madis muller : new models in northern europe? speech by mr madis muller, deputy governor of the bank of estonia ( eesti pank ), at a symposium organised by the konrad - adenauer - stiftung, berlin, 28 november 2012. * * * ladies and gentlemen, thank you for this excellent opportunity to discuss together with colleagues from latvia and lithuania the experience of the three baltic countries during the financial crisis. while the situation of each country is undoubtedly different, we can still consider if there are any lessons one could learn from the baltic cases. in my opening comments, i would like to address specifically the question of what is the best pace for economic adjustments once a country has been hit by a crisis. we hear today many suggestions that austerity requirements have gone too far and that we should allow more time for implementing difficult reforms. first, let me start by saying that in more open economies, the crisis was felt almost instantly. in small and open countries such as the baltic countries, there was no domestic demand to substitute for the lost export income. the economic reality had changed very suddenly. the eu countries could be divided into two groups. the countries that had a higher export dependence had to react fast to the changed economic environment. this applies especially to smaller countries, including the baltic states, although germany ’ s economy is also heavily reliant on exports. those small countries in particular had to accept the new economic reality of lower demand, higher unemployment and forced fiscal consolidation due to a fall in tax income or borrowing difficulties. the other group consists of bigger or more closed economies that were relying on domestic demand. they were able to smooth the initial impact of the crisis with more extensive government support measures. there was also the expectation that the crisis would be temporary. with the benefit of hindsight we know that we were not facing a temporary bump on the road, but a more fundamental need for adjustment. the initial smoothing of the shock may have been even more costly as it resulted in a higher level of public debt. secondly, the required policy adjustment involves a dimension which we now consider critical : the speed of reacting and the decisiveness of policy actions. the baltic countries have learned it firsthand through their experience, which of course is the hard way. there are few economists today that would fundamentally question the need for fiscal consolidation and structural reforms in europe, as the crisis has clearly turned out not to be temporary. however, we all know it is politically difficult to cut government spending

must have the opportunity to make a definite pre - calculation as to the cost of these assets to him and the price at which he will have to pass them on in order to make both ends meet. /... / therefore, maintaining the firm value of a monetary unit is an enormous, difficult, and very responsible task in every country. to sum it up, i would like to express my many thanks to all the estonians : to every corporate manager, state official, banker, and politician who has supported the central bank in performing its difficult task by having faith in it. without your trust in the past 12 years we would not have reached the point where we are standing now. once again - thank you very much!