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Müller: Growth might get stuck behind slow vaccination pace

Governor of the Bank of Estonia Madis Müller.
Governor of the Bank of Estonia Madis Müller. Source: Ken Mürk/ERR

Governor of the Bank of Estonia Madis Müller said on the "Otse uudistemajast" webcast that this year's economic growth could miss forecasts because of vaccination efforts progressing slowly. The new government aims to go over planned Recover Europe investments.

Müller said that while borrowing was sensible in the crisis, a long-term plan for covering expenses is needed now. "It seemed sensible to us in the central bank to liven up the economy with various measures during the crisis," Müller said in terms of the previous government's fiscal decisions.

Müller is not critical of the previous government's fiscal policy, while he admitted that some differences of opinion concerned the long view and that crisis measures need to be temporary and solutions found to cut costs.

The governor said that he has discussed the matter with Minister of Finance Keit Pentus-Rosimannus. "She also seems concerned with making sure spending beyond our means does not last too long," he said.

Exiting the deficit requires gradually saving a few hundred million euros for which no plans currently exist. "The new finance minister finds herself in a complicated situation where she is expected to fill that void and provide answers," Müller said.

"We should definitely try to move closer to fiscal balance. I believe this might require certain expenses to continue to grow," he noted.

Müller said that interest rates will not remain low forever. While it is sensible to borrow today, a state's finances cannot be based on loans being cheap in the long run.

New government to review Recover Europe investments plan

The central bank governor said that support from the Recover Europe instrument should be used for making investments capable of yielding long-term benefits. "Investments to support long-term growth could be the main goal of the recovery fund investments," he remarked.

"However, it has to be said that we do not have much time left for debating where to invest the close to €1 billion coming Estonia's way," he said.

Müller said that the new government has promised to go over recent plans in the coming weeks.

He added that while healthcare investments are important and doubly so in a healthcare crisis, spending a large part of the money on constructing a new hospital in Tallinn would not be fiscally sensible.

According to Müller, the finance minister agrees in that projects that qualify for support should not add to long-term expenses and should support long-term growth instead. Müller said that digital and green turn projects are suitable examples.

The previous government was planning to spend €436 million on the Tallinn Hospital and Police and Border Guard Board (PPA) helicopters, €211 on the digital turn and €409 million on the green turn.

People with lower income hit harder in the crisis

Müller said that countries have suffered differently in the crisis and economic activity will recover as vaccination progresses.

"This crisis has hit countries that depend on revenue from tourism the hardest. The spread of the virus was more aggressive in many European countries than it was in Estonia. We all hope that immunization will allow us to open up the economy and return to normal business activity this year," Müller said.

"There are other worrying trends – looking at unemployment that has gone up from fewer than 5 percent to 9 percent. It has hit very different sectors and workers, whereas lower-paid people in the service sector, more vulnerable groups have been hit hardest."

Economic recovery depends on pace of vaccination

"We can hope that the Estonian economy will grow this year as will the European economy as a whole," Müller said.

"Compared to December when we forecast growth at 4 percent, we did not foresee the virus intensifying towards the year's end and additional restrictions proving necessary in Estonia and Europe," he said.

The central bank governor said that returning to growth might therefore take longer and also depends on the pace of vaccination that has been slower than hoped.

"We could see a clearer recovery in the second half-year. Even though there is still a lot of uncertainty in terms of the virus, we can see more positive signs compared to December. We know that the U.S. economy recovered quite quickly in the second half of last year and the new administration is planning aggressive support measures. There is a trade agreement with the UK that was not a given a few months ago. There are positive aspects," Müller said.


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Editor: Marcus Turovski

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