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EU’s Credibility Boosted as Estonia Embodies Harmonized Banking Policies

In a significant move that underscores the European Union’s (EU) credibility in shaping national financial regulations, Estonia has fully incorporated EU banking directives into its legislation. This development marks a turning point in the country’s post-communist transition process, highlighting the EU’s unprecedented influence on domestic institutions and policies.

Estonia’s Post-Communist Transition

Since 1989, Estonia has undergone significant reforms, with key decisions shaping its legislative order. The period between 1990 and 2008 saw the consolidation of these structures, with the country’s financial sector becoming increasingly integrated into the European framework. This harmonization process was driven by a combination of factors, including EU accession negotiations and the country’s commitment to meeting membership conditions.

EU Banking Directives in Estonia

The Estonian banking legislation has become deeply entrenched in EU rules, with nearly 95% of its content derived from Brussels. Domestic input is minimal, consisting mainly of two areas: the second pillar of the pension system and the Central Register of Securities. This “stickiness” of formal rules and institutions reflects the historical institutionalist tradition’s emphasis on path dependence.

Influence of EU Law

In an interview with a senior civil servant at the Ministry of Finance, it was evident that EU law serves as the primary reference point for financial sector regulation in Estonia. “Since the financial sector regulation is pretty much harmonized with European Union law, then all reforms and changes generally start from there,” they said.

EU’s Influence through Simple Politics

The influence of the EU has also been felt through the prevalence of a “simple politics” approach, where policymakers seek to govern by constructing communicative discourses that justify policies and regulations on the grounds of EU accession or membership obligations. This constructivist perspective is supported by the work of Kattel and Raudla (2013) and Bohle and Greskovits (2012).

Adopting EU Rules

While both rationalist and constructivist theories can explain the adoption of EU rules in the 1990s and 2000s, the realization of idiosyncratic risks during this period led to ad hoc reactive actions guided by pragmatic considerations. The high political salience of banking crises in the 1990s further emphasized the importance of Europeanization.

Conclusion

In conclusion, Estonia’s banking legislation has been shaped by a complex interplay between Europeanization and post-communist transition processes. This development is consistent with the differentiation thesis, which highlights simultaneous Europeanization, liberalization, and (re-)regulation in finance.

Direct Implications

The harmonization process has significant implications for the institutional development of Estonia’s banking sector. The veto player and goodness of fit propositions associated with rationalist and constructivist theories are of little significance in explaining the transposition of EU banking directives into national legislation.

In contrast, the misfit argument, which suggests that regulatory philosophies or deeply entrenched models may resist harmonization, is not applicable to Estonia’s experience. The country’s post-communist legacy has created a vacuum for institutional resistance to EU policies, allowing for a relatively smooth integration into the European financial framework.