Policies have been adopted to further improve labor market flexibility. While labor and product market flexibility are already comparatively high, legislation that was formulated before the downturn is to take effect in mid-2009 to reduce layoff costs, align the labor law with private contract law, streamline procedures, and simplify conflict resolutions.
At the same time, the social safety net is to be strengthened by increasing unemployment compensation benefits, which is crucial in light of the downturn but may be postponed for budgetary reasons.
As elsewhere, the Estonian economy’s flexibility and resilience are now being tested even more than during the 1998 Russian crisis. The authorities have chosen to tackle them within the currency board arrangement, which has served Estonia well, although euro adoption would provide a more secure setting.
With inflation falling, a strengthening of the fiscal position to continue to meet the Maastricht criterion is appropriate, as well as to secure longer-term sustainability. The financial sector has weathered pressures thanks to large buffers and supportive policies. Further enhancing an already flexible labor market should support the response to the current downturn and to maintain external competitiveness—vital to contain the growth of external indebtedness.