But we feel that the costs of delayed action may sometimes outweigh its benefits, as postponing the inevitable and failing to accept the changed reality will lead to additional unnecessary costs. One should not want to keep alive old structures that clearly cannot be sustainable in the changed world for longer than necessary. This is a waste of limited resources and reduces long-term productivity. There is a saying that “a crisis should not be wasted” – negative shocks to an economy should lead to productivity gains. Our experience shows that quick decision-making and decisive policy actions can shorten the period of uncertainty that also weighs on economic activity. People and entrepreneurs in countries with delayed reforms overreact, leading to a higher level of risk aversion than necessary. Overshooting in risk aversion results in lost jobs and postponed investments. BIS central bankers’ speeches  1  Estonia, for example, lost almost 20% of its GDP during the crisis. By now we have regained the pre-crisis level, contrary to many countries that preferred to delay the necessary reforms. Some of them still face years of decreasing economic output. In summary, I would like to stress that prolonged fiscal consolidation and structural reforms can lead to unnecessary costs to the society. Some countries have chosen to delay the pain and take only gradual steps with their structural reforms, but this has in fact resulted in a reduction of the overall economic activity to the extent that might be no less than the shortterm cost of a quicker adjustment.
Madis Müller: New models in Northern Europe? Speech by Mr Madis Müller, Deputy Governor of the Bank of Estonia (Eesti Pank), at a symposium organised by the Konrad-Adenauer-Stiftung, Berlin, 28 November 2012. *  *  *  Ladies and gentlemen, Thank you for this excellent opportunity to discuss together with colleagues from Latvia and Lithuania the experience of the three Baltic countries during the financial crisis. While the situation of each country is undoubtedly different, we can still consider if there are any lessons one could learn from the Baltic cases. In my opening comments, I would like to address specifically the question of what is the best pace for economic adjustments once a country has been hit by a crisis. We hear today many suggestions that austerity requirements have gone too far and that we should allow more time for implementing difficult reforms. First, let me start by saying that in more open economies, the crisis was felt almost instantly. In small and open countries such as the Baltic countries, there was no domestic demand to substitute for the lost export income. The economic reality had changed very suddenly. The EU countries could be divided into two groups. The countries that had a higher export dependence had to react fast to the changed economic environment. This applies especially to smaller countries, including the Baltic States, although Germany’s economy is also heavily reliant on exports.