules of the currency board. Open market
operations (using Central Bank bills) have not been used for monetary policy
purposes but rather to encourage the development of a secondary market and the
deepening of the interbank market. Similarly, reserve requirements are not used as
monetary policy instruments but with the aim to assist the banks in case of liquidity
shortages. The degree of privatisation of the banking sector is relatively high and
further bank privatisation is envisaged for the future. The competition in the sector is
satisfactory and the bankruptcy laws play the role of enforcing a hard budget
constraint on financial firms. Concluding, the Estonian banking system is certainly
one of the more developed and sounder of the area, and bad loans in the sector have
almost completely disappeared.

The exchange rate is fixed (against the DM) as the rules of the currency board
prescribe. There have been no major tensions on the foreign exchange market to date.

Conclusion

It is premature to judge whether Estonia will be in a position, by the time of its
accession, to participate in the euro area; that will depend on the success of its
structural transformation permitting to attain and to adhere permanently to the
convergence criteria, which are not however a condition of accession.

Estonia's participation in the third stage of EMU as a non-participant in the euro area
should pose few problems in the medium term. Its central bank legislation is already
fully compatible with EC rules in terms of explicit prohibition of budget deficit
financing. The successful implementation of the currency board to date and the
relative development of the banking sector are encouraging indicators of the ability of
Estonia to complete the restructuring of its financial sector in the next few years.

Taxation

The _acquis_ in the area of direct taxation mainly concerns some aspects of corporation
taxes and capital duty. The four freedoms of the EC Treaty have a wider impact on
national tax systems.

The indirect taxation _acquis_ consists primarily of harmonised legislation in the field
of Value Added Tax and excise duties. This includes the application of a noncumulative general tax on consumption (VAT) which is levied on all stages of
production and distribution of goods and services. This implies an equal tax treatment
of domestic and non-domestic (import) transactions. The VAT _acquis_ also contains
transitional arrangements for the taxation of transactions within the European Union
between taxable persons. In the field of excise duties the _acquis_ contains harmonised
tax structures and minimum rates of duty together with common rules on the holding

**58**

and movement of harmonised excisable goods (including the use of fiscal
warehouses). As a result of the introduction of the Single Market, all fiscal controls at
the Community's internal frontiers were abolished in January 1993.

The mutual assistance between Member State tax authorities is an important feature of
administrative cooperation in the Internal Market; the respective Directive covers both
direct and indirect taxation.

The Europe Agreement contains provisions on approximation of legislation in the area
of indirect taxation.

The White Paper contains as Stage I measures those which make up the main
requirements of the indirect taxation _acquis_ (essentially, those measures applied in the
Community up to 1993), and as Stage II measures those which are in addition
necessary to implement the full indirect taxation _acquis._

**Descriptive Summary**

_Direct Taxation_

The two company taxation Directives and the Arbitration Convention provide for a
mechanism which applies on the basis of reciprocity. Respective provisions can
therefore by definition not be expected to exist before accession.

_Indirect Taxation_

The overall contribution of VAT and excise duty revenue to the Estonian state budget
was about 42% and 11% respectively in 1995. This is expected to continue on an
upward trend.

_Value_ _Added Tax_

The current Estonian VAT system was introduced in January 1991 with major
revisions entering into force in January 1994. Estonia applies a single VAT rate of
18% which is applicable to all taxable transactions, including imported goods. In
contrast, "imported" services are not liable to any VAT. In addition to the standard
VAT rate Estonia applies zero-rating to a limited ranges of supplies.

Certain activities are exempt from VAT without the right to claim the input credit on
such supplies. These exemptions relate mainly to activities in the public interest,
financial and insurance services, property and lotteries and similar games. Taxable
persons are in principle entitled to deduct VAT incurred on their purchases for
business purposes of goods and services. However, the Estonian VAT Act does not
contain any provisions enabling tax to be refunded to taxable persons not established
within the country.

_Excise_

**59**

The current system of excise duty in Estonia was introduced in 1995. Excise duties
are applicable to mineral oils, alcohol and alcoholic beverages and manufactured
tobacco. For each product category, the duty is specific in nature.

_Mutual Assistance_

The tax administration has not yet had to develop its capacity for mutual assistance
with the tax authorities of Member States, since mutual assistance is a feature which
would only become applicable on accession.

**Current and Prospective Assessment**

_Value_ _Added Tax_

The current VAT system in Estonia has been based on the main principles of the VAT
legislation of the Community and thus represents a starting point in its future
alignment on the Community VAT _acquis._ However, it is characterised by being very
general and inconsistent in its application.

In order to register for VAT in Estonia the entrepreneur must be listed in the Business
Code which requires the establishment of a branch in the country. This means that
foreign entrepreneurs (without a branch in the country) cannot be registered for VAT
purposes in Estonia. Estonia's approach regarding exempt transactions deviates from
that of the Community both in terms of scope and substance. Since Estonia does not
operate any arrangements for the refund of VAT to non-registered foreign taxable
persons, VAT represents an increased cost to such traders.

Estonia's membership of the European Union would require substantial adjustment to
bring the VAT legislation into line with the requirements of the Community _acquis,_
both in respect to the general provisions of the Community VAT legislation and as
regards the system of taxation necessary in a Community with no internal frontier
controls.

The Estonian national strategy plan for implementing the recommendations of the
White Paper regarding VAT does not provide a clear and detailed timetable for future
adjustments. In the short term it is planned to concentrate on changing zero-rates to
exemptions without the option for credit of the input VAT. The medium term
objectives envisage the full alignment of the Estonian VAT system on that of the
Community by 1 January 2000.

_Excise_

There exists no effective excise suspension system where goods can move between
authorised tax warehouses without payment of duty.

In order to ensure a correct application of the Community excise legislation it is
essential that Estonia sets up a warehousing system based on the Community model
as soon as possible.

**60**

The Estonian national strategy plan for implementing the provisions of the White
Paper does not provide a clear and detailed timetable for future adjustments of the
Estonian excise legislation. A short term objective consists of enhancing controls at
local level. The long term objective is the approximation of the scope and rates of
duty towards the Community legislation. However no full harmonisation of the
legislation is planned.

_Mutual Assistance_

There would also be a need, on accession, to implement the appropriate arrangements
for administrative cooperation and mutual assistance between Member States. These
requirements are essential for the functioning of the Internal Market.

Conclusion

The _acquis_ in respect of direct taxation should present no significant difficulties.

As regards indirect taxation, although a start has been made a considerable effort will
be required if Estonia is to comply with the _acquis_ concerning VAT and excise duties
in the medium term.

It should be possible to start participating in mutual assistance as the tax
administration develops its expertise in this respect.

Statistics

The main principles of the Community _acquis_ relate to the impartiality, reliability,
transparency, confidentiality (of individual information) and dissemination of official
statistics. In addition there exists an important body of principles and practices
concerning the use of European and international classifications, systems of national
accounts, business registers, and various categories of statistics.

The Europe Agreement provides for co-operation to develop effective and reliable
statistics, in harmony with international standards and classifications.

The White Paper includes no provisions in this field.

Descriptive Summary

The State Statistical Office (SSO), under the Ministry of Finance, is the central body
charged with producing and disseminating official statistics in Estonia.

The legal basis for Estonian official statistics consists of the 1990 Statistics Act. A
new Statistics Act, which takes EU and other international statistical standards into
account, was approved by the Government in December 1996 and is now in the
Parliament.

**61**

**Current and Prospective Assessment**

Estonian official statistics meet basic Community requirements. Important progress is
still required.

There are deficiencies in sectors, such as business statistics, the establishment of a
business register, short-term economic indicators, and input/output statistics. The
reorganisation of agricultural" statistics is still a major task.

**Conclusion**

Estonia will require a sustained effort if it is to comply with EU requirements for
official statistics in the medium term.

**62**

**3.4 Sectoral Policies**

**Industry**

EU industrial policy seeks to enhance competitiveness, thus achieving rising living
standards and high rates of employment. It aims at speeding up adjustment to
structural change, encouraging an environment favourable to initiative, to the
development of undertakings throughout the Community, and to industrial cooperation, and fostering better exploitation of the industrial potential of policies of
innovation, research and technological development. EU industrial policy is
horizontal by nature. Sectoral communications aim at transposing horizontal concepts
into specific sectors. EU industrial policy results from an articulation of instruments
from a number of Community policies; it includes both instruments related to the
operation of markets (product specification and market access, trade policy, state aids
and competitions policy) and measures related to industry's capacity to adapt to
change (stable macro-economic environment, technology, training, etc.).

In order to cope with competitive pressure and market forces within the Union, the
industry of applicant countries needs to have achieved a certain level of
competitiveness by the time of accession. The applicant countries need to be seen as
pursuing policies aimed at open and competitive markets along the lines set out in
Article 130 ("Industry") of the Treaty. Co-operation between the EC and the
candidate countries in the fields of industrial co-operation, investment, industrial
standardisation and conformity assessment as provided for in the Europe Agreement
is also an important indicator of development in the right direction.

Descriptive Summary

Industrial output of Estonia stood at around 0.8 bn Ecu in 1995, or less than a third of
the industrial output of Luxembourg and it has a 23% share in GDP. Industry accounts
for 185 thousand jobs (28% of total employment). The food processing industry (20%
of the industrial work force), light industry (19%), engineering and metal processing
(19%), engineering and metal processing (19%) and wood processing industry (11%)
are the main employers. The total number of industrial enterprises is estimated at
around 4600, nearly all are SMEs.

Estonia's economic structure to a large extent has overcome the inefficient system of
inter-regional labour division under Soviet occupation regardless of its natural
resources and limited national market. Yet with the beginning of the transition in
Estonia radical changes took place in its industry. The recovery in GDP growth since
1994 can be primarily attributed to an expansion in industrial production, a sizeable
increase in the number of new private businesses and a rise in foreign direct
investment (FDI). In 1990 heavy industry accounted for half of industrial production
and it is currently being forced to improve product quality and production technology.
A special feature of recovery of the Estonian industry is its strong involvement in
outward processing trade (OPT, covering 12% of all imports), practised mostly in the
textile industry with Finland and Sweden. While EU companies want to benefit from

**63**

the low labour costs in Estonia, Russia has its semi-finished products processed in
Estonia because of its higher production quality. The ongoing process of
modernisation of the Estonian economy is reflected in the high share of machinery
and technical equipment in imports. Conversely the composition of exports
increasingly reflects the country's current comparative advantages in low value added
sectors, such as wood processing, the paper industry, textiles and food stuffs. Estonia
has been very successful at reorienting its exports to western markets.

**Estonian Industry, main production sectors in 1995**

Sector % share industrial % share industrial output [1 ]

employment
Food Industry 15 ' 4 0
Textile and Clothing 14 11
Forest Industry and furniture 11 15
Mechanical and electrical engineering 12 11
Chemical Industry and pharmaceuticals 7 12
Transport Equipment 3 5
Other non-metallic mineral products 3 6
Construction 20 n.a.

Total 100 100

_pm:_ _Share industry_ _(excl,_ _construction) in_

_total GDP_ . _23_

The **food industry** is the most important sector in Estonian industry. Production
capacity was designed to meet the requirements of Estonia and many parts of the
FSU. Market collapse led to sharp output reductions. Despite the recession, however,
the food industry managed to retain its leading position in Estonian industry.
Reorientation of the industry toward EU markets proved difficult because of trade
restrictions and quality and hygiene requirements. An important part of Estonia's food
exports still go to Russia in spite of the high import tariffs imposed by Russia on
Estonian products. The food industry is the favourite target of foreign investors,
which has led to restructuring and an improvement of the technological level of
manufacture. There are also steps taken on the legislative side to improve quality and
meet EU requirements. It is possible that the sector will be sufficiently advanced at
the time of accession. The long term outlook for especially fish products, manufacture
of beverages and dairy products is relatively good.

The **textiles** and **clothing** industry is the second most important sector in the Estonian
industry and is dominated by a small number of large, privatised companies. Low
labour costs and low capital investment needs have made it Estonia's most important
sector for subcontracting and outward processing trade. However, Estonian companies
have started to reduce the number of subcontracts and to concentrate on the export of
own collections. With labour costs expected to rise in the future, there will be further
adjustment needs.

**64**

The **wood industry** is also a major branch of industry and, given that a large part of
Estonia's territory is forest, the industry has the domestic resources for its
development. The mechanical forest industry, especially furniture, has strong
competitive advantages due to inexpensive wood, a very skilled low-cost labour force
and a low capital investment need due to the high share of manual work. Furniture
accounts for more than half of total output in the forest sector, which has strong trade
links with the EU. This sector should develop well and accession should not pose a
problem. The chemical forest industry will have to compete on both domestic and
export markets with technologically more advanced manufacturers. Especially the
pulp industry is technologically obsolete and causes great environmental damage.
Given the backwardness of this sector considerable investments have to be carried out

to improve its competitive.. In its present state this industry is not sufficiently
competitive..

**Mechanical and electrical engineering:** Privatisation is largely completed. Due to
low-labour costs the sectors attracted subcontracting and now accounts for a quarter of
total OPT imports and exports. Overall, however, most production is still destined for
the former Soviet Union and CEECs. The **chemical** industry is very small, mostly
producing fertilisers. Production facilities strongly need modernisation and large
investments to protect the environment. The **pharmaceutical** industry has completed
impressive reforms, including privatisation, the establishment of regulatory
authorities, and a harmonised legislative framework. Most **mining** activities are
connected with oil-shale-mining which has devastated large parts of the countryside in
the North East.

Estonia has followed a rapid and determined privatisation policy. With the creation of
the Estonian Privatisation Agency (EPA) the earlier organisational problems of the
privatisation process have been overcome. The privatisation of small businesses is
now practically complete. By May 1996 virtually all of the 450 large and mediumscale-enterprises that were included in the government's original programme for
assets sales have been privatised. According to EBRD estimates by 1996 the private
sector already contributed around 70% to GDP, and this is expected to rise further.
The focus is now on the restructuring and privatisation of monopoly infrastructure
companies (in particular utilities).

Current and Prospective Assessment

Industry is only a small part of the Estonian economy, smaller than in any other of the
applicant countries. It is heavily concentrated in only a few key sectors: food
products, wood and paper, furniture, textiles and clothing, which together represent
more than half of total industrial output. These sectors have a sound basis in terms of
the raw materials available, the topography of the country, and prevailing low wage
levels. Nonetheless, considerable modernisation is necessary in some subsectors such
as the pulp industry in particular. Other sectors which have been developed as part of
the planned economy of the Soviet Union, such as mechanical and electrical

**65**

engineering, appear also to be vulnerable. The pharmaceuticals sector, on the other
hand, can be considered as an example of impressive reform.

The strong points of Estonian industry are the favourable macroeconomic
environment and the high investment rate. Moreover, as a result of their sound
financial policies and the consolidation of the banking sector industry can already
obtain medium to long term credits.

Privatisation of industry is largely completed. While some sectors of Estonia's
industry such as textiles and clothing, pharmaceuticals and the construction sector)
have largely been privatised and modernised- often with the help of FDI - and hence
perform well on export markets, other sectors (like the food industry, wood processing
and paper production, mechanical and electrical engineering, chemicals and
construction materials) are still in the process of restructuring and in need of further
capital investments for modernisation to gain competitiveness.

**Conclusion on Industrial Competitiveness**

Estonia has made good progress in industrial restructuring and in the adoption of EU
industrial legislation. Provided that current efforts and foreign capital inflows are
continued, in the mid term one can expect that only very limited problems for
industrial competitiveness will remain, which should not develop into obstacles for
full participation in the enlarged EU market.

An evaluation of the _acquis_ specific to the free circulation of industrial goods is to be
found in the separate section on the internal market.

**Agriculture**

The Common Agricultural Policy aims to maintain and develop a modern agricultural
system ensuring a fair standard of living for the agricultural community and the
supply of food at a reasonable price for consumers, and ensuring the free movement of
goods within the EC. Special attention is given to the environment and rural
development. Common market organisations exist to administer the CAP. These are
complemented by regulations on veterinary health, plant health and animal nutrition
and by regulations concerning food hygiene. Legislation also exists in the area of
structural policy, originally developed primarily to modernise and enlarge agriculture,
but more recently with an increasing emphasis on the environment and the regional
differentiation of the policy. Since reforms in 1992, increasing contributions to farm
support have come from direct aid payments increasingly compensating for reduced
market support prices.

