Regulatory Convergence, Financialization and Hollowing Out of the State: The Case of Financial System in Estonia

Abstract

The paper addresses the effects of the regulatory convergence and international capital flows on national institutions, policies and conceptions on the working of the economy and financial system in particular. It is shown on the case of Estonia how these two factors - foreign investments and international integration - have affected and essentially hollowed out policy-makers’ institutional understanding of money, finance, banking, and the market economy in general. Moreover, the financial system in Estonia has been riddled with institutional incompatibilities, while the macro-economic strategy, based on the harmonization process and the restrictive monetary regime, has reduced policy autonomy for financial stability purposes. Likewise, in light of the harmonization process, one can detect dissonance in the perceptions of financial regulators, fragmentation of policies, and inadequate financial governance to steer the developments in the finance sphere. Policy-making that has resulted in both over- and misregulation has lacked the holistic, system-wide view on the relation between the financial industry and other institutional sectors.