which until now have been either directly or indirectly protected by the state. and principal solutions to this problem shall not differ from the decisions made in the first half of 1990s. it is true that, for example, opening up of the electricity market to free competition is definitely more time - consuming than privatisation of many industrial enterprises. but, surely, restructuring of the electricity sector does not differ in principle from the reform in the banking sector. in both cases the state must ensure the availability of the critical infrastructure in estonia and communication with the external markets - in one case, it means payment systems, in the other case interconnections with the european and scandinavian grids. in both cases the government has to ensure supervision over the market actors ’ behaviour and establish clear rules. in both cases the government must have action plans or guidelines for crisis management. and when these guidelines and relevant national policies are in place, there will be no impediments to the complete opening of the market. the task of the government is not to delay the opening of the market but rather to speed it up. i am positive that, like in the banking sector, the society will benefit from this. it will result in more efficient production, lower prices, better service quality and curb the power of the monopolistic producers. to date, as in the early 1990s, we again face the question of what is the right fiscal policy. of course, today this problem is raised in a slightly different way. but, in essence, it is the same question - what fiscal policy shall ensure the stable development of the estonian economy within the fixed exchange rate regime and as part of the euro area. i shall return to this question towards the end of my presentation. thus the economic policy key issues we are facing in the beginning of the 21st century resemble in many aspects the problems we tried to resolve in the beginning of 1990s. we have achieved progress in finding solutions to some of the problems, others have remained unresolved. one thing is clear - undue postponement of tough issues is no good to anybody. if we want to be treated as equal partners in the european union, if we want to sustain the rapid growth rate and growing income level, we must tackle these problems with similar resolution and energy we did 10 years ago. b. challenges facing estonian economy on its way to the european union - internal policy so - what are today ’ s and tomorrow ’ s challenges facing estonian economy? filled with pride for the

world financial systems have become more pro - cyclical than before. in that case, early tightening may pre - empt the possibly devastating effects of asset price volatility and loan losses once the economy starts to cool down. that might be even more relevant if credit growth is high in the early stage of the cycle. this approach has particular appeal for policy makers under the currency board as the active use of monetary measures is excluded and reserve requirements are essentially the only available monetary tool. in these circumstances, tightening prudential measures early on might seem a very reasonable thing to do. it is important to underline that in heavily bank dominated financial system, banking regulations might serve also as an instrument to affect domestic demand more directly than under other circumstances. indeed, bank of estonia increased capital adequacy ratio on more or less cyclical grounds in 1996 and tightened capital requirements further at the onset of asian contagion, before the peak of the cycle. having said that, one should not look over the possible caveats of this " macro - prudential " policy approach. one obvious shortcoming is that as financial markets do mature and financial instruments become more complex, tightening banking regulations will simply intensify financial disintermediation. in that case, major capital flows will be channeled to less regulated areas that will bring about new risks of potentially systemic nature. the second problem is that the determination of the exact stage of business cycle is simply impossible. the longer it takes, the more weight is given to the consideration whether the tightening would not emerge too late and contrary to the best intentions, would contribute to pro - cyclical behavior of banks. to be honest, we have recently thought what approach would be suitable for us to take at present and we have understood that the topic is debated also in several present eu member states. vii. conclusions after i prepared this presentation, i started even more to support the old truth in slightly modified wording – maintaining financial stability is more the art than the science. maintaining the financial stability is the mission impossible for one institution to carry out in isolation, be it the central bank or any other authority. what is needed is shared data, shared analysis that brings together macro and micro prudential aspects of financial stability, common set of principles to fall back in case of systemic crisis, and perhaps most essentially, there is a need for common mindset. i would like to highlight one essential aspect of financial stability. the pan - european consolidation of banking industry