The Europe Agreement provides the basis for agricultural trade between Estonia and
the Community and aims to promote co-operation on the modernisation, restructuring
and privatisation of Estonia's agriculture sector as well as on the agro-industrial sector
and phyto-sanitary standards. The White Paper covers the fields of veterinary, plant
health and animal nutrition controls, as well as marketing requirements for individual

**66**

commodities. The purpose of such legislation is to protect consumers, public health
and the health of animals and plants.

**Descriptive Summary**

_**Agricultural Situation**_

The value of the agricultural "production in 1995 was approximately 0.13 % of that of
the Union.

Agriculture's share of GDP declined after independence from around 20 % to 7 % in
1995. Employment in agriculture contracted to 7%. Until 1994 the economy
contracted and consumption shifted from dairy and meat products to bread and
cereals. Around 46 % of the total land area is covered by forest (2 million ha) whereas
32 % serves as agricultural land (1.5 Mio ha).

The Estonian farm sector is currently in the process of privatisation. Large scale
farming enterprises (former state farms) with different legal structures (co-operatives,
limited liability and joint stock companies) still manage about 30 % of agricultural
land (average size: 520 ha), whilst the remaining 70 % of the agricultural land is
equally shared between 14,500 family farms (average size: 23 ha) and household plots
(average size: less than 2 ha).

The return to legal owners of 1.2 million hectares of land has been requested. By May
1997 500,.000 hectares (42 %) have been returned and registered in the land register.
Completion is planned for the year 2000.

850,.000 hectares of land has not been claimed back and will, for the time being, be
left in state ownership and leased.

In 1995, Estonia produced 514,000t cereals, 539,000t potatoes, 2,000t oilseeds,
812,000t milk (self-sufficiency: 148%), 25,000t beef meat (92%), 46,000t pig meat
(109%).

The food processing industry currently represents 34% of total industrial output and
its employment has remained fairly constant at about 4% since 1986. The food
processing industry has faced two main problems, falling domestic demand although
this now seems to be stabilising, and increasing imports due to the absence of customs
protection. Meat (22%), dairy (20%) and fish (17%) processing dominate agro-food
activity. Nearly all food processing enterprises have been privatised. None of the
Estonian meat processing facilities have been certified for export to the EU.

Trade in agriculture and fishery products has traditionally been an important element
of the Estonian economy. In 1995, agricultural products represented 16.6% of total
exports and 14.3% of imports. The majority (65%) of Estonian agricultural exports
(mainly fish, meat and dairy products) go to New Independent States and 29% to the
EU. Estonia is a net importer of agricultural products and the EU has a positive trade

**67**

balance of 157 MECU (1995) with Estonia. Sugar, beverages, fats and oils are
predominant on imports.

_Agricultural Policy_

The PSE (producer subsidy equivalent) calculated by the OECD was 3% in 1995,
compared to 49% for the EU.

Estonia has until now followed a very liberal policy towards agriculture. Despite the
fact that several laws foreseeing increased support for farmers have been adopted by
the Parliament, they have so far only been implemented to a very limited extent and
total budgetary spending on agriculture rernains relatively low (16.4 MECU) or 3.4%
of the total budget in 1993.

Few product-specific support policies exist. Programmes are mainly aimed at
improving seed and breeding quality, registration and training. The main instrument
used to provide support to the agricultural sector is the Agricultural and Rural Life
Credit Fund (ARLCF), which provides credits for farms and the processing industry.

The only public intervention is the state procurement for the national grain reserve;
this is equivalent to six months of human consumption (50,000t). However, in
practice this policy objective has not been met.

Agricultural prices are not regulated and are significantly lower than EC prices
although increasing since 1992; (in 1995 e.g. wheat: 73% of average EC price; beef
meat: 38%; pig meat: 88.6%; milk: 47%). Rural development policies are still at the
debating stage and no single ministry is responsible for policy formulation.

Estonia pursues a free trade policy and has no customs protection in place. The Free
Trade Agreement between Estonia and the European Community entered into force
on 1 January 1995. Estonia has completely liberalised its market access, while the
Community has granted concessions either with unlimited access or in the framework
of tariff quotas.

At this stage the impact of the Free Trade Agreement on animal products has been
limited to the dairy sector, the only sector where some products (e.g. powdered milk)
meet the minimum hygiene standards of the EU.

During 1996, the Baltic Free Trade Agreement was extended to agricultural products.
The Agreement entered into force by 1 January 1997 and is intended to be the first
step in the formation of a customs union. In May 1995, Estonia ratified a free trade
agreement with the Ukraine. Estonia is currently negotiating membership of the
WTO.

Estonia has started the process of adapting legislation identified in the White Paper.

Current and Prospective Assessment

**68**

Cereal production and yields might recover to reach near self-sufficiency levels in the
medium term, and Estonia has the potential for increasing in livestock products.
However Estonia's potential for exporting their dairy and livestock produce to the EU
can only be realised once EC quality and hygiene standards are achieved. Due to over
capacity and outdated technology this sector is still lagging behind the general

recovery.

The main market policy instruments applied in the EC are not applied in Estonia.
This includes key instruments such as dairy quotas, key features of the arable crop
scheme (base area, set-aside, compensatory payments, and premiums in the livestock
sector), as well as certain rural and structural development programmes.

Management and control of these measures would require relatively sophisticated
administrative systems, including an appropriate land register and cattle identification
and registration systems. As a general observation, it is clear that the administrative
capacity would need to be further developed in these areas if these measures were to
be applied in Estonia; the State grain board would need to be dismantled.

It is difficult to foresee at this stage what will be the development of agricultural
support prices in Estonia in the period before accession; this will depend on a number
of factors including the domestic economy, the situation on export markets, and the
development of price support levels in the Union.

Estonia is introducing the legislation identified in the White Paper.

In the veterinary field, considerable work remains to be done in adapting Estonian
national legislation to EC requirements. This includes approximation of legislation
(the aim is to complete it by 1998) as well laboratories facilities and establishment of
a fully resourced official veterinary service, including the imposition of effective
controls at border inspection points, and on goods transiting the country. Certification
procedures, introduction of an effective animal identification system need to be
further developed. Legislation on animal welfare will be required.

There will be a need to upgrade certain food processing establishments both for trade
and for the internal market.

In the field of animal nutrition current legislation appears to be inconsistent with
Community rules. Approximation of legislation is in an initial stage, and no timetable
is given for the completion of the work.

As regards plant protection products and organic farming, legislation is not
harmonised with EC legislation but work on adoption of the legislation has been
initiated. It appears that pesticide residue monitoring is not carried out in Estonia at

present.

As regards seeds and propagation material legislation is stated to be harmonised with
that of the EC. Estonia does not enjoy equivalence for any EC species and it seems

**69**

that considerable amount of work still needed to truly approximate and establish
necessary developed infrastructure.

Adoption of legislation approximating to EC legislation on plant health was
anticipated for the end of 1996.

**Conclusion**

Substantial efforts of alignment to the _acquis_ are still necessary, although progress has
been made in adopting the measures mentioned in the White Paper.

Particular efforts are needed in relation to : 

- implementation and enforcement of veterinary and phytosanitary requirements and
upgrading of establishments to meet EC standards; this is particularly important
with regard to the inspection and control arrangements for protecting the EU
external borders;

- strengthening of the administrative structures to ensure the necessary capacity to
implement? and enforce policy instruments of the CAP including the import
arrangements;

- further restructuring of the agro-food sector to improve its competitive capacity.

Since only a limited number of the mechanisms of the common agricultural policy
presently exist, fundamental reform of the agricultural policy will be needed, and a
substantial effort will be necessary to prepare for accession in the medium term.

Fisheries

The Common Fisheries Policy includes common market organisations, structural
policy, agreements with third countries, management and conservation of fish
resources, and scientific research in support of these activities.

The Europe Agreement includes provisions concerning trade in fisheries products
with the Community and provides for cooperation. The White Paper includes no
measures in this field.

**Descriptive Summary**

In 1995, Estonia's fisheries provided 2.6% of GDP. Fisheries employ approximately
20,000 workers. Estonia has privatised the entire fishing sector.

The distant water fleet (North West Atlantic) has been reduced from 75 vessels in
1991 to 31 vessels at 1 January 1996 with a corresponding catch reduction from
230,000 t to 70,000 t all of which is exported. Main species caught are horse
mackerel, redfish and blue whiting (mainly NAFO area). In the Baltic, 161 vessels are

**70**

deployed by small private companies and a further 500 boats under 12m length make
up the coastal fleet. The total catch was 60,000 t in 1995 (mainly herring, sprat and
cod - all under quota). Over half of the fleet is more than 20 years old.

Fisheries comprise a sizeable branch of the Estonian food industry, but it operates at
only 40-50% of its capacity. 120 enterprises in 1994 produced 102,000t (down from
233 OOOt in 1990) of which 30,000t was canned produce. Shore-based production was
34,000t and relies on imports for variety and to maintain capacity. Total employment
in this sector is 8,000.

The aquaculture production (mainly trout and carp) has fallen from a peak of l,700t in
1989 to 317t (value: 0.4 million ECU). Total employment in this sector is 2,000.

As a trading partner of the Community, Estonia represents 0.15% of EU total imports
(independently of origin) of fisheries products and 6% of EU imports of fisheries
products from the candidate countries. As regards EU exports, Estonia receives 0.13%
of the total EU exports of fisheries products and 1,5% of our exports of these products
to the applicant countries (in terms of value).

Management of the resources in the Baltic Sea is currently accomplished between EU
and Estonia in the framework of a common body - the International Baltic Sea Fishery
Commission.

No protectionist import measures or national subventions are applied.

Current and Prospective Assessment

Estonia's production and foreign trade data, when compared to the corresponding EU
figures, are low and unlikely to have any significant impact upon the whole
Community.

Capacity adjustment of the fleet, the modernisation of the whole sector, and the
determination of the necessary structural aid will become the main issues.

According to the data available as regards fisheries agreements concluded and
Estonia's membership to international or regional fisheries organisations, no major
problems should be expected.

It will be necessary for Estonia to establish a fisheries administration which is capable
of implementing the Common Fisheries Policy - in particular, the management of
resources, the keeping of a fishing fleet register, the application of structural policy
for the sector, the management of the market scheme and. the collection of all
statistical data - as well as the EU's policies on health, hygiene and environmental

matters.

Conclusion

**71**

The process of modernisation and _acquis_ implementation will require significant
efforts. The entry of Estonia into the Community fisheries policies does not appear to
pose any major problems.

**Energy**

Main EU energy policy objectives, as reflected in the Commission White Paper "An
energy policy for the EU" include enhancement of competitiveness, security of energy
supplies and protection of the environment. Key elements of the energy _acquis_
comprise of Treaty provisions and secondary legislation particularly concerning
competition and state aids, internal energy market (including directives on electricity,
price transparency, gas and electricity transit, hydrocarbons licensing, emergency
response including security stock obligations, etc.), nuclear energy, as well as energy
efficiency and environmental rules. Development of Trans-European Energy
Networks and support for energy R&D are other important elements of energy policy.
Ongoing developments include liberalisation of the gas sector, energy efficiency
_acquis_ and the Auto-oil programme.

In the field of nuclear energy, the Community _acquis_ has evolved substantially from
the original EAEC Treaty to a framework of legal and political instruments, including
international agreements. At present, it addresses issues of health and safety, including
radiation protection, safety of nuclear installations, management of radioactive waste,
investment including EURATOM financial instruments, promotion of research,
nuclear common market, supplies, safeguards, and international relations.

The Europe Agreement provides for co-operation to develop the progressive
integration of the energy markets in Europe and includes provisions on assistance
within the related policy areas. The White Paper preparing CEECs for the internal
energy market underlines the need for full application of key internal market
directives in combination with EC competition law. As to the nuclear sector, the
White Paper refers to nuclear supply safeguards and shipments of nuclear waste

**Descriptive Summary**

Estonia's energy sector and particularly electricity production is dominated by
indigenous oil shale (a solid fuel geologically not related to coal). Use of domestic
peat, wood and wind is increasing and represents 5% of the country's energy balance.
For the remaining 35% of its needs, particularly for oil and gas, but also coal the
country is dependent on Russia. Electricity of nuclear origin is not generated in
Estonia.

The energy sector is inefficient with an intensity 2-4 times higher than EU levels, due
to its heritage of low prices, inadequate policies and obsolete technologies.

Estonia is presently looking into a better connection of its energy network to the EU.
Although a possible future Baltic electricity ring could contribute to such a
connection, it is expected that in the medium term Estonia will remain linked to the
Russian power system.

**72**

**Current and Prospective Assessment**

Estonia's energy policy objectives are in line with those of the ËU and include
security of energy supplies, including diversification; introduction of more market
principles; environmental protection, increase of efficiency; and enhanced Baltic
energy co-operation. Particularly in the energy sector such Baltic co-operation is
beneficial due to complementarities among the countries concerned.

The competition framework in the energy sector does not yet fulfil 'the directives of
the internal energy market in combination with the application of EC competition
law. Although the Estonian Competition Law of 1993 is applicable to energy utilities,
there is no specific legal and regulatory framework for the energy sector which may
ensure compliance with EU legislation including the rules of the internal energy
market. The current efforts to adopt the Energy Act, including the necessary
secondary legislation, should therefore be pursued. Implementation of this Act would
bring Estonia nearer to _EUacquis._

The energy sector is generally characterised, with the exception of oil and coal trade,
by state dominated monopolies. Privatisation has however started and is likely to
include certain large energy companies. Energy prices have been considerably
increased but particular household prices need to be further adapted in order to

recover costs.

Emergency preparedness in the energy sector including the obligation to hold ninety
days of oil stocks does not comply with _acquis._ Although work has started internally
there is not yet a time table or investment funds to comply with this part of the _acquis._

Oil shale mining and burning are inefficient and present considerable environmental
problems. They represent two thirds of Estonia's S02 emissions. Reducing the
dependency on oil shale will involve a major restructuring programme and Estonia
will have to address its socio-regional consequences.

The country will have to step up efforts to adopt Community norms and standards on
energy efficiency (e.g. labelling appliances and minimum efficiency standards) and on
environmental protection (e.g. on fuel quality).

Although Estonia has no nuclear programme, it will need to comply with the Euratom
Treaty and related policies in such fields as radioactive waste management, radiation
protection, supply of nuclear materials, safeguards and accession to international
agreements concluded by Euratom. As there is no nuclear programme, Estonia is not
yet party to the international agreements and other regimes in the nuclear field nor has
it implemented those conventions to which it is party (Convention on the Physical
Protection of Nuclear Materials and the Vienna Convention on civil liability).

Furthermore, no full-scope safeguards agreement is yet in force with the IAEA, but it
is party to the Treaty for the non-proliferation of nuclear weapons and is preparing for
future full-scope safeguards.

**73**

As it has no nuclear reactors nor indeed any other nuclear industry, no particular
problems are expected in applying Community legislation relating to supply and the
nuclear common market or in implementing the Euratom safeguards system in
Estonia.

**Conclusion**

The nuclear waste situation of the former Soviet Paldiski naval sub-marine base

should be followed closely.

Provided that current efforts are intensified, no major problerns are foreseen to
approximate the energy related _acquis_ in the medium term. Of specific importance in
the pre-accession period will be the adjustment of monopolies including import and
export issues, access to network, energy pricing, state interventions and restructuring
of the oil shale sector, emergency preparedness including the building up of
mandatory oil stocks, energy efficiency and environmental norms.

No major difficulties are foreseen for compliance with Euratom provisions.

**Transport**

Community transport policy consist of policies and initiatives in three fundamental

areas:

- Improving quality by developing integrated and competitive transport systems
based on advanced technologies which also contribute to environmental and safety
objectives.

- Improving the functioning of the single market in order to promote efficiency,
choice and user-friendly provision of transport services while safeguarding social
standards;

- Broadening the external dimension by improving transport links with third
countries and fostering the access of EU operators to other transport markets( The
Common Transport Policy Action programme, 1995-2000).

