TALLINN - As the Estonian economy begins to stabilize, the government has affirmed its target to adopt the euro in 2011.
After the economic seismic shock of late 2008 and the continued fallout in 2009, government, bankers and the EU are starting to see signs of stabilization. The elusive entry into the eurozone is becoming more feasible on a month by month basis.
Bank of Estonia Governor Andres Lipstock presented the central bank's 2008 Annual Report to the Estonian parliament on June 11, in which he sounded a tone of mild confidence.
"Today I dare to look at the situation with moderate optimism and repeat what has already been said in March: Estonia has all the possibilities to successfully overcome the crisis," Lipstok said.
Lipstok emphasized that adopting the euro is Estonia's main and the most immediate economic policy goal.
"It must be made sure that the current account deficit, which cannot be avoided in the prevailing economic environment, remains below 3 percent of GDP both this year and in 2010," he said.
In an appeal to the government he advised that "in order to achieve this, Eesti Pank is of the opinion that in addition to the steps taken in February and April, this year's fiscal deficit has to be reduced by a further 6.5 billion kroons."
More positive comments came from Europe.
"Estonia's plan to adopt the euro in 2011 is ambitious, but achievable," Joaquin Almunia, European Union Monetary Affairs Commissioner, told ERR News.
He did not agree that Estonian budget cuts were too slow. "I believe that the government does what it has to do. If you overreact in monetary policy, you may kill expectations of new growth. Estonia needs growth," Almunia said.
Entry into the eurozone has remained an elusive target for Estonia during the recent boom years. Despite the conservative budgetary framework it operated, the Estonian economy was unable to hit the inflation targets demanded under the Maastricht criteria, the requirements that must be met for a country to adopt the euro.
Lipstok said Eesti Pank is forecasting a slight decline in inflation levels for 2009 and the following year. In order to achieve this, he reiterated that "it is clear no changes should be made and must not be made in Estonia's monetary policy and the monetary policy framework."
There has been much speculation about Estonia's ability to retain its current peg to the euro. Rumors of devaluation in Latvia have lead to a domino theory being discussed by the media.
The Central Bank, however, has defended its plans to maintain the peg. "The exchange rate of the Estonian kroon will remain unchanged and we will accede to the euro area with the current exchange rate."
Almunia refused to be drawn on speculation about devaluation of the kroon. "I don't want to speculate over negative scenarios. Let's work for positive scenarios."
"The European Commission considers Estonia to be one of seven countries who are able to keep their budget deficit below 3 percent," he said.
This is another key criterion for achieving the Maastricht terms for euro adoption.
Reviewing how the Estonian economy was adjusting to the current environment, Lipstock stressed that Estonia's enterprises and households have thoroughly changed their behavior and expectations over the past half a year.
"The private sector has already largely adjusted to the changed economic environment and the main threats to the Estonian economy have markedly abated," he said.
"The current account, i.e., the difference between investment and savings, has practically balanced and the financing of the economy's current expenditure is ensured by current income. In addition, Estonia has no problems with financing its external debt."
"Structural reforms and maintaining confidence in fiscal and monetary policy in the medium and longer-term are the tools that will help the economy out of the crisis," he said.
At the end of his speech, the governor noted the measures taken over the past half a year in both the public and the private sector had improved the country's chances to overcome the crisis.
This is confirmed by the fact that most of the rating agencies, as well as the IMF's recent mission to Estonia, have expressed positive assessments of Estonia's economic outlook.