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Estonia zeroes in on euro target

  • 2010-01-28

TALLINN - Moody’s Investors Service says that Estonia will fulfill its euro adoption terms this year to become the next member of the single currency bloc, reports Bloomberg. “Right now it is looking like they will meet all Maastricht criteria and therefore it will be impossible for the European Commission to keep them out,” says the rating agency Vice President and Senior Analyst Kenneth Orchard. Earlier, in September, Orchard had said it would be “very difficult” for Estonia to reach the terms.
Estonia will be the third Eastern European country to join the euro, after Slovenia and Slovakia, as the government spent less and generated more revenue than budgeted for in 2009. Prime Minister Andrus Ansip’s administration, whose austerity measures have exacerbated the EU’s second-worst recession for Estonia, sets Jan. 1, 2011 for the currency switch.

The Finance Ministry said on Jan. 21 that the country is “very likely” to meet euro adoption criteria after revenue in 2009 was 100.7 percent of the budgeted level, while spending was 95.6 percent. Estonia, where gross domestic product contracted an annual 15.6 percent in the third quarter, hopes the euro will protect it from currency risk and attract investment.
The 10 former communist countries that joined the EU since 2004 are obliged to adopt the euro once they meet the bloc’s fiscal conditions. Terms require governments to cap budget deficits at 3 percent of GDP, limit debt to 60 percent of output and to ensure inflation isn’t more than 1.5 percentage points above the average of the three countries with the slowest price growth. Estonia’s Cabinet cut the budget by 9 percent of GDP last year to keep the overall shortfall at 2.8 percent of GDP.

Estonia, which doesn’t have a sovereign bond market, has the European Union’s lowest debt to GDP ratio at 10.9 percent this year, compared with 76.7 percent in Germany, the European Commission said on Nov. 3. