Estonia heading for euroland

  • 2010-06-10
  • From wire reports

TALLINN - European finance ministers backed Estonia’s bid to become the 17th country using the euro, overriding the European Central Bank’s warning that the Baltic state may struggle to keep inflation under control, reports Bloomberg. The June 8 decision to admit Estonia, a former Soviet republic that entered the European Union in 2004, shows that the EU won’t let the Greece-fueled debt crisis in Western Europe prevent it from widening the currency bloc to the east.
Political backing for Estonia to switch to the euro next Jan. 1 comes in the face of the ECB’s concerns that the country’s inflation rate, at 2.5 percent in April, may jump in years ahead as economic growth outstrips the euro-area average.
“There’s no room for high inflation,” Estonian Finance Minister Jurgen Ligi told reporters before a meeting of EU finance ministers in Luxembourg June 8. “The ECB always expressed concerns about inflation during previous accessions.”
European governments have the formal power over euro entry, with the ECB relegated to an advisory role. Officials from the 16 euro countries approved Estonia June 7, followed by all 27 EU finance ministers on June 8. The endorsement will be reviewed by government leaders at a June 17 summit, with a final decision by finance ministers on July 13.

With economic output of 14 billion euros, Estonia would rank as the euro’s second-smallest economy, ahead of Malta. Its central bank governor, Andres Lipstok, would take a seat on the ECB’s interest-rate-setting council in January.
Estonia’s policies are geared to “implementing further structural reforms, maintaining fiscal discipline, preserving financial stability and avoiding the emergence of imbalances,” Luxembourg Prime Minister Jean-Claude Juncker said.
Inflation in Estonia jumped as high as 10.6 percent in 2008, the fourth-highest in the 27-nation EU that year. In the 12 months to March, the test period for euro entry, the rate was minus 0.7 percent, compared with a euro-admission target of 1 percent.

Estonia’s conquest of price pressures reflects “temporary factors” and “it may be difficult to prevent macroeconomic imbalances, including high rates of inflation, from building up again,” the ECB said in its non-binding opinion on May 12.
Full-year inflation is likely to rise to 1.3 percent in 2010 and 2 percent in 2011, the commission forecasts. Estonia passes the other four economic tests for euro users: targets for budget deficits, debt, long-term interest rates and currency stability.

Estonia’s admission would probably mark the currency union’s last expansion for years. Lithuania and Latvia, the next in line, are aiming to join in 2014. Poland, the largest eastern European economy, and the Czech Republic haven’t set target dates.