The Europe Agreement provides for approximation of the legislation with Community
law and co-operation aiming to restructure and modernise transport, the improvement
of access to the transport market, the facilitation of transit and the achievement of
operating standards comparable to those in the Community. The White Paper focuses
on measures for the accomplishment of Internal Market conditions in the transport
sector, including such aspects as competition, legislative harmonisation and standards.

**Descriptive Summary**

Estonia's virtually ice-free Baltic ports meant that it was a significant transit route for
trade between the former Soviet Union and the West. As a result, its ports developed
capacities for particular trades which are no longer fully exploited. The country's role as
a transit corridor between Western Europe and Russia and the Central Asian States is

**74**

however dependent on the state of relations with Russia, which have not always
facilitated this traffic. The establishment of new frontiers with Russia and Latvia has

also affected the competitiveness of Estonia as a transit route. Estonia needs therefore to
invest in improvements to its East-West rail network and to improve border crossing
infrastructures at all the new borders, as well as in its ports. Estonia territory is crossed
by one Pan-European Transport Corridor, as identified at the Pan-European Transport
Conference in Crete.

Although the general improvement in the Estonian economy has led to transport taking
an increasing share of GDP, the changes in the Estonian economic situation induced a
sharp decrease in absolute transport demand following the opening of the country.
Nonetheless demand is rising again, without recovering to its former level. At the same
time there is an accelerating change in the modal split, with road transport of goods
increasing its share, and railways and inland waterways declining. Use of private cars
has grown very rapidly and it is now dominant in passenger transport, partly as a result
of relatively low petrol prices, resulting in an increase in congestion in the cities and
around them, as well as at certain border crossings.

**Current and Prospective Assessment**

In terms of implementing the internal market, Estonia has made great efforts to adapt
its legislation to the Community _acquis._ The international transport sector in Estonia
to a large extent already applies rules similar to those applied in the Community,
particularly in inland waterways and combined transport. Estonia* should have no
problems with road passenger transport, provided that Community rules on access to
the profession are rapidly adopted. In the railway sector, the actual application of the
_acquis_ as regards public service provision and the standardisation of accounting
systems will have to be monitored over the coming years.

Road haulage should not pose major difficulties for the accession of Estonia, provided
that, during the pre-accession period, the Estonian authorities adapt their legislation
on weights and dimensions and access to the occupation of road haulage operator to
Community legislation. Roadworthiness tests will also have to be brought into line
with Community rules.

As regards maritime traffic, Estonia still has some way to go in adopting the _acquis_ in
its safety legislation. Considerable progress has been made in the air transport sector,
particularly as regards reorganisation and, provided progress continues, the sector
should not pose any major problem for accession as long as the majority of the
planned legislation actually enters into force in 1998/99.

The development of an integrated and competitive transport system is a goal accepted
by the Estonian authorities. The main difficulties will probably be achieving
satisfactory levels of safety and efficient use of the transport system. Estonia has made
satisfactory progress on safety. However, achieving a coherent transport system
appears to be more difficult. The share taken by road transport is likely to continue to
grow and Estonia will have to put effort into promoting the use of the rail network.

**75**

In order to improve links with the Member States of the Community and with its
neighbours, between 1995 and 1999 Estonia is planning to invest around
ECU 100 million from the national budget in transport infrastructures used by
international traffic, particularly the pan-European corridors. At around 0.7% of GNP,
this will be insufficient.

**Conclusion**

Estonia has made significant progress in adapting its transport legislation to the
_acquis._ Provided efforts are made, and legislation is actually implemented, in road
haulage (access to the sector, weights and dimensions), the maritime sector (safety)
and, to a lesser extent, air transport, and provided financial transparency is improved
in the rail sector, transport should not pose major difficulties as regards the adoption
of the internal market _acquis._

However, steps should be taken to ensure that the means required to lay the basis for
the future extension to the accession countries of the trans-European transport
network are provided, which does not seem to be the case at the present time.
Furthermore, Estonian administrative structures, including inspection bodies such as,
for example, those in the area of safety, should be rapidly strengthened.

**Small and Medium Enterprises**

EU enterprise policy aims at encouraging a favourable environment for the
development of SMEs throughout the EU, at improving their competitiveness and
encouraging their Europeanisation and internationalisation. It is characterised by a
high degree of subsidiarity. The complementary role of the Community is defined and
implemented through a Multiannual Programme for SMEs in the EU. This
programme provides the legal and budgetary basis for the Community's specific SME
policy actions. The _acquis_ has so far been limited to recommendations on specific
areas, although legislation in other sectors also affects SMEs (e.g. competition,
environment, company law).

The Europe Agreement provides for co-operation to develop and strengthen SMEs, in
particular in the private sector, inter alia through provision of information and
assistance on legal, administrative and tax conditions. The White Paper contains no
specific measures.

**Descriptive Summary**

As a result of the reform policy creating a market economy and supported by the
privatisation process, the number of private companies grew rapidly since the late
1980s. In 1995 10,000 new companies were established. Small and medium sized
enterprises (SMEs) dominate in construction, wholesale and retail trade and in other
services. Their contribution to employment has increased annually. By the end of
1995 it accounted for more than 54%. Although the share of large enterprises of the
economy has declined considerably, large companies still dominate in industry and in
energy production.

**76**

The Estonian enterprise policy is quite general as it aims at stimulating the business
climate for all enterprises regardless of size. However, the Law of State Support for
Entrepreneurship of 1994 establishes a Small Business Loan and Guarantee Fund and
a Rural Life and Agricultural Credit Fund. There are no specific accounting rules
applicable for SMEs, except for an exemption from audit in the case of very small
enterprises. Support for SMEs is available through the SME Office at the Ministry of
Economy and the Department of Local Government and Regional Development at the
Ministry of Internal Affairs, as well as through non-governmental intermediaries such
as the Estonian Small Business Association, the Chamber of Commerce and Business
Advisory Service Centres.

**Current and Prospective Assessment**

The basic structures for SMEs are in place, but there is a need for further refinement
and increased coherence of policy, simplification of legislation to make it more SME
friendly, strengthening of support infrastructures, improvement of the tax environment
and development of SMEs' access to financing.

Due to the liberal trade regime of Estonia, the SMEs are already, also on the domestic
market, exposed to considerable pressures from international competition. It is
however likely that the competitive pressures on Estonian SMEs will become even
stronger by participation in the internal market. The on-going efforts to strengthen the
SMEs during the pre-accession period will therefore need to be continued.

Conclusion

No specific problem areas are expected identified regarding Estonia's integration into
the Community's SME Programmes.

**77**

**3.5** **Economie** **and Social Cohesion**

**Employment and Social Affairs**

Community social policy has been developed through a variety of instruments such as
legal provisions, the European Social Fund and actions focused on specific issues,
including public health, poverty and the disabled. The legal _acquis_ covers health and
safety at work, labour law and working conditions, equal opportunities for men and
women, social security co-ordination for migrant workers and tobacco products. Social
legislation in the Union has been characterised by laying down minimum standards. In
addition, the social dialogue at European level is enshrined in the Treaty (Article
118B), and the Protocol on social policy refers to the consultation of the social
partners and measures to facilitate the social dialogue.

The Europe Agreement provides for approximation of legislation with Community law
and co-operation on improving standards of health and safety at work, labour market
policies and the modernisation of the social security system. It also provides for
Community workers legally employed in Estonia to be treated without discrimination
on grounds of nationality as regards their working conditions. The White Paper
provides for measures for approximation in all the areas of the _acquis._

Descriptive Summary

Social dialogue takes place both on bipartite and tripartite levels and mainly involves
two unions, with regular contacts to the European Trade Union Confederation
(ETUC), and two employers' organisations which are not members of the Union of
Industrial and Employers' Conference of Europe (UNICE). The social dialogue
appears to be developing well.

According to ILO methodology, the unemployment rate was about 7.6% in 1994
(latest figures). However, a labour market survey carried out by the Labour Market
Board in 1995 according to EU standards shows unemployment at approximately 9%.
The regional disparities are considerable.

On labour market policy. Estonia has developed a regionalised employment service
structure to deliver active labour market policy. This is one precondition for
functioning labour markets, which has to be supplemented with a range of labour
market policy measures to ensure an efficient allocation of labour and a capacity for
continuous adaptation to structural change.

Estonia is in the process of preparing a number of social reforms replacing earlier
laws. There is a draft law on social security on the way which will form the framework
for social legislation and provide the basis for discussions on new financing
arrangements and the pension reform. At the present, social contributions are paid by
employers as a special tax while employers and employees might share the cost under
a new system. New laws are under preparation on social benefits for disabled persons

**78**

and pensions. Continued efforts are required to ensure that measures of social
protection are developed.

The health system in Estonia will need to be significantly improved.

**Current and Prospective Assessment**

Estonia adopted in December 1996 a new Occupational Health and Safety Act laying
down the basic principles for the protection of health and safety at work, which was
modelled on the EU framework directive. But many of the specific measures, have still
not been introduced.

Some are apparently under preparation. Estonia has set up a plan which provides for
the conclusion of approximation in the social field by 1999. Independent inspection
structures, in accordance with the ILO rules, are not yet in place but are expected to be
operational in 1998.

Estonia has already incorporated some of the main principles of the Community labour
law in its national legislation. But new laws and substantial adjustments to existing
laws are needed to ensure conformity with the _acquis_ on collective redundancies,
transfer of undertakings and the protection of employees in case of insolvency of the
employer. In a number of other areas such as information applicable to the work
contract or employment relationship and working time, further steps will be needed to
ensure compliance with the _acquis._ The information and consultation of workers on
company level as requested by a number of EC Directives needs to be strengthened.

The basic provisions of EC non discrimination law between women and men are
covered by the Estonian legislation. The non discrimination principle is not always
respected in practice, particularly in the field of equal pay for equal work and in
gender based advertising. The difference in pay between women and men is
considerable. Adaptation is necessary in the field of parental leave for fathers.

Concerning the right to the free movement of workers, there would appear to be no
obstacles to prevent Estonia from being able to implement the provisions of the _acquis_
in this area. The introduction of the right to free movement will however require
changes in the national law, particularly as regards access to employment and a
treatment free from discrimination on grounds of nationality.

In the field of social security of migrant workers accession does not, in principle, pose
major problems, although some technical adaptations will be necessary. More
important is the administrative capacity to apply the detailed co-ordination rules in cooperation with other countries. Estonia appears to have many of the administrative
structures required to carry out these tasks, but further preparation and training will be
necessary before accession.

The two Directives on the warning labelling of cigarettes and maximum tar content
have not yet been transposed into the national legislation. The Estonian authorities

**79**

have announced that legislation covering the Directives is under preparation, and
approval is expected before the end of 1997.

**Conclusion**

Social reform should be pursued, and the public health system needs to be
significantly improved. In addition, the social dialogue should be further developed.
Estonia will need to make efforts to ensure the realignment of its legislation with EC
requirements in areas such as of health and safety, labour law and equal opportunities
and continue to develop the structures to ensure effective implementation of
legislation. If Estonia pursues its efforts, it should be possible to take on the
obligations of EU membership in the medium term.

**Regional Policy and Cohesion**

In accordance with Title XIV of the Treaty, the Community supports the
strengthening of cohesion, mainly through the Structural Funds. Estonia will have to
implement these instruments effectively whilst respecting the principles, objectives
and procedures which will be in place at the time of its accession.

The Europe Agreement provides for co-operation on regional development and spatial
planning, notably through the exchange of information between local, regional and
national authorities and the exchange of civil servants and experts. The White Paper
contains no specific provisions.

**Descriptive Summary**

Estonia was at some 23% of EU average GDP in 1995. In spite of the country's small
size, there are considerable differences between the regions as with regard to
economic development. These disparities can be generalised as a division between the
eastern and the most prosperous western parts.

Estonia is divided into 15 regional administrative units, the "maakond", and 254 selfgoverning municipalities with independent budgets and the right to impose local

taxes.

Regional Policy Guidelines were approved by the Government in 1994 and by the
Parliament in 1995. Special efforts are targeted at areas with specific economic
problems:

- counties in eastern and southern Estonia,

- the small islands,

- the border areas,

- mono functional industrial areas.

Estonia's regional development policy constitutes an integral part of its national
development policy. Indeed, regional development initiatives are implemented
through sectoral policies, in accordance with the « Regional Policy Guidelines ». The

**80**

Ministry for Internal Affairs assumes overall responsibility for regional development
actions. The National Regional Policy Council, composed of representatives from
concerned ministries, insures proper inter-ministerial co-ordination. Spatial planning
is under the responsibility of the Ministry of Environment.

Government programmes have been launched to stimulate the development in such
fields as conversion of large industrial conglomerates, conversion of former military
activities, integration of the non-Estonian population and village development. A
network of regional business promotion centres has been established.

Estonia's regional policy instruments are very limited. Moreover, the share of total
development related expenditure constituting potential counterpart funds to EU
structural policy cannot yet be determined. Therefore, Estonia's co-financing capacity
cannot presently be evaluated with sufficient reliability.

**Current and Prospective Assessment**

Within the framework of its national economic policy, Estonia implements certain
regional development initiatives. However, the financial resources at the disposal of
these initiatives are very restricted and need to be strengthened in the perspective of
accession to match the EU's structural initiatives.

Ministerial responsibility seems well entrenched but procedures to insure proper
interministerial co-ordination cannot solely rely on the National Regional Policy
Council. Moreover, administrative and budgetary procedures should be established in
order for Estonia to be able to channel EU actions.

**Conclusion**

Estonia's progress in establishing a regional development policy is limited. A
differentiated policy addressing regional disparities should be introduced. Moreover,
given Estonia's size, its regional policy should continue to constitute an integral part
of the national development strategy. Yet, Estonia's administrative capacity suggests
that, given the necessary political support, the administrative and budgetary structures
to manage the integrated EC structural actions could be established. Thus, subject to
the necessary reforms, Estonia should, in the medium-term, be ready to apply the
Community rules and to channel effectively the funds from the EC structural policies.

**3.6 Quality of Life and Environment**

**Environment**

The Community's environmental policy, derived from the Treaty, aims towards
sustainability based on the integration of environmental protection into EU sectoral
policies, preventive action, the polluter pays principle, fighting environmental damage
at the source, and shared responsibility. The _acquis_ comprises approximately 200
legal acts covering a wide range of matters, including water and air pollution,
management of waste and chemicals, biotechnology, radiation protection, and nature
protection. Member states are required to ensure that an environmental impact
assessment is carried out before development consent is granted for certain public and
private projects.

The Europe Agreement stipulates that Estonian development policies shall be guided
by the principle of sustainable development and should fully incorporate
environmental considerations. It also identifies environment as an area for bilateral

co-operation, as well as for approximation of legislation to that of the Community.

The White Paper covers only a small part of the environmental _acquis,_ namely
product-related legislation, which is directly related to the free circulation of goods.

Descriptive Summary

The environmental situation in Estonia is comparatively good having improved in
recent years, partly as a result of the rapid decline in industrial and agricultural
production in recent years, and partly as a result of high levels of environment related
investment. However, there are still important problems, a major challenge being the
highly polluting _oil shale industry,_ which accounts for a major portion of energy
production.

Although sulphur emissions from the plants have halved since 1990, due to reduction
in power generation, Estonia is still a net exporter of sulphur dioxide, and substantial
remediation measures such as flue gas desulphurisation and anti-particulate filters are
necessary. Oil shale use also causes leaching from toxic ash dumps and contamination
of agricultural land. The government is currently considering plans to replace the old
boilers with new technology, but no timetable has been fixed.

Over the years, Estonia has accumulated significant quantities of _wastes_ including
military, industrial and hazardous waste. A programme to provide technical and
financial assistance for municipalities, which are responsible for waste water
treatment and drinking water supply, has been adopted. Estonia has ratified both the
1974 and the 1992 Helsinki Conventions on the protection of the Baltic Sea and has
made a good start in reducing untreated _waste water_ discharges to the Baltic Sea. An
international working group has been set up to assist Estonia with the _radioactive_
waste aspects of the development of a decommissioning plan for Paldiski site (former
Soviet Navy training centre). The country contains important reserves of natural
marine, lake and forest biodiversity.

