Estonia grew faster than most emerging market economies during 2000-07, but it is now in a severe recession. While the initial reversal of GDP growth was caused by a collapse of domestic demand, at the current juncture Estonia is vulnerable to external shocks as well. The current-account deficit has been reduced, but there are risks of further cut-back in credit that could intensify or prolong the reduction of output. The main challenge facing the policymakers is therefore to bring the economy quickly back to trend growth, which is complicated because of past policy commitments.