Bank of Estonia: Taking a loan to support the economy is sensible
Borrowing is necessary to support the state during the current economic crisis caused by the impact of the coronavirus, the Governor of the Bank of Estonia Madis Müller said on Monday.
Speaking on ETV's "Esimene stuudio" on Monday evening, Müller said the bank does not consider borrowing to be the right thing to do when the economy is not in crisis. But he said the decision of the state to take a loan now is reasonable.
He said previously the bank has been thought of by many as too conservative when it comes to borrowing money. "But even now we can see that the economic downturn in Estonia will be very sharp, which we have to expect from this year, and this is the moment when it is definitely reasonable to provide additional support to the government, including by financing it with a loan," he said.
Müller confirmed the bank had been involved in the discussions surrounding the more then €2 billion package of economic measures which the government has introduced. But he said that politics has also played its part in the decision-making process.
"Unfortunately, it has not been 100 percent compiled only on the basis of expert recommendations, but the government, as a political body, added a policy that has already received some criticism. But a lot of good and necessary things are included in the package," he said.
But Müller said a distinction must be made between direct, short-term measures and long-term measures.
"First of all, what we are dealing with today, and which is largely in the supplementary budget and the government's first-aid package, is that we will survive the immediate, most serious crisis, preventing corporate bankruptcies and job losses, alleviating the loss of people's incomes which have been lost. This is a short-term activity," he said.
"When it becomes clearer when and how to get out of the emergency situation, then we should rethink what kind of support the Estonian economy needs to get back on the right track in the long run. Then it would be right to target well and think about where the necessary support should be directed so that it would be most useful in the long run."
Müller said the government can also get out of the crisis without cutting spending. He believes the government should direct more spending to the social sector and companies. "Whether the government should save somewhere is also a question of political choices, the more reasonable it is to ask, the longer the emergency and crisis will last," he added.
Müller said lowering excise duties is not an effective measure to stimulate the economy in the current crisis
He also reiterated Estonia's economy has been better prepared for the current crisis than a decade ago during the financial crash. Companies are stronger, as well as the entire financial sector, which was at the heart of the previous crisis.
"Banks are stronger, the government has incomparably better opportunities to borrow money. It brings many benefits. Maybe a clearer vision of what the recovery might look like. Although there is also a lot of confusion, because we do not know when it will happen, but at least we understand what the economic problems are about. The impact of the restrictions imposed on economic activity both in Estonia and in other countries is very immediate and rapid, but at the same time it is conceivable that the moment when these restrictions can finally be lifted, the recovery could be reasonably fast." he said.
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Editor: Helen Wright