**82**

Public environmental expenditure as a percentage of GDP is high with respect to
average EC levels, and there is government commitment to fund environmental
investment, especially for Baltic Sea 'hot-spots'. Estonia has been very successful in
mobilising foreign assistance, with some 40% of investments financed by
international loans. A high level of public awareness exists on environmental issues,
though particular attention is needed to problems that could arise from uncontrolled
economic development.

Estonia embarked in project development before reforming its legislation. However,
some important environmental legislation was passed in 1994, including amongst
others a water act, regulation of waste water discharge, on the movements of
hazardous waste and the setting up of the Environmental Fund. In 1995 followed the
act on Sustainable Development. Recently the National Environmental Strategy was
adopted, and a detailed National Environment Action Plan is being implemented.
However, although sectoral legislation has been passed, applicable standards and
regulations are often still those of the former Soviet Union. The new legislation tends
to be of a framework nature, needing to be fleshed out with standards, implementation
measures and administrative structures.

**Current and Prospective Assessment**

Approximation of Estonian environment legislation to the EC _acquis_ is under way,
and should be achievable in the medium term. The Government's objective is to adopt
by the end of 1998 all White Paper legislation. An approximation strategy for the nonWhite Paper legislation should be ready in 1998. Efforts will be needed in order to
make the recent waste, water and nature legislation fully compatible with EU
legislation. Radiation protection and radioactive waste legislation are still missing. In
this area there is generally a lack of safety culture. Particular attention should be given
to the quick transposition of framework directives dealing with air, waste, water and
the Integrated Pollution Prevention and Control directive (IPPC), as well as the
establishment of financing strategies for legislation in the water, air and waste sectors
requiring major investments.

Effective compliance to the EC _acquis_ will be most difficult to achieve in the large
combustion plant area and in the water sector (especially waste water treatment for
small and medium size towns), because of the importance of investment needs. High
levels of investment will also be needed in industry. Urban air pollution, solid and
hazardous waste management, and management of municipal waste are also areas
where investment together with greater public awareness is required. The radioactive
waste situation of the former Soviet Paldiski naval submarine base should be followed

closely. Adequate implementation and enforcement structures will have to be
developed. An important bottleneck which needs to be addressed is the lack of human
resources with expertise to conduct the approximation process. The country's
environmental accession strategy should include implementation timetables for
meeting the EC environmental _acquis_ starting amongst others with implementation
of the framework and IPPC directives mentioned above.

**83**

**Conclusion**

Given the prevailing trends in innovative policy reform and relatively high investment
levels, and with a major effort towards development of legislation enforcement
structures, Estonia should be able to fully transpose the environmental _acquis_ and
make substantial progress in effective compliance in the medium term. However,
effective compliance with a number of pieces of legislation requiring a sustained high
level of investment and considerable administrative effort (e.g. urban waste water
treatment, drinking water, aspects of waste management and air pollution legislation)
could be achieved only in the long term.

**Consumer Protection**

The Community _acquis_ covers protection of the economic interests of consumers
(including control of misleading advertisement, indication of prices, consumer credit,
unfair contract terms, distance selling, package travel, sales away from business
premises and timeshare property) as well as the general safety of goods and the
specific sectors of cosmetics, textile names and toys.

The Europe Agreement provides for approximation of legislation with Community
law and co-operation with a view to achieving full compatibility between the systems
of consumer protection in Estonia and the Community. Stage I measures of the White
Paper focus on improving product safety, including cosmetics, textile names and toys,
and on the protection of the economic interests of the consumer, notably measures on
misleading advertising, consumer credit, unfair contract terms and indication of
prices. Stage II measures relate to package travel, sales away from business premises
and time-share property. New EC legislation which has been adopted recently
(distance selling) or will be adopted soon (comparative advertising, price indication)
will also need to be taken into account.

**Descriptive Summary**

The Ministry of Economy has overall responsibility for consumer policy. The
Ministry supervises the Consumer Protection Board which is a public body with the
authority to protect and pursue consumer complaints. The Consumer Protection Act of
1993 defines the rights of consumers in transactions with merchants, producers and
intermediaries and establishes an institutional framework for consumer protection.
Several other legal acts and rules regulate specific aspects of consumer protection.

The Estonian Consumer Protection Union is a voluntary, independent organisation
which aims at protecting the interests of consumers, to educate and inform them and
to co-operate with State and local bodies. The organisation is represented in the
Consumer Consultative Council, which advises the Consumer Protection Board, but is
relatively weak due to a shortage of resources.

Current and Prospective Assessment

**84**

Although the Consumer Protection Act provides considerable protection of consumer
interests, Estonia needs to make a number of adjustments before her legislation is
complies with the requirements of EU standards. Concerning the protection of
economic interests, the existing rules on the indication of prices and misleading
advertising are generally in line with the Community provisions, although
amendments are still required in fundamental areas to secure a complete realignment
with the EC _acquis._ New legislation is needed in areas such as sales away from
business premises, distance "selling, package travel and timeshare property. In some
cases, draft laws are under preparation. Existing rules on unfair terms of consumer
contracts and consumer credit need to be amended to strengthen the protection of

consumers.

The provisions of The Consumer Protection Act on general product safety are
insufficient and need to be more precise, including more competence to the public
authorities. The elaboration of new legislation has been announced. Draft laws in the
specific sectors of cosmetics and the safety of toys are under discussion.

The development of a strong and independent consumer movement, sustained by
public authorities will need to accompany the introduction of the _acquis._

Conclusion

Important progress has been made in aligning the legislation in the field of consumer
protection with the _acquis._ But reform of the Estonian legislation will need to be
continued since the existing laws only to a limited extent comply with the _acquis._ At
the institutional level, Estonia appears to have the structures and bodies required to
implement consumer policies. Taking on the consumer policy is unlikely to cause
major problems for Estonia in the medium term.

**85**

**3.7. Justice and Home Affairs**

**The Present Provisions**

The Justice and Home Affairs (JHA) _acquis_ principally derives from the framework
for co-operation set out in Title VI (Article K) of the Treaty on European Union
(TEU), "the third pillar", although certain "first pillar" (EC Treaty) provisions and
legislative measures are also closely linked.

The EU JHA framework primarily covers: asylum; control of external borders and
immigration; customs co-operation and police co-operation against serious crime,
including drug trafficking; and judicial co'-operation on criminal and civil matters.
The TEU stipulates key principles upon which such co-operation is based, notably the
European Convention on Human Rights and the 1951 Geneva Convention on the
Status of Refugees. It is also based implicitly on a range of international conventions
concerning its fields of interest, notably those of the Council of Europe, the United
Nations and the Hague Conference. The legislative content of third pillar _acquis_ is
different from the first pillar; it consists of conventions, joint actions, joint positions
and resolutions, (including the agreed elements of draft instruments which are in
negotiation). A number of EU conventions (including the 1990 Dublin Convention,
and conventions relating to extradition, fraud and EUROPOL) have been agreed by
the Council and are now in the process of ratification by national Parliaments; several
other conventions, including one on external frontiers are in various stages of
negotiation in the Council. The JHA _acquis_ involves a high degree of practical cooperation, as well as legislation and its effective implementation.

_The New Treaty_

For many of the above matters, the entry into force of the Treaty resulting from the
Amsterdam Inter-Governmental Conference will mark the end of the current

cooperation framework.

Reiterating the objective of developing the Union into an "area of freedom, security
and justice", the new Treaty brings these matters, including the free movement of
persons, asylum and immigration, into the Community's sphere of competence.

On the free movement of persons in particular, the new Treaty provides for the
incorporation of the Schengen _acquis_ into the framework of the European Union and
binds any candidate for EU membership to accept that _acquis_ in full.

With regard to matters remaining within the cooperation framework, i.e. policing and
criminal justice, the new Treaty provides for the reinforcement of the cooperation
system.

_The Europe_ _Agreement_ _and the White Paper_

The Europe Agreement includes provision for co-operation in the fight against drug
abuse and money laundering.

**86**

The White Paper does not deal directly with third pillar subjects, **but reference** is
made to first pillar matters such as money laundering and freedom of movement of
persons which are closely related to Justice and Home Affairs considerations.
Reference is also made to the Brussels and Rome conventions.

**Descriptive Summary**

General Preconditions for JHA Co-operation

Estonia joined the Council of Europe in 1993 and has signed or ratified the most
important instruments concerning human rights. The Constitution provides for an
independent judiciary according to the rule of law. Reform in JHA institutions is
underway, and progress has been made concerning the protection of the border. The
Government has prepared a strategy for the JHA sector, and in February 1997 set up
an inter-ministerial working group. Estonia has not yet ratified the 1990 data
protection convention, but a law on Personal Data Protection was passed by the
'Estonian Parliament in June 1996. (See also separate section on Single Market).

_Asylum_

Estonia ratified the Geneva Convention and the 1967 Protocol in February 1997. At
the same time the Estonian Parliament adopted the Law of Refugees which
implements the Convention. The Estonian authorities are currently making provision
to bring the law into effect and to appoint and train a competent authority (the
Citizenship and Migration Board). The law is based on the Geneva Convention and
incorporates a number of EU provisions such as the "safe country concept".

_Immigration/Border Control_

Estonia has visa-free agreements with the UK, Ireland, Denmark, Finland, Sweden,
Norway, Iceland and several central European countries, including Latvia and
Lithuania with which it operates a common visa space.

Further visa-free regimes are being negotiated with other EU member states. Estonia
has adopted the EU third country list for which visas are required. The Estonian
immigration administration has been streamlined and a register has been created for
the issuance of permanent and temporary residence permits to persons without
Estonian citizenship.

A readmission agreement is in place with Finland, Sweden, Denmark, Norway, Latvia
and Lithuania. Negotiations are underway with other EU countries Progress has been
made on border management, including significant reform of the border guard; and
further improvements are underway. A border control system is being developed in
cooperation with Nordic countries. Estonia has introduced machine-readable
passports. Estonia and Russia work together on the management of the mutual border,
although difficulties persist due to the absence of agreement with Russia on
readmission.

**87**

_Police_ _Co-operation_

Organised crime exists in Estonia in the fields of drug trafficking, money laundering,
car theft, security services, and fraud. To tackle organised crime (and drugs-related
crime) more effectively, specialist units have been established in the police service
and co-operation has been strengthened between the law enforcement bodies. Reform
in the police service is on the way. Training in specific areas such as the fight against
drugs, economic crime and money laundering is being intensified with the assistance
of several EU countries and through bilateral training programmes. Estonia is
preparing to ratify the 1990 money laundering convention. (See also separate section
on Single Market). Estonia experiences no domestic or international terrorism.
Estonia has ratified the key international conventions on terrorism, and domestic
legislation in place.

_Drugs_

Estonia is used as a transit country for drug trafficking, between East and West. There
is a small domestic market and a modest production of amphetamines. Estonia has
ratified, or is preparing to ratify, the main international drugs conventions, and is
active in the anti-drugs programmes of the UNDCP and Phare. Domestic anti-drugs
legislation and systems are currently being developed, and a law on narcotic drugs and
psychotropic substances is under preparation.

_Judicial Co-operation_

Estonia has made considerable progress in preparing the judiciary for EU accession in
the JHA sector. Estonia has ratified four Hague Conventions (evidence abroad, service
of documents, access to justice, and maintenance) and will apply for the Lugano
Convention. Estonia also ratified several key Council of Europe Conventions on
criminal matters, in April 1997, and the additional protocols.

Current and Prospective Assessment

There are some important gaps still to be filled in Estonia's legislation but some useful
progress has been made. An important priority for the near future will be the
ratification and application of the necessary international legal instruments, and
improvements in the levels of education and experience of the legal profession.

The main institutional challenge lies in the field of resource constraints, both of
personnel and finance. The Government is taking steps to prepare the institutions for
participation in the JHA process, for example by familiarising officials with practical
co-operation with EU counterparts, through targeted education and on-the-job
training.

Efforts still have to be made to improve the administration to deal with issues related
to refugees and asylum seekers, as well as further to develop systems to deal with
organised crime and money laundering.

**88**

**Conclusion**

Estonia is starting from a very low base in terms of the JHA _acquis_ (present and
future). There are some encouraging signs of progress, notably in respect of border
control, but Estonia will need to sustain a major effort if it is to meet the justice and
home affairs _acquis_ in the medium term.

**89**

**3.8** **External Policies**

**Trade and International Economic Relations**

The _acquis_ in this field is made up principally of the Community's multilateral and
bilateral commercial policy commitments, and its autonomous commercial defence
instruments.

The Europe Agreement includes provisions in several areas requiring parties to act in
accordance with WTO/ GATT principles, or other relevant international obligations.

The White Paper includes no provisions in this field.

**Descriptive Summary**

Estonia has developed an open, trading economy and is expected to become a member
of the World Trade Organization (WTO) by the end of 1997. Estonia has observer
status in the Government Procurement Agreement and, upon accession would have to
comply with the obligations of the plurilateral WTO agreements to which the
Community is a party.

At present Estonia does not maintain quantitative restrictions on any textile or
clothing products. On accession the Community textiles policy would be extended to
Estonia; any Community restrictions still maintained at the date of accession would
require adjustment by an appropriate amount to take account of Estonian accession.

Current and Prospective Assessment

At present, Estonia does not apply import duties. On accession Estonia would have to
apply the Community's Common Customs Tariff, and the external trade provisions of
the Common Agricultural Policy. The post Uruguay Round weighted average level of
most favoured nation duties for industrial products will be 3.6% for the Community.

In its relations with international organisations Estonia should ensure that its actions
and commitments respect the Europe Agreement and ensure a harmonious adoption of
its future obligations as a member of the Community.

On accession Estonia would become party to the Community's various preferential
agreements. Preferential agreements between Estonia and third countries would, in
general, have to be terminated on accession.

In the area of trade in services and establishment, Estonia is expected soon to join
GATS on terms largely consistent with those of the Community, and it should be
possible to resolve any remaining, significant inconsistencies between the
commitments of Estonia and those of the Community.

On accession Estonia would have to repeal national legislation in the field of
commercial defence instruments, and EC legislation would become applicable there.

**90**

Experience from previous accessions has shown **that the automatic** extension of
existing **anti-dumping** measures **to** new member states **prompts third countries to raise**
**problems in terms of the compatibility of this approach with relevant WTO**
**provisions. It has also shown that** accession creates **a potential for circumventing**
measures adopted by the Community under the commercial defence instruments. This
happens when, prior to accession, substantial quantities of the products subject to
measures are exported to the territory of the future member state and, on accession,
are automatically released for free circulation in the enlarged customs territory. These
two problems would have to be addressed during Estonia's pre-accession phase.

Estonia is not **a** member of any non-proliferation regime, although it has expressed
interest in membership. The Estonian control list of dual-use items resembles the
Community control list. Arms export is also controlled. There appears to be no
obstacle in principle to Estonia applying EC legislation in this field.

**Conclusion**

Estonia is well placed to be able to meet Community requirements in this field within
the next few years.

**Development**

The _acquis_ in the development sector is made up principally .of the Lomé Convention,
which runs until early 2000.

Neither the Europe Agreement or the White Paper include provisions in this field.

**Descriptive Summary**

Estonia has no preferential trade agreements with ACP countries, and no GSP
schemes apply. However, access to the Estonian market is very liberal.

Estonia has no budget for development aid, although it has contributed financially to
the reconstruction of Bosnia and Herzegovina.

**Current and Prospective Assessment**

On accession, Estonia should apply its preferential trade regime to the ACP States and
participate, together with the other member states, in financing the European
Development Fund (EDF), which provides financial aid under the Lomé Convention.

Applying the Lomé trade regime should not generally be a source of difficulties for
Estonia.

Normally, new member states accede to the Lomé Convention by means of a protocol
on the date of their accession to the EU.

**Conclusion**

**91**

Estonia should be able to meet EU requirements in this field in the next few years.

**Customs**

The _acquis_ in this sector is the Community Customs Code and its implementing
provisions; the EC's Combined Nomenclature; the Common Customs Tariff
including trade preferences, tariff quotas and tariff suspensions; and other customsrelated legislation outside the scope of the customs code.

The Europe Agreement covers the establishment of a free trade area with the
Community and the progressive removal of customs duties on a wide range of
products, according to clear timetables starting from the date of entry into force of the
agreement.

