Estonia's euro adoption good for neighbors

TALLINN - Analysts say that Latvia’s economy could be negatively affected by Estonia’s entry into the euro zone, since businesses looking to invest in the Baltic region would focus on Estonia after considering the greater security provided by its currency. “In the first stage the influence on Latvian businesses will be negative. It will definitely be a further plus for the Estonians in terms of new work places and GDP growth,” said Latvian central bank chief Ilmars Rimsevics in a news conference last week, reports bbn.ee.

The central bank president however added that adoption of the euro in Estonia would still be a positive signal for other countries striving for the common currency. He said that Estonia’s entry would be “important news and a motivating factor for Latvian politicians and Latvian businesses on the path to 2014,” the earliest Latvia would be able to adopt the euro.
Swedbank says in its most recent economic forecast that Estonia indeed is “highly likely” to adopt the euro next year, reports news agency LETA. The bank says that fulfilling the Maastricht budgetary criterion is the most complicated issue for the country, but the bank estimates that this criterion was already fulfilled both in 2008 and 2009.

“The government has made very big efforts and there is no reason to think that after the budgetary criterion is fulfilled, the wish of balancing the budget would be abandoned,” says the forecast. Swedbank estimates that Estonia’s public sector budget deficit in 2009 was around 2.7 percent of GDP, within the limit of 3 percent required by Maastricht. It said that the public sector budget can reach balance, and then surplus, in 2012-2013.

Estonia hopes it can adopt the single currency at the start of 2011 as its inflation rate has plunged during the recession. Spending cuts have also meant it has been able to cap its public sector deficit at the required limit.
Latvia’s government is aiming to adopt the euro in 2014, though it has plenty of work to do to get its public sector deficit down, from an expected 10 percent of GDP this year to 3 percent of GDP in 2012.