Estonia is facing its most challenging economic situation since the early 1990s. Past overexpansion, in particular of real estate and construction, was financed by rapid credit growth, mainly via variable interest rate and foreign currency loans. Growth was in general biased towards domestic demand, fuelled also by high wage growth. Unsustainably high current-account deficits exposed Estonia to a sudden reversal of investor sentiment in the wake of the global financial crisis. The downturn has not yet bottomed out and the challenge will be to stimulate recovery and bring the economy back to potential. Macroeconomic policies have a pro-cyclical bias and the labour market has been regulated by a law which contains many elements from the Soviet era. Given the limited scope for macroeconomic policies under the currency board arrangement and low synchronisation of shocks and business cycles with those of the euro area, effective counter-cyclical fiscal policy and flexibility of the economy are crucial. The first OECD Economic Survey of Estonia addresses these issues, and focuses in particular on: i) modifying the fiscal framework to enhance the role of fiscal policy as a countercyclical tool; ii) reducing distortions in the housing market while strengthening financial stability; iii) increasing flexibility and reducing segmentation of the labour market; and iv) enhancing the business environment to foster productivity.