Economy expert: Estonia has no other way but deflation
12.05.2009, 12:58 Estonia is 20 pct more expensive than
international competitiveness would allow and even modest inflation is harming
economy’s recovery, Heido Vitsur, an economy expert at Estonian Development Fund
told Eesti Päevaleht.
“Deflation is usually something that is terrifying. But Estonia has no other
way than deflation is it doesn’t want or can’t devalue the EEK,” Vitsur said.
“Estonia wasn’t competitive even years ago and it’s so even less with its
expenditures and productivity. The level of expenditures can be taken down by
devaluation or deflation in the short term. In longer perspective the
productivity growth will also help, but it’s not possible to count on it in the
time of sharp crisis,” Vitsur said.
He brought out three reasons why it’s not possible to compare Estonia to
other countries when talking of deflation.
First, not a single country besides Estonia has set euro as their first
priority, but coming out of the crisis.
“These two are far from being concurrent. Of course we’re talking of how big
aid packages can be used in one or other case,” Vitsur said.
“The other reason is that Estonia is among those countries that let huge
consumption boom on foreign credit to evolve. Accidentally we’re among weak
countries in this group and can’t hope on measures which are used by GB, US or
even Ireland. It is, to take huge loans to enliven the economy. No one is
lending money to us for they don’t believe in our capability to service bigger
national loan than we already have. So the 3 pct deficit level is already given
by the size of reserves and borrowing capability (considering that the crisis
won’t be over this year),” Vitsur said.
“Thirdly – if Estonia had understood importance of a policy that recons with
the cyclic nature of economy couple of years ago, it would have given us more
liberty is using economy’s incentive programs and we wouldn’t have increased our
expenditures to such level from which coming down is painful and complicated,”
the economy expert said.
Ultrafast halting like ours is complicated and may bring along downwards
spiral which is difficult to control and also social tensions:” But the main
problem, as mentioned before, is elsewhere – Estonia’s economy was uncompetitive
years ago with its high expenditures that didn’t match productivity,” Vitsur
said.
He said that the situation hasn’t improved, rather worsened.
“The currencies of nearly half of our trading partners have devalued sensibly
in past 6 months and that has worsened our competitiveness and hopes for
recovery,” Vitsur said.