The White Paper includes in Stage I, measures to consolidate and streamline the free
trade established under the Europe Agreement, including legislation compatible with
the Customs Code, Combined Nomenclature, etc. Stage II concerns the adoption of
the full Community legislation, with a view to joining the customs union upon
accession.

**Descriptive Summary**

On accession the Estonian customs authorities would be required to assume all the
responsibilities necessary for the protection and control of their part of the EU's
external border. Besides the provisions on indirect taxation, they would be responsible
for the implementation and enforcement at the external border of the Community's
common commercial policy, the common agricultural policy, the common fisheries
policy etc.

Estonia's capacity fully to apply the _acquis_ presupposes the possibility to adopt and
implement the Community legislation; and the existence of an adequate level of
infrastructure and equipment, in particular in terms of computerisation and
investigation means and the establishment of an efficient customs organisation with a
sufficient number of qualified and motivated staff showing a high degree of integrity.

With the support of the technical assistance provided by customs programmes,
Estonia is currently in the process of amending its present customs code and preparing
38 implementation acts. At present, the legislation in force is not EC compatible.
Furthermore, no legislation concerning customs reliefs on counterfeit and pirated
goods exists at this stage.

Estonia has almost aligned its national goods nomenclature to the Community's
Combined Nomenclature. In addition, Estonia will have to be familiarised with the
methodology of the Binding Tariff information system used in the EC.

Estonia adopted on 1 April 1997 the new system of cumulation of origin between
European countries.

**92**

Estonia has applied to become a contracting party to the EC/EFTA Common Transit
Convention and the Single Administrative Document Convention. A Community
Task Force is assisting Estonia in this field.

**Current and Prospective Assessment**

Estonia would need to adapt its national procedures to the Community legislation
regarding suspensive arrangements and customs procedures with economic impact. At
the moment of accession, some technical transitional arrangements would be needed,
notably for operations beginning before the date of accession but which are concluded
after that date.

Estonia will have to align its tariff structure to meet the Common Customs Tariff
rates. Estonia is not familiar with the operation of a system of tariff suspensions or
with the management of tariff quotas and ceilings which are fundamental mechanisms
to apply the Community Commercial policy. This raises significant concern in
relation to Estonia's capacity to cope with the complexity of the Community
mechanism in these domains.

It will be important that the Estonian customs authorities can participate appropriately
in the various computerised systems necessary for the management, in the customs
union/internal market, of the customs and indirect tax provisions, as well as the
computerised systems for mutual administrative assistance in customs, agricultural
and indirect tax matters. Computerisation is at a very preliminary stage of
development in Estonia.

Estonia would need on accession to dismantle customs controls at the borders with

EU member states and with other acceding countries. The resources needed for the
reinforcement of the border posts along its frontiers with non-EU member states
should be taken it into account in its strategic planning.

**Conclusion**

Estonia will need to continue major efforts to draft customs legislation compatible to
that of the Community and to align its organisation and staff to the duties that have to
be carried out by a modern customs administration. If it does so it may be able to meet
EU requirements in the medium term.

Common Foreign **and** Security Policy

Since regaining its independence in 1991, Estonia has orientated its foreign and
security policy towards the EU and NATO. Improvement of relations with
neighbouring countries has also been a priority for Estonia. Estonia has been an active
participant in the dialogue arrangements provided for under the Union's-Common
Foreign and Security Policy and whenever invited has supported EU policies within
that framework.

**93**

Estonia is a member of the UN, OSCE, Council of Europe and many other
international organisations. It is an associate partner of WEU, participates in the
NACC, the PfP and has made clear its desire to become a member of the WEU and
NATO as soon as possible. It has sent troops to participate in IFOR/SFOR and
provided assistance to the post-war reconstruction of Bosnia. It also participates in a
number of regional organisations including the Council of Baltic Sea States.

There are no territorial disputes between Estonia and any member state of the Union,
although a formal delineation of the maritime border with Finland and Sweden
remains to be undertaken. Neither does Estonia have any major disputes with
neighbouring associated countries. Negotiations concerning the delineation of sea
borders with Latvia have been completed and await ratification.

The development of good relations with Russia is a key element of Estonian foreign
policy. Important positive developments include the agreement on the withdrawal of
Russian troops from Estonia and the accompanying agreement on the treatment of
(Russian) military pensioners. An important remaining issue between Estonia and
Russia is the absence of a border agreement. Important progress was made in the
border negotiations in the last quarter of 1996 when Estonia renounced its demands
that Russia recognise the validity of the 1920 Tartu Peace Treaty. The draft border
agreement includes a full description of the frontier following, with only minor
amendments, the existing control line. The Estonian government has expressed its
readiness to sign the agreement as soon as Russia is ready to do so.

Estonia has a new and small diplomatic service with limited experience and resources.
In due course it should nevertheless be able to play a full role as a member of the
Union. It maintains 23 representations abroad and employs some 220 diplomatic staff.

Estonia supports non-proliferation of nuclear, biological and chemical weapons and is
a signatory to all relevant international arms control agreements Estonia itself does
not manufacture or export weapons. The small Estonian armed forces, which are
under democratic control, are being reorganised to meet NATO requirements. Estonia
is a member of the Baltic peacekeeping battalion (BALTBAT) and participated in a
major PfP exercise (Baltic Challenge) in 1996.

In the statement accompanying its application for membership of the Union, the
Estonian government confirmed that it was ready and able to participate fully and
actively in the CFSP of the Union.

The assessment of Estonian foreign and security policy to date leads to the
expectation that as a member it could fulfil its obligations in this field.

**94**

**3.9.** **Financial Questions**

Financial **Control**

The implementation of Community policies, especially for agriculture and the
Structural Funds, requires efficient management and control systems for public
expenditure, with provisions to fight fraud. Approximation of legislation is moreover
needed to allow the system of "own resources" to be introduced, with satisfactory
provision for accounting.

The Europe Agreement provides for cooperation in audit and financial control,
including technical assistance provided by the Community as appropriate. The White
Paper includes no measures in this field.

Descriptive Summary

The State Audit Office, which was established in 1990, is the principal, independent,
external financial control authority in Estonia. In 1992 the Office became a member of
the International Organisation of Supreme Audit Institutions, the standards of which
were taken into account in drawing up the Law on the State Audit Office of 1995.

The State Audit Office reports to the Parliament its observations of how ministries,
agencies and state-owned enterprises account for and use State funds and other assets.
The Office further controls the use and repayment of foreign loans contracted by the
State as well as the use of foreign assistance. The controls are _a posteriori._

Internal audit of tax collection is assured by the National Tax Board along the lines of
international audit standards. The National Customs Board is responsible for
collecting import duties.

The economic activities of local governments are controlled by an Audit Committee,
appointed by the Council of each local government. Within Ministries, State agencies,
State enterprises, and similar organisations independent internal control mechanisms
will be established. Several laws form the system for penalising fraud against
financial and economic interests, but there is no central authority responsible for
fighting fraud.

Current and Prospective Assessment

The required instruments for a successful implementation of EU policies will need to
be established, including the necessary internal financial control mechanisms.

The Estonian authorities will have to ensure the efficient administration of the "own

resources" system, and this would need to include amendments of the existing
accounting system. Further cooperation with the Commission will be desirable in this
field.

**95**

**Conclusion**

The field of financial control does not appear to present major obstacles for accession
in the medium term, although considerable preparations will be required to establish
the necessary management and control mechanisms for the satisfactory
implementation of the Community policies.

**Budgetary Implications**

The communication entitled "Agenda2000" sets out the overall financial framework
which should accommodate the budget impact of any future enlargements in the
medium term. This is to ensure that any enlargement is compatible with proposed
Community policy guidelines within reasonable budget limits.

As things stand, it would be difficult, not to say premature, to attempt precise countryby-country evaluations of the budgetary implications of each of the applicants joining
the Union. Exactly what the impact would be may vary considerably depending on a
whole series of factors:

the date on which the applicant country joins;
developments in Community policies between now and then, in particular the
decisions to be taken on further reform of the common agricultural policy and
new guidelines for structural measures;
the progress made by the applicant countries in terms of growth, increasing
their competitiveness and productivity and their ability to absorb the _acquis',_
the transitional measures that will come out of the negotiations.

Only a few orders of magnitude for certain budget categories and an overall estimate
can be given purely as a guide.

**Expenditure**

If the common agricultural policy were to be reformed along the lines suggested by
the Commission, once the reforms were fully up and running and in terms of just
market intervention measures, Estonia's accession would give rise to only marginal
additional expenditure in relation to likely expenditure on the present fifteen Member
States.

After a gradual phasing-in period, allocations for Estonia for structural funds would
be likely to be around 4% of its GNP.

Application of the other internal Community policies in the new member countries
would be likely to involve additional expenditure probably in excess of their relative
proportion of Union GNP, since for certain policies the additional implementing costs
also depend on the target population, the geographical area covered or the number of
Member States involved in the coordination and harmonisation measures. The GNP of

Estonia is currently less than 0.1% of total Union GNP.

**96**

By contrast, Estonia's accession should not involve significant additional expenditure
as far as Union external action is concerned.

It should not be forgotten that when an applicant country joins, the Community
budget will no longer have to bear the costs of grants the country was eligible for
under the various pre-accession programmes, such as PHARE.

In light of the above, the estimated costs in the three areas mentioned arising from
Estonia's accession should fall within the range of, annually, ECU 0.3 to 0.4 billion
in 2005-06 (at constant 1997 prices).

Revenue

Assuming full application of the own resources system, the new members'
contributions to the Community budget should, in terms of total GNP and VAT
resources (taking account of the capping rules applying to VAT), be close to the
proportion of the Union's GNP they account for, which in Estonia's case is less than
0.1%. Estonia's portion of traditional own resources will depend on the structure of its
trade flows at the time of accession.

To ensure that the own resources are established, monitored and made available in
line with Community regulations, Estonia will have to overhaul its current customs
system. In addition, for the purposes of accurately calculating the GNP resource
considerable improvements will have to be made to the national accounts to ensure
that they are reliable, homogeneous and complete. Improving the statistics will also be
essential for drawing up the VAT own resources base, which will mean bringing
Estonia's VAT system fully into line with the Community directives.

**97**

**4.** **Administrative Capacity to Apply the** _**Acquis**_

The European Council in Madrid in December 1995 concluded that the harmonious
integration into the EU of the central and eastern European applicant states would, in
particular, require the adjustment of their administrative structures. This chapter
examines the current state of the public administration in Estonia, including relevant
aspects of the judicial system, and assesses the current and prospective ability to carry
out the functions required of it in a modern, democratic state, with a particular focus
on the need to administer matters related to the _acquis._

**4.1 Administrative Structures**

A description of Estonian constitutional structures, their powers and responsibilities,
including those of regional and local government, is given in Chapter 1.

The Estonian central administration consists of 14 Ministries and a number of Boards

and inspections services. The State Chancellery, which is the office of the Prime
Minister, plays an important role in evaluating and coordinating the work of all
government officials. The Office of European Integration, which reports directly to
the Prime Minister, works on a permanent basis and is responsible for technical
support and co-ordination of matters related to EU accession.

The Law on Government and the Public Service Act, which both entered into force in
January 1996, define the relations among the ministries and between central and local
levels of government as well as the role and conditions for officials and public

servants.

The principle of political independence of the civil service is recognised in Estonia,
although senior positions are not always free of party political influence.

Since 1991 there have been significant reductions in the numbers of administrative
staff. Government ministries employ 2,150 staff, government agencies 9,620, and the
regional councils 1,390; numbers in local government are not available. Pay in the
civil service is far lower than in the private sector.

Training programmes to upgrade the staff of the public administration on EU related
issues and efficient public management within a democratic society based on a market
economy have been implemented by the government with international assistance,
resulting in a substantial upgrading of staff qualifications. To co-ordinate the reform
process, a specific administrative structure has been established by the Government,
consisting of a Ministerial Commission which formulates the policy and submits
proposals for the government, as well as a Council of Senior Civil Servants which
represents the main involved ministries. A national training institute for civil servants
operates under the authority of the Chancellery.

**98**

In spite of its limited staff resources the Office of European Integration has
progressively developed its coordinating capacity. (See also the section of the
Introduction concerning relations between the European Union and Estonia).

**4.2 Administrative and Judicial Capacity**

Estonia was part of the Soviet Union until 1991 and administered under central
planning until then. The communist system rejected the primacy of the rule of law and
subjugated the law and the administration to the implementation of Party policy.
Against this background, both the administration and the rule of law itself
increasingly came to be seen by the public as instruments of political control.

The structures and systems of the Estonian public administration still require
significant development. The extent of what has already been achieved should not,
however, be underestimated. Despite the problems, and perhaps in part because of the
need to create new structures, the Estonian civil service has in many cases shown a
considerable flexibility.

Most ministries are small, and heavily burdened with work. The effective functioning
of a ministry is often dependent more on the quality of leading personalities than by
the structures of the institution itself. Lack of funding is a constant problem for all
ministries. But the 1997 budget favoured defence particularly and that ministry is
improving in range and capacity. The State Chancellery is still developing its role,
with international help. Overall, the use of information technology is already at a
high level in the Estonian public service.

The legal basis for the civil service is adequate. Political pressures on civil servants
are considerable, especially at municipal level, but also in central ministries. The
trend appears nonetheless to be in the direction of a reinforcement of civil service
independence.

The civil service is under-staffed. Although the limited size of the Estonian
administration in some respects facilitates staff development and reforms of the
administrative structure, the small number of staff also means that important functions
often depend on a quite limited number of people, which makes the ministries
vulnerable to a "brain drain" to the private sector (connected to pay levels in
particular), and can call into question the ability of ministries fully to fulfil their
functions.

Public confidence in the civil service is not assured. There is widespread
dissatisfaction at perceived abuses in some parts of the administration, including local
government. Often, detailed evidence to back up such perceptions is lacking,
although confirmed cases do exist.

The Government's reform initiatives, while pointing in the right direction, will need to
be better targeted and much intensified as a part of the pre-accession process. The
level of professionalism and training varies widely. Considerable international
assistance is being provided in these areas.

**99**

The most serious concern in this area in the context of EU accession is the very
considerable number of legislative and administrative initiatives which need to be
taken at the same time, the co-ordination of which will be a difficult challenge for the
Estonian administration. The Government's approach includes a cohérent, though not
exhaustive, plan for the implementation measures outlined in the Commission White
Paper. The Office of European Integration will need reinforcement.

_Key Areas for the Implementation of the Acquis_

The uniform application of EC law: The effective application of the _acquis_
presupposes that the judicial authorities" of member states are able to apply the
provisions of the Treaty dealing with ensuring the unity and application of the _acquis,_
and are able to ensure the proper functioning of the Single Market and Community
policies in general. A high quality and well trained and resourced judiciary is
necessary for the application by the courts of EC law, including cases of direct effect,
and cases of referral to the European Court of Justice under the terms of Article 177
EC.

The judicial system in Estonia has important weaknesses, particularly concerning
resources, and relevant expertise. Given this situation, the Commission has
significant doubts about the ability of the system to ensure the effective application of
the _acquis._

Single market: The ability of Estonia to ensure the correct application of Community
requirements in the Single Market, particularly concerning the free movement of
goods and services presupposes the existence of highly developed and effective
regulatory, standardisation, certification and supervisory authorities, able to act fully
in accordance with EC rules. An analysis of these points is made in Chapter 3.1
(under "The Four Freedoms").

Concerning the administrative capacity in respect of free movement of goods, the
situation in Estonia is not yet satisfactory, due mainly to limitations on staff resources.
Progress towards a separation of functions between assessment and certification is
underway, leading to improved compatibility with the EU system. Concerning the
free movement of services the situation is in some respects satisfactory, but while the
Central bank and private bank supervisions function well (there are 28 staff involved
at the Bank of Estonia), the Insurance Supervisory authority, which employs 14
supervisors, and the Insurance Inspectorate, which employs only 12 staff, are
inadequately resourced.

In order to meet EU requirements in this area a considerable reinforcement of staff
resources will be required.

Competition: As explained in Chapter 3.1 (under "Competition") enforcement of
competition law requires the establishment of anti-trust and state aid monitoring
authorities, and that the judicial system, the public administration and the relevant
economic operators have a sufficient understanding of competition law and policy.

[00

In Estonia the central authority is the Competition Board which has 22 staff; this is
inadequate. The level of expertise is not high, although the Competition Board is
currently functioning satisfactorily. The ability to implement EU requirements in this
field will require a reinforcement of the human resources.

Telecommunications: In order to formulate and implement the many liberalisation
regulations contained in the _acquis_ in this field it is necessary to have a regulatory and
policy making body that is effectively separated from any operating company.

In Estonia the regulatory competence in the telecommunications field lies with the
Ministry of Transport and Telecommunications (60 staff, 4 on telecommunications) as
well as with the Inspection of Telecommunications (35 staff) which arranges the
usage of radio frequencies, type approvals for radio equipment and surveillance of the
usage of radio equipment. As a whole these services appear to have the potential
capacity required to administer the telecommunications _acquis._

Indirect taxation: The effective administration of the indirect taxation _acquis_
presupposes structures capable of implementing the EC legislation concerning the
harmonisation of Valued Added Tax and excise duties in an environment in which

fiscal controls at internal EU frontiers have been abolished; and the excise system is
based on the tax warehouses, duty being payable at the local rate in the member state
at the time the goods are consumed. This requires a highly developed and well trained
and resourced service, with a high degree of integrity.

In Estonia the relevant authority is the Ministry of Finance with a total of 800 staff.
Due to a large turnover of staff, resulting partly from trained staff being recruited by
the private sector, it is difficult to estimate the capacity of existing staff. In order to
ensure the effective administration of the _acquis_ in this area it will be necessary to
consolidate and improve the overall professional standards of the staff, including
training measures and improvements in pay.

Agriculture: The administrative requirements in the agricultural area primarily
concern veterinary and phytosanitary control, to protect public health and ensure the
free movement of agricultural goods; and the ability to administer the mechanisms
and requirements of the CAP, including high standards of financial control and
official statistics. These points are dealt with in Chapter 3.4 (under "Agriculture");
general standards in the statistical field are examined in Chapter 3.3 (under
"Statistics").

The administrative capacity in respect of veterinary and phytosanitary controls in
Estonia requires considerable development. Concerning numbers of staff, the State
Veterinary and Food Control Inspection has 571, and the three main plant health
institutions have 106. For the administration of general CAP requirements,
appropriate administrative structures need to be created. The Ministry of Agriculture
has 115 staff.

In order to meet EU requirements in this area considerable improvements will be
required.

Transport: The application of the EU Internal Market and competition requirements
to the transport sector, the development of relevant infrastructure products, and other
aspects of the transport _acquis_ will present administrative challenges to new member

states.

The responsible government authority in Estonia is the Ministry of Transport and
Telecommunications with a total of 60 staff (56 on transport). There are problems
arising from a lack of qualified staff. This raises particular concerns with regard to the
enforcement of safety controls.

Employment and social policy: A central administrative requirement in respect of the
_acquis_ in this area is adequate inspection capacity, particularly concerning health and
safety at work.

In Estonia the labour inspectorate (77 inspectors) requires considerable reinforcement
of staff resources and expertise.

Regional policy and cohesion: The main administrative requirements in this area are
the existence of appropriate and effective administrative bodies, and in particular a
high degree of competence and integrity in the administration of Community funds.

In Estonia the Department of Local Government and Regional Development at the
Ministry of the Interior, with 20 staff in this area, coordinates regional development
initiatives. These arrangements are not yet fully adequate. And the situation
concerning financial control is not yet satisfactory (see the section, below, on
"Financial control"). The effective administration of the _acquis_ in this area will
require, in particular, the creation of the necessary administrative, budgetary and
control frameworks.

Environment: Because EU environmental policy, involves the integration of
environmental protection into EU sectoral policies the administrative requirement is
potentially very wide, affecting many bodies not normally associated with
environmental protection. However, the main responsibility lies with environment
ministries and various subsidiary bodies.

In Estonia, the Environment Ministry employs 105 staff. Monitoring is carried out by
sectoral authorities, enforcement by the State Inspectorate and 17 Country
Environment Departments. These arrangements are not yet adequate since the services
do not have the means to enforce legislation. The effective administration of the
_acquis_ in this area will require improvements in training, upgrading equipment, and
greater investment in human resources.

Consumer protection: In this area, the effective administration of the _acquis_ requires
the allocation of overall responsibility to a specific State body through which the

102

formulation, implementation and enforcement of consumer policy and consumer
protection legislation can be undertaken.

In Estonia the government Domestic Market Division within the Ministry of
Economy shares its responsibility for consumer affairs with the semi-independent
Consumer Protection Board (55 staff). As regards non-governmental consumer bodies
these remain weak in the Estonia. There remains confusion about the exact scope and
objectives of consumer policy. This in part explains difficulties in the effective
enforcement of consumer laws; however, other factors which need to be addressed
include a lack of expert staff, organisational deficits, and a lack of sensitivity to
consumer questions among the judiciary.

Justice and home affairs: Oversight of justice and home affairs questions falls to
justice and interior ministries. The administrative structures need to be able to deal
effectively with asylum and migration questions, border management, police
cooperation and judicial cooperation. There is an overriding need for sufficient and
properly trained staff with a high degree of integrity.

In Estonia the justice and interior ministries are adequately staffed. The capacity to
handle asylum and migration questions is not yet assured through the Citizenship and
Migration Board, but significant progress is being made. Border management has
been reformed, and further improvements are underway. Similarly, the police is being
reformed, and specialist units have been created. Considerable progress has been
made to improve judicial cooperation. The effective administration of the _acquis_ in
this area will require greater financial and human resources and an intensification of
the current reform efforts.

Customs: Applying the _acquis_ in this area requires an adequate level of infrastructure
and equipment, including computerisation and investigation resources, and the
establishment of an efficient customs organisation with a sufficient number of
qualified and motivated staff showing a high degree of integrity.

In Estonia the customs service employs 1,100 staff. Due to a high turnover of staff, it
is difficult to estimate their efficiency, and therefore the adequacy of staffing levels.
The effective administration of the _acquis_ in this area will require the retention of
qualified and experienced staff, and greater resources directed at customs control at
the borders.

Financial control: The protection of the Community's financial interests requires the
development of anti-fraud services, training of specialised staff (investigators,
magistrates) and the reinforcement of systems of specific cooperation. The
implementation of Community policies, especially for agriculture and the Structural
Funds, requires efficient management and control systems for public expenditure,
with provisions to fight fraud. Administratively it is essential to have a clear
separation between external and internal control. Police and judicial authorities need
to be able effectively to handle complex transnational financial crime (including
fraud, corruption and money laundering) which could affect the Community's
financial interests.

103

In Estonia the main external control body is the State Audit Office employing 80 staff.
This is a modest level given the scale of the tasks. The effective administration of the
_acquis_ in this area will require considerable efforts to establish the necessary
management and control mechanisms.

**4.3 General Evaluation**

Estonia's administrative structures will require a major effort of reform if there is to be
adequate capacity in the medium term effectively to administer the _acquis._

Concerning the judicial capacity effectively to apply Community law, a definite
evaluation at this stage is difficult.

104

**C.** **SUMMARY AND CONCLUSIONS**

Estonia submitted its application for membership of the European Union on 24
November 1995. Its request is part of a historic process of ending the division of
Europe and consolidating the establishment of democracy across the continent.

In accordance with the provisions of Article O of the Treaty, the Commission has, at
the request of the Council, prepared an Opinion on Estonia's request for membership.

Estonia's preparation for membership is going forward notably on the basis of the
**Free Trade Agreement** which entered into force on 1 January 1995. The European
Union and Estonia signed a **Europe Agreement** on 12 June 1995. Once the
ratification procedures are complete and it enters into force, it will supersede the Free
Trade Agreement. Implementation of the **White Paper** of May 1995 on the Internal
Market, another essential element of the pre-accession strategy, is going ahead on the
basis of an Action Plan drawn up by the government in June 1996. The government
has put in place the necessary mechanisms to coordinate its policies for European
integration.

In preparing its Opinion, the Commission has applied the **criteria established at the**
**Copenhagen European Council** of June 1993. The Conclusions of this Council
stated that those candidate countries of Central and Eastern Europe who wish to do so
shall become members of the Union if they meet the following conditions:

  - stability of institutions guaranteeing democracy, the rule of law, human rights and
respect for and protection of minorities;

  - the existence of a functioning market economy, as well as the ability to cope with
competitive pressures and market forces within the Union;

  - the ability to take on the obligations of membership, including adherence to the
aims of political, economic and monetary union.

A judgment on these three groups of criteria - political, economic, and the ability to
take on the acquis - depends also on the capacity of a country's administrative and
legal systems to put into effect the principles of democracy and the market economy
and to apply and enforce the acquis in practice.

The **method** followed in preparing these Opinions has been to analyse the situation in
each candidate country, looking forward to. the medium term prospects, and taking
into account progress accomplished and reforms already under way. For the political
criteria, the Commission has analysed the current situation, going beyond a formal
account of the institutions to examine how democracy and the rule of law operate in
practice.

1. **Political** Criteria

105

Estonia's political institutions function properly and in conditions of stability. They
respect the limits on their competences and cooperate with each other. Elections in
1992 and 1995 were free and fair, and in the latter case led to an alternation of power.
The Opposition plays a normal part in the operation of the institutions. Efforts to
improve the operation of the judicial system and to intensify the fight against
corruption need to be sustained.

There are no major problems over respect for fundamental rights. But Estonia needs
to take measures to accelerate naturalisation procedures to enable the Russianspeaking non-citizens to become better integrated into Estonian society.

Estonia presents the characteristics of a democracy, with stable institutions
guaranteeing the rule of law and human rights.

**2.** **Economic Criteria**

After a sharp contraction of output immediately following independence, the economy
has been growing since the second half of 1993 (4.0% in 1996). The government has
more or less maintained a principle of balanced budgets in public finances. External
debt is low, though Estonia runs a high trade deficit. Inflation rates have declined
over recent years, but still stood at 23.1% in 1996. GDP per head is about 23% of the
EU average, for a population of L5 million. The agricultural sector employs 8% of
the labour force, and accounts for 7% of Gross Value Added. 54% of Estonia's
exports are directed to the EU, and 66% of its imports originate in the EU.

On the basis of its analysis, the Commission's judgment as to **Estonia's ability to**
**meet the economic criteria** established at Copenhagen is as follows:

Estonia can be regarded as a functioning **market economy.** It has liberalised foreign
trade and privatised the public sector. Prices have been liberalised to a very large
extent. The currency board system and the prudent fiscal stance have helped to reduce
inflation. The legislative framework is largely in place. But land reform has been
slow, and reform of the pension system has not yet started.

Estonia should be able to make the progress necessary to cope with **competitive**
**pressures and market forces** within the Union in the medium term, provided in
particular that the export base is broadened. The setting of a low exchange rate and
low unit labour cost have facilitated the switch to light manufacturing industry as a
source of foreign reserves. The banking sector is healthy and expanding strongly.
Estonia has been a major recipient of foreign direct investment, although the inflow
has decreased recently. But the export base is rather narrow, and the need to finance
rising trade and current account deficits is a matter for concern.

3. **Capacity** to **take** on **the** obligations of **membership**

106

Estonia's ability to take on the acquis has been evaluated according to several
indicators:

  - the obligations set out in the Europe Agreement (even though this has not yet
entered into force), particularly those relating to the right of establishment, national
treatment, free circulation of goods, intellectual property and public procurement;

   - implementation of the measures set out in the White Paper as essential for
establishing the single market;

  - progressive transposition of the other parts of the acquis.

Estonia has already made serious efforts to apply some of the obligations which will
come into effect with the Europe Agreement, even before this has entered into force.
It is meeting its obligations under the Free Trade Agreement, and according to the
timetable for implementation set out in it. No serious bilateral problems have arisen.
Estonia has also adopted significant elements of the acquis relating to the **single**
**market,** and has made a good start in transposing the rules and directives set out in
the White Paper. In the fields of company law, accounting, data protection and capital
liberalisation, it is well on the way to putting in place the necessary legislative
foundation. There is still substantial work to be done on public procurement,
intellectual property, financial services, taxation and competition (especially the
transparency of state aids). „

Despite the progress achieved in the field of legislation, there are doubts about the
capacity of the Estonian administration to implement this legal framework. But the
present significant weaknesses should be temporary, given the high quality of existing
staff.

As for the **other** aspects of **the** _acquis,_ Estonia should not have difficulty in applying
it in the medium term in the following fields: education, training and youth; research
and technological development; audio-visual; small and medium enterprises; trade
and international economic relations; and development.

By contrast, substantial efforts will be needed in the fields of statistics; fisheries;
consumer protection; and customs.

Estonia has made good progress in industrial restructuring. Provided that current
efforts are maintained, its **industry** should be able to cope with integration into the
single market in the medium term.

Estonia has moved quickly to liberalise its telecommunications. Provided that
current efforts at liberalisation and transposition of laws are maintained, it should be
able to apply the _acquis_ in the medium term.

For the environment, very substantial efforts will be needed, including massive
investment and strengthening of administrative capacity to enforce legislation. Partial

107

compliance with the _acquis_ could be achieved in the medium term. Full compliance
could be achieved only in the long term.

Estonia has made progress in taking on the acquis in the **transport** sector, but needs
to make improvements in the road freight and maritime sectors, and pay particular
attention to safety issues. Provided this is achieved, accession in the medium term
should not pose major problems. But investment will be needed to extend the
European transport network so as to ensure that the single market functions well.

It should be possible for Estonia to apply the **employment and social affairs** _acquis_
in the medium term, provided that it works to align its legislation with EU standards
eg for health and safety and labour law.

In the field of **regional** policy **and** cohesion, provided that Estonia creates the
necessary administrative and budgetary framework, and takes the steps necessary to
create adequate structures of financial control, it should be able in the medium term to
use regional and structural funds to support its development effectively.

The **agriculture** sector needs restructuring, and only a limited number of the
mechanisms of the common agricultural policy presently exist. A substantial effort
will be needed to prepare for accession in the medium term.

In the field of energy, Estonia has no nuclear energy programme, so no difficulties are
foreseen for Estonia to comply with Euratom provisions. Estonia should be able to
comply with most of the energy _acquis_ in the medium term, provided that work is
maintained on monopolies, access to networks, energy pricing and restructuring of the
oil shale industry.

On the basis of the analysis of Estonia's capacity to apply the _acquis,_ it is not yet
possible to be sure when it could become able to take and implement the measures
necessary to remove the controls at borders between Estonia and member states of
the Union.

Estonia's participation in the third stage of economic and monetary union, which
implies coordination of economic policy and complete liberalisation of capital
movements, should pose few problems in the medium term. It is premature to judge
whether Estonia will be in a position, by the time of its accession, to participate in the
Euro area. That will depend on how far the success of its structural transformation
enables it to achieve and sustain permanently the convergence criteria. These are,
however, not a condition for membership.

In justice and home affairs, Estonia has started from a low base and made
encouraging progress, notably in the field of border control. But a major, sustained
effort will be needed if it is to meet the acquis in the medium term.

Estonia should be able to fulfil its obligations in respect of the common foreign and
security policy.

108

In addition, Estonia has no territorial disputes with Member States or neighbouring
candidate countries. Estonia gives high priority to its relationship with Russia, and
has achieved important progress, though there is still no border agreement between
them.

4. Administrative and Legal Capacity

For Estonia to have in the medium term the administrative structures necessary for the
essential work of applying and enforcing the _acquis_ effectively, there will need to be a
major effort of reform.

It is not yet possible to judge when Estonia's judicial system, which has an equally
important role to play, will acquire the capacity to play it effectively, even though
Estonia has recently undertaken an extensive programme of recruitment of new
judges.

