Economy expert: Estonia has no other way but deflation

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.

Source http://balticbusinessnews.com/default2.aspx

Add comment:

Subject:
Name:  
email:
Code: 

Remark:

Email not will be shown.

Tags forbidden.