Poor man status awaits if Estonia adopts euro too soon

  • 2009-12-02
  • Staff and wire reports

TALLINN - Rapid accession to the eurozone is a trap for the future economic development of Estonia, says Professor of Nord Academy Ivar Raig, reports news agency LETA. He says that while most Estonian politicians and economists claim that euro adoption would promote business confidence towards Estonia, drawing in new investment leading to a reduction of unemployment, the euro would actually stall economic growth and structural reforms, and end up increasing social problems and unemployment. Raig points to the experiences of Portugal and Greece, two countries in the eurozone who haven’t met the hype of becoming richer economies through the euro.

On the contrary, euro adoption is an over-politicized issue, says the professor. “In Estonia it has become the mantra of parties in power. However, Brussels will make its decisions on Estonia’s entry by weighing what Estonia’s accession could mean for the eurozone.”

The key problem, as he sees it, is that in order for the monetary union to function well, the real income of the nations in the eurozone must be fairly equal. The gap between Estonia and Old Europe, however, has been increasing in the current crisis.
Though Estonia seems to be ready to give up its currency, “perhaps we should analyze why Sweden, Denmark and the UK are not rushing into it and why the Czech Republic, Hungary and Poland have postponed it,” questions Raig.
“Having our own currency enables us to stimulate the domestic economy and achieve new growth. On the contrary, the euro is likely to push up prices in Estonia because of price convergence. As a result, the prices of many products and services will rise to the level in Scandinavia.”

The professor points to the current budget debate and proposed spending cuts, arguing that this has caused the country to postpone working to solve numerous acute social, healthcare and educational problems. The accepted fiscal policy adopted by the current administration has started to restrict modernization of the economy and stopped investment into education and healthcare, two key issues needed in making the country’s economy sustainable, says Raig.

Echoing the views of leading economists, he expresses the sentiment that accession to the eurozone will not bring about significant confidence and new investments into Estonia if the country fails to restructure its economy. “Estonia needs a new, wholesome economic policy; the crisis has created new risks that the euro will not remove. With the shortage of a skilled and qualified workforce, [simply having] low interest and inflation rates will not be enough to attract new investors to Estonia. The result will be stagnation and a low income level. Wages could not be raised quickly since it would drive up inflation, and Estonia could eventually be fined by the EU for violating the criteria, he stresses.

Sounding a warning to those expecting Estonia’s problems to disappear upon euro adoption, he says that those who regard the euro as a miracle measure could be badly disappointed when it fails to improve anything. “The best that Estonia can get from the eurozone is a low economic growth rate and saying goodbye to hopes to catch up with the EU average.”
Estonia is likely to meet the criteria necessary for the euro adoption next year and be the next European country to enter the eurozone, possibly at the beginning of 2011, says the World Bank.

However the country’s further economic development may not be sustainable, since the state development level and economic cycle is in a different phase than the economy of Old Europe. If Estonia fails in modernizing the economy and increasing its competitiveness, “Estonia will become a slum offering cheap labor in the eurozone, which is not desired,” cautions Raig.
The professor also warns against using “creative means to make us more eligible for the eurozone. It would be natural for Estonia to adopt the euro at the end of the next growth cycle, 2016-2018, since our income level would have climbed closer to the EU average and we could keep inflation low, also avoiding a major crisis. Until then, Estonia should stimulate new growth by using large amounts of EU aid, our own reserves and through borrowing.”