Tallinn - The Organisation for Economic Development and Cooperation (OECD) called on the Baltic state of Estonia Monday to introduce more flexible budgets and to avoid producing another housing bubble.

In its Economic Survey of Estonia 2009, presented in the Estonian capital, Tallinn, the OECD said a collapse in domestic demand had left Estonia "vulnerable to external shocks" and that the main challenge facing Estonian policymakers was "to bring the economy quickly back to trend growth, which is complicated because of past policy commitments."

The Paris-based organization, sometimes referred to as a club for 30 of the world's richest countries, came up with four main recommendations for EU member state Estonia.

Estonia wants to become an OECD member despite the small size of its economy and the fact that it is experiencing one of Europe's deepest recessions. In 2007 it agreed a "roadmap" to membership with the OECD which commits its to a free market economy.

Measures suggested include a medium-term budgetary framework incorporating expenditure ceilings and a fresh approach to the real estate market.

"The favourable tax treatment and credit guarantees of housing loans amplified the housing boom and should be phased out over the medium term," the OECD report said.

Estonia's housing bubble burst spectacularly in 2007, contributing to a rapid reversal in the country's growth figures.

Other suggestions from the OECD included increased business competition a more flexible labour market.

"The labour market has been regulated by a law which contains many elements from the Soviet era," the OECD claimed.

Estonia won its independence from the Soviet Union in 1991 and became an EU and NATO member in 2004. (dpa)