CONCLUSION

In the light of these considerations, the Commission concludes that:

   - Estonia presents the characteristics of a democracy, with stable institutions,
guaranteeing the rule of law, human rights and respect for and protection of
minorities. But measures need to be taken to accelerate naturalisation of Russian
speaking non-citizens, to enable them to become better integrated into Estonian
society;

  - Estonia can be regarded as a functioning market economy, and it should be able
to make the progress necessary to cope with competitive pressure and market forces
within the Union in the medium term;

   - Estonia has made considerable progress in transposing and implementing the
_acquis_ relating particularly to the single market. With further effort it should become
able to participate fully in the single market in the medium term. Particular efforts,
including investment, will be needed to apply the _acquis_ fully in sectors such as
environment. Strengthening of the administrative structure will be indispensable if
Estonia is to have the structures to apply and enforce the acquis effectively.

In the light of these considerations, the Commission recommends that negotiations for
accession should be opened with Estonia.

The reinforced pre-accession strategy will help Estonia to prepare itself better to meet
the obligations of membership, and to take action to improve the shortcomings
identified in this Opinion. The Commission will present a report no later than the end
of 1998 on the progress Estonia has achieved.

109

###### **ANNEX**

**COMPOSITION OF PARLIAMENT**

Political parties Number of seats

Coalition and Rural Union Party 41

Reform Party 19

Centre Party 16

"Motherland" (Isamaa) 8

Moderates 6

"Our House is Estonia" 6

Right 5

i\o

**SINGLE MARKET: WHITE PAPER MEASURES**

This table is based on information provided by the Estonian authorities and confirmed by them as correct as at the end of June 1997. It does not
indicate the Commission's agreement with their analysis. The table includes directives and regulations cited in the White Paper which total 899.
These have been listed in accordance with the categorization used in the White Paper and in relation to the policy areas covered. The table
shows the number of measures for which the Estonian authorities have notified the existence of adopted legislation having some degree of
compatibility with the corresponding White Paper measures.

Regul ations

#### White Paper chapters

l.Free Movement of Capital Estonia

Number of White Paper measures
2.FM and Safety of Industrial Products Estonia

Number of White Paper measures
3.Competition Estonia

Number of White Paper measures
4.Social policy and action Estonia

Number of White Paper measures
5.AgricuIture Estonia

Number of White Paper measures
6.Transport _Estoni!i_

Number of White Paper measures
7.Audiovisual Estonia

Number of White Paper measures
8.Environment Estonia

Number of White Paper measures

^Telecommunication Estonia

Number of White Paper measures
lO.Direct Taxation Estonia

Number of White Paper measures
1 l.Free movement of goods Estonia
Number of White Paper measures
H.Public Procurement Estonia

Number of White Paper measures

13.Financial services Estonia

Number of White Paper measures
14.Protection of personal data Estonia

Number of White Paper measures
15.Company Law Estonia

Number of White Paper measures
16.Accountancy Estonia

Number of White Paper measures
17.Civil law Estonia

Number of White Paper measures
18.Mutual rec. of prof. Quai. Estonia

Number of White Paper measures
19.1ntellectual property Estonia

Number of White Paper measures
20.Energy Estonia

Number of White Paper measures
H.Customs law Estonia

Number of White Paper measures
22.1ndirect Taxation Estonia

Number of White Paper measures
23.Consumer Protection Estonia

Number of White Paper measures
Total Estonia

Number of White Paper measures

_**\\\**_

Direc tives

Stage
I

**3**

3

**16**

56

**0**

3

**9**

12

**10**

93

**3**

19

**1**

1

**4**

31

**0**

9

**1**

2

**0**

0

**2**

5

**8**

13

**0**

0

**2**

2

**2**

3

**0**

1

**0**

2

**1**

5

**5**

10

**0**

2

**15**

15

**5**

8

**87**

295.

Stage
II/III

**1**

l

**3**

104

**0**

0

**5**

15
**t)**
46

**6**

15

**0**

0

**0**

7

**0**

7

**2**

2

**0**

0

**0**

î

**6**

8

**2**

2

**3**

3

**1**

2

**0**

1

**0**

16

**2**

3

**1**

2

**0**

1

**26**

54

**0**

3

**58**

293

Stage
II/III

0

0

0

î

0

0

2

2

0

2

0

13

0

0

0

0

0

0

0

0

0

. 0

0

0

0

0

0

0

0

1

0

0

0

0

0

0

0

3

0

0

112

184

2

6

0

0

116

212

Stage
I

**0**

0

**0**

4

**1**

1

**0**

0

**10**

62

**0**

8

**0**

0

**3**

7

**0**

0

**0**

0

**0**

0

**0**

0

**0**

0

**0**

0

**0**

0

**0**

0

**0**

0

**0**

0

**0**

0

**1**

3

**7**

14

**0**

0

**0**

0

**22**

99

Total

4

4

19

165

1

4

16

29

20

203

9

55

1

1

7

45

0

16

3

4

0

0

2

6

14

21

2

2

5

6

3

5

0

2

0

18

3

n

7

15

119

201

43

75

5

n

283

899

###### **STATISTICAL DATA**

If not explicitly stated otherwise, data contained in this annex are collected from „ Statistical Office of Estonia
(EESTI STATISTIKAAMET)" with whom Eurostat and Member States' statistical offices are co-operating
since several years in the framework of the Phare programme. Regular data collection and dissemination are
part of this co-operation process with the aim to enable the application of EU laws and practices in statistics.
The data presented below have been compiled as far as possible using EU definitions and standards which in
some cases differ from national practices. This may occasionally give rise to differences between the data
presented here and those shown elsewhere in the opinion, which are generally based on the individual applicant
countries' updated replies to the questionnaire sent to them in April 1996. The exact compatibility with EU
standards on statistics and thus the comparability with EU figures can still not be guaranteed, particularly those
statistics that have not been supplied through Eurostat, but have been delivered direcctly by the countries
concerned. Wherever available, methodological notes are given describing content and particularities of
statistical data presented in this annex. Data correspond to the informtion available as of May 1997.

BASIC DATA

1990 1993 1994 1995 1996

1000 **hectares**

Total Area

Population ( end of the period)

    - Total

   - Females

   - Males

Population density

Urban Population

Deaths rate

Births rate

Income and GDP per capita

-Average monthly wage and salary per employee

-GDP per capita

Structure of production: share of branch GVA

-agriculture

-industry

-construction

-services

**4522.7** **4522.7** 4522.7 4522.7

in 1000

**1506.9**

**803.3**

703.6

**1491.6**

795.7

695.9

per 1 km 2

1476.3

788.3

688.0

**34.7** 32.6

**in** **% of total** population

71.5 69.8

per 1000 of population

14.0

10.0

14.8

9.5

14.1

9.1

150

1854

8.1

22.9

5.3

63.7

share of branch GVA in 1995

22.9

,63.7

Population density: Data for population density refer to data on the end of period.

Urban population: Data for urban population refer to data on the end of period.

**U2_**

European Currency Unit

in % of Total Gross Value Added

g -agriculture

rj] -industry

Q -construction

rj -services

- - Others

NATIONAL ACCOUNTS

Gross Domestic Product (Current Prices)

Gross Domestic Product (Current Prices)

Gross Domestic Product

Gross Domestic Product

Final consumption expenditure _<_

-of households and NPISH

-of general government

Gross fixed capital formation

Exports of goods and services

Imports of goods and services

Final consumption expenditure

-of households and NPISH

-of general government

Gross fixed capital formation

Exports of goods and services

Imports of goods and services

1990 1991 1992 1993 1994 1995

**in Millions of National Currency**

797.7 1832.0 13157.7 22059.9 30102.9 41503.4

**in Billions** **of** **ECU**

1.4 1.9 2.8

**in Purchasing Power Standard per capita**

3508.9 3592.8 3917.2

_**'/%**_ **change over the previous year**

-8.5 -1.8 4.3

**in** _**'/»**_ **of** **Gross** **Domestic Product**

77.8

57.5

20.3

23.9

68.9

73.1

81.8

59.4

22.4

26.4

78.6

89.8

81.8

58.0

23.8

25.6

75.8

84.0

77.7

64.4

13.2

67.8

54.7

13.1

31.9

27.0

71.0

55.2

15.8

60.0

54.1

6.0

4.0

2.0

0.0

-2.0

-4.0

-6.0

-8.0

10.0

GDP (% Change over the previous year)

_**&tK**_
Hrr%r

## _~_ _\mm [r] ^mm^W-M_

**V.** **"'•-Jr***

##### **u3**

**MAIN ECONOMIC INDICATORS**

Inflation rate

Industrial production volume indices

Gross agricultural production volume indices

Unemployment rate (ILO methodology)

   - Total

   - less then 25 years

   - 25 years and more

Gross Foreign debt

Balance of payments

-Exports of goods

-Imports of goods

-Trade balance

-Services, net

-Income, net

-Current account balance

-Capital and fin. acc.(excl. reserves)

-Reserve assets

1990 1991 1992 1993 1994 1995 1996

**percentage change over the previous year**

1076 89.8 47.7 29 23.1

**previous year** **- 100**

81.3

88.3

**in** **%** **labour force**

6.6

11.3

5.8

in Billions **of** USD

97

85.8

7.6

11.8

6.9

101.9

98.8

1857

-2531

-674

379

3

-166

245

-106

2064

-3122

-1058

512

7

-443

565

-101

0.022 0.17 0.212

in millions **of** USD

457

-547

-90

42

-13

36

52

-82

812

-957

-145

75

-13

22

219

-195

1329

-1684

-356

105

-30

-165

167

-31

**Inflation rate:** Percentage change of yearly average over the previous year - all items index (data are based on national CPIs which are
not strictly comparable)

**Industrial production volume** indices: Industrial production covers mining and quarrying, manufacturing and electricity, gas and water
supply (according to the NACE Classification Sections C,D,E). Index of Industrial Production covers total industrial production
including estimates for enterprises up to 19 employees.

**Gross agricultural production volume indices:** The gross agricultural output has been calculated in 1993 prices.

**Unemployment rate (by ILO methodology):** Percentage of the unemployed in labor force. This rate is derived from LFSS (Labor Force
Survey) observing the following ILO definitions and recommendations:
_**Labor force**_ employed and unemployed persons in the sense of the ILO definitions stated below.

_**The employed**_ all persons aged 15+, who during the reference period worked at least one hour for wage or salary or other
remuneration as employees, entrepreneurs, members of cooperatives or contributing family workers. Members of armed forces and
women on child-care leave are included.

_**The unemployed**_ all persons aged 15+, who concurrently meet all three conditions of the ILO definition for being classified as the
unemployed: (i) have no work, (ii) are actively seeking a job and (iii) are ready to take up a job within a fortnight.
Data refer to the Estonian Labour Force Survey 1995 (ELFS 95). ELFS 95 was carried out in January-April 1995. The questions
were asked about the years 1989-1995. The next survey will take place in April-June 1997 and will collect information since the
beginning of 1995. According to this for the time being, annual average numbers about 1993 and 1994 can be given. The
object of ELFS 95 were people who in 1995 were 16-75 years old. In 1989 the same people were 10-69 and in 1994 15-74 years
old. In order to guarantee the comparability of the data between years 1989-1995, data presented in the tables are about
population aged 16-69.

**Gross foreign debt:** Debt is extracted form the OECD's External Debt Statistics.

**Balance of payments:** Data is derived from IMF database, their comparability with respective EU statistics can not be guaranteed, but
balance of payments is compiled mainly in accordance to IMF standards. Balance in trade of goods in accordance with balance
of payments principles. Exports and imports are both in f.o.b. values. Net income includes direct, portfolio and other
investment income, compensation of employees. Current account balance by definition of IMF 5th Manual, capital transfers are
excluded. Reserve assets: it means changes in reserve assets during the year; (+) signifies an increase, (-) a decrease in reserve

assets.

**i»H-**

**FOREIGN TRADE**

**1993** **1994** **1995** **1996**

**Imports and exports** (current prices) **in millions of USD**

```
1655.7

1302.7

 -353

```

**previous** **year-** **100**

**in** ***/.** **of total Import**

**14.8**

3

13.7

0.7

9.1

18.1

28.8

11.8

**in** **%** **of** **total** Export

21.3

**10.8**

7.1

0.2

7.1

18.5

16.8

18.2

previous **year -** **100**

141.3

```
 2539

1836.7

-702.3

```

13.1

3.7

11

0.7

9.6

20

29.8

12

15.7

11.9

7.1

0.2

8.3

18.8

19.9

18.1

137.4

124.7

       - Imports

       - Exports

-Balance of trade

External trade volume indices

       - Imports

       - Exports

**Structure of Import by SITC (current prices)**

       - (0+1) food and live animals, beverage and tobacco

        - 2 crude materials, inedible

        - 3 mineral fuels and lubricants

        - 4 animal and vegetable oils etc.

        - 5 chemicals and related products

       - 6 manufactured goods classified chiefly by material

       - 7 machinery and transport equipment

       - 8 miscellaneous manufactured articles

Structure of export by SITC (current prices)

        - (0+1) food and live animals, beverage and tobacco

        - 2 crude materials, inedible

        - 3 mineral fuels and lubricants

        - 4 animal and vegetable oils etc.

       - 5 chemicals and related products

        - 6 manufactured goods classified chiefly by material

       - 7 machinery and transport equipment

        - 8 miscellaneous manufactured articles

External trade price indices

        - Imports

        - Exports

```
894.7

804.4

-90.4

 13.7

 3.2

 15.2

 0.6

 7.7

 15.5

 32.3

 11.8

 22.8

 10.3

  7

 0.2

  5.3

 18.8

 18.5

  17

```

3204.1

2077.9

-1126.3

14.7

3.5

9.3

0.5

10.8

19.9

29.6

11.7

15.2

10.1

6.4

0.1

9.7

20.6

19.8

18.1

Imports and exports (current prices); Structure of external trade by SITC (current prices): Trade data exclude direct re-exports,
trade in services and trade with customs free zones as well as licenses, know-how and patents. The data are based upon the special
trade system and are regularly updated. _Trade_ _aassifications:_ Estonia is using the commodity classification according to the
_Combined Nomenclature._ _Imports_ are recorded on _CI_ _F_ basis and are captured with the date'of acception of the customs declaration
by customs authorities. _Exports_ are recorded on _FOB_ basis and are captured with the date of acceptation of the customs declaration
by customs authorities. The customs statistics are utilised for monitoring of foreign trade data. Eurostat has converted National
Currencies to the US dollar by applying the International Monetary Fund annual average exchange rates.

External trade price indices: The price indices have been calculated by "unit value" method.

