Presentation by Dr. Raul Eamets, Professor of Macroeconomics, Head of the Institute of Economics, University of Tartu (Estonia) at the Bank of Latvia conference "Economic Adjustment under Sovereign Debt Crisis: Can Experience of the Baltics Be Applied to Others?" Riga, November 2, 2012.

1. Baltic economies: more pain in
the past, more gain in the future?
Raul Eamets
University of Tartu
"Economic Adjustment under Sovereign Debt Crisis:
Can Experience of the Baltics Be Applied to Others?"
Bank of Latvia 02.11.2012.

2. Source: Morten Hansen & Raul Eamets

3. Our GDP is back in 2005
200=100
190
EU27
180 EA
DK
170 DE
160 EE
IE
150 LV
LT
140
NL
130 PT
SK
120 FI
110 SE
UK
100 US
JP
90
2000 2002 2004 2006 2008

4. Estonia: two restrictive
supplementary budgets in 2009
• 10,6% cut in operational expenditure of the central government
– including the wage bill by 9,6% and administrative costs by 12%.
• Stricter limits on new borrowing by municipalities.
• Suspending contributions to the second pillar pension system for until
the end of 2010;
• increase in value added tax (from 18% to 20%)
• twice higher taxes on natural gas
• considerable increases in different environmental duties

5. Fiscal Policy in Estonia
Budget Budget deficit/surplus
surplus/deficit
% of GDP
% of GDP
4,0
3,0
2,0
1,0
0,0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
-1,0
-2,0
-3,0
-4,0

6. What would have happened without action…
"If nothing had been done" scenario
public balance
% of GDP
4,0
2,0
0,0
2002 2003 2004 2005 2006 2007 2008 2009* 2010*
-2,0
Maastricht criterion
-4,0
-6,0
-8,0
-10,0
-12,0
-14,0

7. Labour market flexibility
…How quickly labour market adjusts to
macroeconomic changes
In Baltics:
Wage reduction
Working hours declined
Employment declined

8. Employment changes: construction was
most affected

9. Wages are flexible
• Union density and collective bargaining coverage is
very low
• Latvia - 20% salary cuts in public institutions
• Estonia – 9,6% salary cuts in public institutions
• Estonia - The total salary income of Estonian
population decreased around 10 billion EEK which
was around 4% of GDP

10. Table 11. Annual wage changes in the Baltic States by economic sector
Industry Estonia Latvia Lithuania
2008 2009 2008 2009 2008 2009
Total economy 13.8% -4.6% 20.6% -4.0% 19% -4%
Primary 17.7% -7.4% 17.2% -4.6% 23% -8%
Industry 11.5% -3.5% 13.4% -4.0% 18% -4%
Manufacturing 10.8% -3.9% 19.8% -2.1% 18% -4%
Energy 17.0% 6.8% 5.6% -5.0% 16% 0%
Construction 8.3% -13.4% 19.0% -1.1% 10% -21%
Business services 12.3% -4.2% 21.0% -1.8% 19% -5%
Public services 17.4% -4.5% 20.2% -9.7% 22% -11%
Public administration 15.7% -7.6% 16.1% -18.0% 23% -10%
Education 20.4% -2.5% 23.4% -9.9% 26% 8%
Source: national statistical offices of Estonia, Latvia, Lithuania

11. Policy responces
Baltics versus EU 15
Baltic countries EU15
Government expenditures ↓ Government expenditures ↑(NL, SE, DE)
Government investnments ↓ Government investments ↑ (AT, DE, DK, NL, PT, SE)
Direct taxes ↑ Direct taxes ↓ (AT, DE, DK, ES. IE, SE, UK)
Excise duties↑ Excise duties↑ (FI, GR, NL, IE, UK)
Public pensions ↓ LAT Social welfare support ↑ (BE, IE, GR)
Business aid ↑ EST Business aid ↑ (ES, DE, FR. GR, NL, UK, PT)

12. Baltic countries: back in growth track
Source: The Economist, 14.07.2011

13. To get budget back to balance -
is it mission impossible?
Lessons from Estonia
1. Very strong political commitment –
in Estonian case it was EURO
2. Small economy ?
3. Strong Government
4. Weak trade unions  no public unrest
5. Flexible labour market

14. To sum up
Limited policy instruments to stabilise economy
Labour market should be "buffer" for macroeconomic
adjustment
Employment  working hours wages
 Socially costly  unemployment 
 Increasing competitiveness and "forced" restructuring,
low loan burden for future generations

15. Thank you!