This brief reviews the main economic developments since transition in the three Baltic economies and highlights challenges for the future. Although the three economies went, in an almost synchronous fashion, through similar stages of catching up and financial convergence-driven booms and busts, outcomes and prospects ahead differ considerably due to different policy frameworks in place.

While Latvia had to be assisted by an official financing programme by the EU and the IMF, the financial consequences of the crisis were less severe for Estonia, which is currently a candidate to join the euro area in 2011. In the coming years the main challenge for these countries is to re-launch their potential for growth while completing the rebalancing of their economies.

The present Economic Brief also identifies a series of lessons from the experience of the Baltics regarding the role of financial and macro-economic policy in managing overheating and dealing with the building up of imbalances.