While presenting the Bank of Estonia's annual report to the Riigikogu on Tuesday, Müller said the restrictions put in place to limit the spread of COVID-19 has brought a 4 percent economic recession to eurozone countries and the coming quarter will accentuate the fall even further.

"Forecasts depend largely on what health care will develop into in the second half of 2020. If we do not need restrictions to limit the spread of the disease and methods to alleviate the recession turn out to be effective, then the economy can reactivate in a quick manner. But that would not be enough to take us back to the level we were at before restrictions were set," Müller said.

Müller said economic activity will recover unevenly in both sectors and countries. "All forecasts currently are speculative, but recovery of eurozone GDP to pre-emergency levels is not likely to happen until 2022."

Measures put in place in Estonia have helped save jobs and also alleviate the growth of unemployment, he said. "Without help from the state, unemployment would have grown exponentially. The crisis brought a decline in tax revenues and a jump in social welfare. We can predict that pressure on the state budget to compensate will remain in place for forthcoming years."

Müller added the Bank of Estonia has evaluated the effects of restrictions in two separate scenarios. "If restrictions would have been lifted at the beginning of May, it would have brought a six percent drop in the economy for the rest of 2020. On the other hand, if restrictions would have lasted until August, we would have seen a recession of 14 percent."

"Even though restrictions have been mostly lifted, they still affect activity and people are predictably more careful making large purchases going forward. The Estonian economy is largely dependent on exports, so our recovery is also affected by the recovery of our target markets," Müller said.

Müller believes the state should demand a stake in enterprises in return for loans

For exiting the crisis, the Bank of Estonia recommends a focus on digitalizing industries, retraining of employees and investing in projects which support climate objectives.

"We are reaching a stage where more and more difficult decisions need to be made about who to help and in which manner to do so. When COVID-19 arrived, it was reasonable to ensure primary financial support for businesses and people who suddenly lost a large part of their income. When exiting the crisis, we have to be more selective about who to give money to," Müller said.

Müller said in the case of supporting large enterprises, their potential ability to compete in the distant future should also be taken into account.

Müller also stated that instead of direct loans, the state should instead offer partial sureties. He said that a partial state-owned stake could also be one of the conditions for a loan.

"The state should also take into account that financial aid should only be given to strategically essential enterprises and not just to support their current owners," Müller added.

"In such a complicated situation, lending any money to enterprises comes with a risk. Taxpayers have a right to expect adequate compensation, otherwise, in essence, the loan ends up in the hands of the company's owners. Instead of just handing out a loan, the government could also demand a right to own a stake in the company," Müller said.

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