Estonian Cabinet admits defeat by inflation, will aim for adopting euro in 2008

  • 2006-05-03
  • From wire reports

ALWAYS NEXT YEAR: PM Ansip (center) promises Estonia will be prepared to introduce the euro in 2008.

TALLINN - The government finally came out and admitted at last week's meeting that Estonia would not be ready to adopt the euro as of Jan. 1, 2007 but must be prepared to do it by the beginning of 2008. Cabinet ministers decided that, considering the country's present inflationary trends, Estonia would not meet the criteria in order to phase in the common currency on Jan. 1, 2007.

Government ministers stated that the price rise above the inflation criterion was largely due to the world market's soaring oil prices and the country's rapid economic growth; thus not a problem in economic terms.
According to its report, the Cabinet was unanimous in that the government must do its best to keep inflation as low as possible. The government would continue to maintain a conservative policy and keep the state budget in surplus.
In order to lower inflation, the government has decided to postpone raising the tobacco and alcohol excise until Jan. 1, 2008.
In the meantime, the government said it would continue all preparation to adopt the euro at the earliest possible date.
The Finance Ministry and the Bank of Estonia have forecasted that the Baltic state, which had been desperately hoping to be among the first wave of new member states to adopt the euro in 2007, would meet the inflation criterion by the second quarter of 2007 at the earliest.

Estonia presently meets all the Maastricht criteria 's particularly on fiscal policy and debt burden 's besides inflation.
Andres Lipstok, president of the Bank of Estonia, said the country would get the opportunity to switch to the euro in the first half of next year. The bank's forecast is based on the presumption that there will be no surprises in terms of oil prices. What's more, the rise in alcohol and tobacco excise scheduled for the middle of this year has been postponed.
Lipstok said that, presuming Estonia's present economic policy continues, a short-term postponement of the euro should not cause any setback in the economy.
If the euro is adopted later than 2008, the potential effects on the Estonian economy would have to be seriously assessed, he stated.
Finance Minister Aivar Soerd said on April 27 that he had informed EU Financial Affairs Commissioner Joaquin Almunia that Estonia had given up its aim of adopting the euro next year. Soerd said he had told Almunia that Estonia would aim for adopting the currency a year later, as of Jan. 1, 2008.

"Almunia supported the decision of the government and found it reasonable," the finance minister told reporters.
Prime Minister Andrus Ansip said the government had given a committee of experts the duty of working out a plan of action by June 1 for adopting the euro one year later. "The Jan. 1, 2007 target is no longer relevant," Ansip said.
Although the Bank of Estonia said it would be better if Estonia did not give any concrete dates, Ansip said it was necessary to do so. The logistics behind cash and IT equipment require clarity, he added.
Soerd said the Estonian economy was ready to accede to the euro now. "The International Monetary Fund is of the opinion that Estonia has no substantial problems with its inflation level, and that it is a temporary phenomenon," he said.
The finance minister announced that, by the end of this year, Estonia would achieve the inflation level of 3.7 percent, which means that meeting inflation criterion is quite realistic for the first half of next year.
In Latvia, Hansabanka's chief economist, Martins Kazaks, said the Latvian government should put off adopting the euro. "Uncertainty with the timetable for euro adoption creates unnecessary costs, which, according to Hansabanka estimates, might reach some 170 million lats (241 million euros)," he said.

Kazaks even ruled out 2008 for Latvia's eurozone hopes. He said that, according to the bank's estimates, Latvia would not manage to meet the Maastricht criteria by mid-2007, as it would be impossible to curb inflation sufficiently without risking a significant economic slowdown.
"We recommend 2010 as a year for transition to the euro 's this is a relatively close target, which is attainable with a prudent economic policy. But, to make 2010 a realistic target, it is necessary to work out a substantiated action plan and start its implementation immediately," Kazaks said.