Euro Crisis, Old and New Trilemmas and Estonia’s Position

Abstract:
The euro crisis created a possibility for the violation, in one way or another, of the one basic condition of the European Union (EU) and the European Monetary Union EMU)—that each Member State is responsible for the condition of its public debt. This has introduced the need to discuss the next possible steps of adjustment to this new policy request. The old macroeconomic trilemma states that no country can enjoy at the same time free capital flows, stable exchange rates and independent monetary policy and its impact on creation of the monetary policy of the EU is a starting point of the article.

Then there is the EU impossibility trilemma, which means that the three general rules of the euro area—that every Member State is responsible for its public debt, there is no co-responsibility of other members of the euro area and the no-monetary financing rule could not be applicable at the same time. This means that in developing a certain new set of institutions, which are targeting the change of basic general economic policy rules, the regularities of economic activities render only a certain combination of tools effective. The paper discusses the possible choices that are determined by applied arrangements, private and public agents’ reactions to them and by the general conditions for policies applied on national and the EU level. The set of possible new regulations will determine the basic features of the EU in the future, though this process may have several possible outcomes. Estonia’s position in this discussion and the impact of possible EU level outcomes on Estonia’s economic policy is examined.