**Wb**

**FOREIGN TRADE**

Structure of imports by main countries (current prices)

1st partner         
2nd partner

3rd partner

4th partner

5th partner

others

Structure of exports by main countries (current prices)

1st partner

2nd partner

3rd partner

4th partner

5th partner

others

**Structure of export by main partners**

**in** **1996**

**FI**

**18.4%**

**38.1%**

FI

RU

DE

SE

NL

RU

FI

SE

LV

DE

**Netherlands**

**Russian Federation**

**Sweden**

Ufe

1993 1994 1995 1996

**in V. of** **total** **imports**

27.9

17.2

10.8

8.9

3.6

31.6

22.6

20.7

9.5

8.6

8

30.6

FI

RU

DE

SE

NL

RU

FI

SE

LV

DE

29.9

16.8

10

8.9

3.1

31.3

23.1

17.8

10.8

8.2

6.8

33.3

FI

RU

DE

SE

NL

FI

RU

SE

LV

DE

29.2

13.5

10

8.2

3.3

35.8

18.4

16.5

11.6

8.3

7.1

38.1

**in** **%** **of** **total** **exports**

32.6

16.1

9.6

8.5

3.1

30.1

21.5

17.6

10.8

7.5

7.2

35.4

FI

RU

DE

SE

GB

FI

RU

SE

LV

DE

**Structure of** **import** **by main partners**

**in** **1996**

**35.8**

**NL**

**RU**

**SE**

**DE**

**FI**

**GB**

**LV**

**Germany**

**Finland**

**United Kingdom**

**Latvia**

**SOCIAL INDICATORS**

**1991** **1992** **1993** **1994** **1995**

**Population on 1 January** **thousand**

1526.53 1506.93

1562.22

**Proportion of population by age (1 January 1995)**

y0_14

yl5_24

y25_44

y45_64

y65_max

**Live** births

Deaths

**Infant** deaths

    - Less than 1 year

-Stillbirth

Marriages

Divorces

Crude marriage rate

Crude divorce rate

Natural growth rate

Net migration rate

Total population growth rate

Total fertility rate

Infant mortality rate

Late foetal mortality rate

Life expectancy

    - Males

    - Females

Life expectancy

    - Males

    - Females

1570.45

19320

19705

258

148

10292

5738

6.57

3.66

-0.3

-5.13

-5.37

1.77

13.35

7.6

iVV

**in** ***/•** **of** **total** **population**

**total/lumber**

```
18006

20115

 285

 175

 8878

 6651

```

```
15170

21267

 239

 121

 7745

 5757

```

1491.6

20.7

14.2

28.5

23.5

13.1

4.7

5.0

14.8

61.7

74.3

12.0

16.1

per 1000 of population

14178

22150

205

126

7378

5606

4.90

3.70

-5.30

-5.10

- 10.40

14.50

8.81

5.75

4.31

-1.37

-21.9

-23.27

1.69

15.83

9.63

5.11

3.8

-4.02

-9.08

-13.1

1.45

15.75

7.91

at 65 years

**LABOUR MARKET**

Economic Activity Rate (ILO methodology)

Average employment

Unemployment rate (ILO methodology)

          - Total

          less then 25 years

          25 years and more

Registered unemployment (end of period)

Average paid employment indices by NACE classes

          Agriculture, hunting, forestry and fishing

          Mining and quarrying

          Manufacturing

          Production and distribution of electricity, gas and water

          - Construction

          Transport, storage and communication

Monthly wages and salaries indices

-real

         - nominal

1993 1994 1995 1996

**in** **%** **of** **population age** **+15**

**70.5** **70.4**

**in thousand**

**703** **687**

**in** _**%**_ **of** **labour** **force**

**6.6**

**11.3**

**5.8**

**7.6**

**11.8**

**6.9**

**in */•** **of** **economically active population**

**4** **4.1** **4** 4.3

1993 1994 1995 1996

**previous year** **- 100**

**74.7**

**96.3**

**86.4**

**105**

**88.6**

**98.8**

**83.3**

**101.5**

**95.2**

**109.6**

**95.6**

**100**

Economic activity rate (ILO Methodology) - Percentage of labor force in the total population aged 15+. This rate is derived of LFSS
(Labor Force Survey) observing the following ILO definitions and recommendations:
_Labor force_ employed and unemployed persons in the sense of the ILO definitions stated below.

_The employed_ all persons aged 15+, who during the reference period worked at least one hour for wage or salary or other
remuneration as employees, entrepreneurs, members of cooperatives or contributing family workers. Members of armed forces and
women on child-care leave are included.

_The unemployed_ all persons aged 15+, who concurrently meet all three conditions of the ILO definition for being classified as the
unemployed: (i) have no work, (ii) are actively seeking a job and (iii) are ready to take up ajob within a fortnight.

Unemployment rate (by ILO methodology): - Percentage of the unemployed in labor force.

Average employment and Average paid employment indices by NACE classes:. The data cover also all budgetary, subsidised
organisations and persons with secondary job are included. Armed forces, apprentices, employees on child-care and additional childcare leaves are excluded.

Unemployment rate (by ILO methodology, Average employment and Average paid employment indices by NACE classes:

Data refer to the Estonian Labour Force Survey 1995 (ELFS 95). ELFS 95 was carried out in January-April 1995. The questions
were asked about the years 1989-1995. The next survey will take place in April-June 1997 and will collect information since the
beginning of 1995. According to this for the time being, annual average numbers about 1993 and 1994 can be given. The
object of ELFS 95 were people who in 1995 were 16-75 years old. In 1989 the same people were 10-69 and in 1994 15-74 years
old. In order to guarantee the comparability of the data between years 1989-1995, data presented in tables are about population
aged 16-69.

Registered unemployment (end of period): Registered unemployment in per cent - percentage of unemployed registered in civil
economically active population, based on Labour force sample survey (LFSS). Data of the State Labour Market Board. Registered
unemployment covers unemployed job seekers registered in state employment offices. The unemployment rate is the share of the
registered unemployed job seekers from the population between 16 and pension age.

##### usr

**PUBLIC FINANCE**

Government budget

-Consolidated central government revenue

-Grants

-Consolidated central government expenditure

-Consolidated general government expenditure

-Consolidated central government deficit/surplus

-General government deficit/surplus

Government budget

-Consolidated central government expenditure

-Consolidated general government expenditure

-Consolidated central government deficit/surplus

-General government deficit/surplus

1990 1991 1992 1993 1994 1995

**in** **million*** **of national currency**

**448.1**

**14.9**

**404.7**

**539.9**

**58.3**

**73**

**2994.8**

**219.9**

**3024**

**3917**

**190.7**

**272.4**

6320.3

243.7

6088.5

7805.7

475.5

539.2

**in** ***/•** **of** **Uross** **Domestic Product**

**22.1**

**29.5**

**3.2**

**4.0**

**21.2**

**27.5**

**1.3**

**1.9**

27.5

35.3

2.2

2.4

10566.8

9590.3

11282

976.5

973.4

31.9

37.5

3.2

3.2

**Government budget: These data relate to central and general government as published in the IMF's** _**Government Finance Statistics**_
_**Yearbook (1996)**_ _**(GFSY);**_ **included also is the country's presentation in the** _**GFSY.**_

**Because the** _**GFSY**_ _**docs**_ **not present statistics for general** **government,** **but for individual levels of government separately, the**
**consolidated series presented here were obtained from central and local government data and adjusted in consolidation for the**
**identified intergovernmental transfers.**

**Even though the statistics cover the central and local government published in** _**GFSY,**_ **the coverage may not be exhaustive if**
**some central or local government units are not included in that coverage. A measure of the exhaustiveness of the** **coverage** **can**
**be obtained by comparing in the** _**GFSY**_ **the note on the coverage of data for individual countries with the list of central and local**
**government units provided.**

**It should be noted that the** **deficit/surplus** **used here is equal to revenue and grants minus expenditure, and does not take**
**lending minus repayments into account (sec further below).**

**The netting of inter-government transfers** **carried-out** **in the attached tables is limited to the current and capital transfers**
**consisting of the identified grants and current and capital subsidies between the levels of government. Other types of**
**transactions occurring between government levels, such as the payments of taxes and employers' social security contributions,**
**and the reciprocal purchases of goods and services are not normally classified as inter-governmental transfers have not been**
**eliminated in the consolidation process. Finally, whether the absence of data for current and capital transfers should be**
**attributed to the absence of transfer or to lack of data is unclear; in all cases absence of information on transfers have been**
**deemed to represent zero-transfers.**

**a.** _**Government expenditure**_ **consists of general government cash expenditures on current and capital goods and**
**services, interest payments and current and capital transfers but excludes non-cash transactions.**

_**b.**_ _**Deficit/surplus**_ **equals cash revenue and cash grants minus cash expenditure. This measure of** **the deficit/surplus**
**differs from that used in GFS which equals cash revenue and cash grants, minus cash expenditure, minus net lending. This**
**exclusion of net lending(consisting, in the** _**GFS**_ **methodology, of operations in financial assets and liabilities carried out for**
**specific policy purposes, rather than for liquidity purposes) brings the measure of** **the deficit/surplus** **presented here closer to the**
**national accounts concept of** **net borrowing/net** **lending.** **Also,** **as a result of** **this** **exclusion, receipts from privatisation (classified**
**as repayments in the** _**GFS**_ **methodology) do not enter in the determination of the** **deficit/surplus** **presented in the attached tables**
**(and therefore do not reduce the deficit).**

##### **Ut**

**FINANCIAL SECTOR**

Monetary aggregates

    - Monetary aggregate M1

   - Quasi money

Total reserves ( gold excluded, end of period)

Average short term interest rates

    - lending rate

    - deposit rate

Official discount rate (end of period)

USD exchange rates

Average of period

End of period

ECU exchange rates

Average of period

End of period

1990 1991 1992 1993 1994 1995 1996

**Billions** **(10*9) of** **US Dollars**

0.38

0.06

0.51

0.13

0.72

0.19

0.72 0.87

0.06 0.13 0.19 0.27

**Millions** **(10*6) of** **US Dollars**

27.3

23.1

11.5

**•**

386.12 443.35 579.91 636.82

***/. per annum**

27.3 23.1 16 13.7

11.5 8.7 6.1

6.3 5.4 4.3 3.6

**IUSD-...EEK**

16

8.7

4.3

6.3

5.4

12.991

12.39

15.453

15.240

11.465

11.462

14.996

15.064

12.034

12.44

15.758

15.587

12.912

15.635

13.223

13.878

**1** **ECU= EEK**

15.484

15.483

Monetary aggregates (end of period): _Money (Ml)_ Includes demand deposits and currency outside banks. _Quasi money_ Include
time, savings and foreign currency deposits. Monetary aggregates are calculated on a monthly basis; according to the monetary
survey Ml comprises currency outside banks and demand deposits (excluding government deposits), Quasi-money comprises time
deposits, savings deposits and foreign convertible and non-convertible currency deposits (excluding government deposits). Eurostat
has converted National Currencies to the US dollar by applying the International Monetary Fund annual end of period exchange

rates.

Official discount rate (end of period):
market-determined.

No official discount rate, no official central bank base or primary rate either; all the rates are

Average short term interest rates: Data are extracted from the IMF's monthly International Financial Statistics (IFS). Average short-term
lending and deposit rates relate to period averages. _Lending rates_ generally consist of the average interest rate charged on loans
granted by reporting banks. _Deposit rates_ relate to average demand and time deposit rates or average time deposit rates. These rates
may not be strictly comparable across countries to the extent the representative value of the reporting banks and the weighting
schemes vary.

Total reserves (gold excluded, end of period): The statistics on official foreign reserves are extracted from the IMF's mondily
International Financial Statistics (IFS). Total reserves (gold excluded) are defined as the sum of central bank holdings of foreign
currencies and other (gross) claims on non-residents; this definition excludes claims on residents denominated in foreign currency.
According to the definition; official foreign reserves are calculated at market exchange rates and prices in force at the end of the
period under consideration. Total reserves (gold excluded) published in IFS may differ from the figures published by the national
authorities. Some factors contributing to possible differences are the valuation of the reserve position in the Fund, and a different
treatment of claims in non-convertible currencies.

USD exchange rates:

Internationales".

International Monetary Fund exchange rates as present in the publication: "Statistiques Financières

_**lo**_

**INFLATION (12 months changes)**
Percentage change of the CPIs with the current month compared with the corresponding month of the previous year (t/t-12)

Jan Feb **Mar** Apr May Jun **Jul** Aug Sep **Oct** Nov **Dec**

```
 1993

 1994

```

25.2

29.3

27.2

26.7

29.2

24.7

35.9

29.5

27.8

28.4

27.4

21.8

25.9

20.1

28.4

17.3

27.8

23.1

28.2

16.4

28.8

14.9

```
1995

1996

```

39.0

28.7

Inflation (% change of CPI)

lafll _**mm**_

**•*** _**\~4z,**_ _**i**_

Infiation (12 months changes): Inflation rates (12 months changes) are percentage changes of the CPIs with the current month
compared with the corresponding month of the previous year. Inflation rates are based on national CPIs which are not strictly
comparable between candidate countries or with those based on EU HICPs (different methods, concepts, practices in the
calculation of CPIs).

##### **i a**

**INDUSTRY**

Structure of GDP by economic activities (NACE, current prices)

    - Mining and quarrying

    - Manufacturing

    - Production and distribution of electricity, gas and water

Industrial production volume indices by NACE classes

-Total

    - Mining and quarrying

   - Manufacturing

    - Production and distribution of electricity, gas and water

1993 | 1994 1995 1996

**in** % **of Grow Domestic Product**

**1.7**

**17.1**

**3.2**

**81.3**

**72.8**

**81.4**

**83.7**

**1.6**

**16.6**

**2.9**

**previous** **year-** 100

**97**

**98.9**

**96.9**

**97.6**

**1.5**

**15.2**

**3.5**

**101.9**

**95.6**

**102.9**

**98**

**Industrial production volume indices by NACE classes:** **Industrial production covers mining and** **quarrying,** **manufacturing and**
**electricity, gas and water supply (according to the NACE Classification Sections C,D,E). Index of Industrial Production covers total**
**industrial production including estimates for enterprises up to** **19** **employees. Electricity, gas and water supply covers only energy**
**production (NACE Rev.** **I.:** **40101,40301).**

**INFRASTRUCTURE**

1985 1990 1995 1996

in Km per 1000 Km2

Railway network

Length of motorways

Number of inhabitants per passenger car

**22.3** **22.7** **22.6** 22.6

Kilometre

**60** **64** 66

inhabitants

**6.6** **6.5** **3.9** 3.6

tZ2_

**AGRICULTURE**

Land area by land-use categories

    - total

    - agricultural land

    - forest

    - arable land

   - permanent meadows and pastures

Agricultural land by legal status

    - state enterprise

   - Cooperatives

-others

Share of GDP

    - Agriculture, hunting, forestry and fishing (Nace A+B)

Gross agricultural production volume indices

Main crops by area

    - Cereals

-of which: wheat

    - Potatoes

    - Sugar beet

    - Fodder beet

Main crops by yield

    - Cereals

    - of which; wheat

    - Potatoes

    - Sugar beet

    - Fodder beet

Sales or procurement of animal for slaughter

     Pigs

    - cattle

    - poultry

Livestock breeding intensity (end of period)

    - cattle

    - of which: cows

    - sheep

    - pigs

1992 1993 1994 1995 1996

**in 1000 Hectares**

**V**
**4522.7** **4522.7** **4522.7** 4522.7

**4522.7**

**1449.5**

**2016.2**

**1127.8**

**306.9**

4522.7

1449.5

2016.2

1127.8

306.9

1127.6

306.9

**1455**

**2021.8**

**1127.6**

**312.5**

**4522.7**

**1454.1**

**2016.6**

**1128.9**

**310.3**

**in** **%** **of agricultural land**

**1.9**

**36.4**

**61.7**

**1.9**

**33.7**

**64.4**

1.3

29.2

69.5

1992 1993 1994 1995 1996

**in** **%** **of** **Gross** **Domestic Product**

9.8 8.9 7.1

**Previous year -** **100**

88.3 85.8 98.8

**in 1000 Hectares**

423.1

43.5

46

1

14.1

20.6

144.5

21.6

21.0

126.4

250

290.2

46.9

36

0

8.7

375.1

50.3

43

0

319.5

34.2

40

1

**in** **100** **kg/Hectares**

304.3

38.6

37

0

16.9

20.0

145.6

317

16.0

16.7

141.1

212

1992 1993 1994 1995 1996

**in** **1000** **tons of live weight**

52.2

54.8

8.5

52.5

90.8

7.5

**45.9**

64.2

9.9

**heads per** **1000** **Ha of** **agricultural** **land**

48.1

52.4

8.3

240

119

29

318

156

57

288

145

42

256

128

34

**heads per** **1000 Ha** **of arable land**

376:8 407 398.4 278.9

**Gross agricultural production volume indices:** The gross agricultural output has been calculated in 1993 prices.

**Sales** or **procurement of animals for slaughter:** Sales of animals for slaughter, killed animals in enterprises and private farms,
household plots for sales, own consumption meat.

_**\Z2>**_

**Estonia**

**1995**

Legend:

A / Country boundary

A / Region boundary

**COUNTRY NAME**

**REGION NAME**

_**CTTYNAME**_

Selected major **settlements:**
(1 000 inhabitants)
o 200-250

**•** **250 - 500**

**•** **500-1000**

  -  - 1 000

General information about the country:
Age groups (in years):

<15

#### **^ ^ _ wm**

15- 65

>65

Living standard (in 1993): ECU 1 003

**(aOPparoaprta)**

Area: 45 277 km [2 ]

Administrative regions: 15 counties

Population: 1 483 900

Saura*: **Statistical** Offlo* of **Estonia**

**Cartography and** **geographic** **Information** **managamant:** QI80O

**25** **75** **km**

**eurostat**

**ISSN** **0254-1475**

### COM(97) 2006 final

# **DOCUMENTS**

###### EN 11 01 06 Catalogue number : CB-CO-97-374-EN-C ISBN 92-78-22862-1

Office for Official Publications of the European Communities

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