Estonia cleared to join euro zone

Wed, May 12, 2010, 01:00

Estonia won the green light today to join the euro zone in 2011 and become its 17th member in what is likely to be the crisis-hit currency area's last enlargement for at least four years.

Despite European Central Bank doubts about how long Estonia can hold down inflation, the European Union's executive arm said the former Soviet republic of 1.4 million people was ready for the euro, unlike other, bigger hopefuls such as the Czech Republic, Hungary and Poland.

"Estonia has achieved a high degree of sustainable economic convergence and is ready to adopt the euro on 1 January 2011," EU Economic and Monetary Affairs Commissioner Olli Rehn said in a statement.

If, as expected, it is given the final go-ahead by EU finance ministers, the Baltic country will become the fifth of the states that joined the Union in 2004 to adopt the currency. Slovenia entered the euro zone in 2007, Cyprus and Malta in 2008 and Slovakia in 2009.

The Commission's decision could reassure other candidates that the euro zone remains open for expansion despite Greece's debt crisis which has fuelled tensions in the currency area and forced it to create a $1-trillion emergency aid mechanism for members facing solvency problems.

But euro zone turmoil has dampened enthusiasm towards the euro among candidates. Polish finance minister Jacek Rostowski said today Warsaw was in no rush to join the currency area, which needs time to "refurbish" after the Greek crisis.

In a separate report, the ECB said there were mixed signals on Estonia's readiness to adopt the euro because of questions over the country's convergence sustainability in the future, notably about inflation.

Very low inflation in Estonia - which averaged -0.7 per cent over the last 12 months, compared to the 1.0 per cent benchmark - was due to mainly temporary factors, it said. "In sum, there are concerns regarding the sustainability of inflation convergence in Estonia," the ECB said.

Under EU law, the Commission's recommendation is binding. The ECB's are not.

The Commission said that other euro candidates - Bulgaria, the Czech Republic, Estonia, Latvia, Lithuania, Hungary, Poland Romania and Sweden - were not ready. Their inflation rates are too high, budget deficits too wide or most have not yet joined the ERM II currency system, a stability test for euro zone membership, it said.

"The nine member states with a so-called 'derogation' (to the euro) have made uneven progress on the road to the single currency," the Commission said.

A recent Reuters poll among economists, mirrored by a report by credit rating agency Fitch, said those countries were forecast to adopt the euro in 2014-2016 at the earliest.

The Commission's recommendation crowns reforms that have turned Estonia into one of the most open and liberal economies in the 27-nation EU and a darling of investors.

It rewards Estonia's austerity programme, which was implemented despite deep recession last year and has ensured the country's budget deficit is below 3 per cent of GDP - one criterion for joining the euro zone.

The country cut its deficit to 1.7 per cent of GDP last year despite an economic contraction of nearly 15 per cent. Estonia also has one of the smaller national debts in the EU - 7.2 per cent of GDP.

The adoption of the euro is not expected to change much for Estonia's investors and its citizens since the country has long kept its kroon currency fixed against the euro in a currency board. The exchange rate is expected to be kept during the currency changeover.

The Commission said Estonia, which accounts for a tiny fraction of the euro zone's €10 trillion economy, met all the entry criteria on inflation, interest rates, its budget deficit, public debt and currency stability.

Reuters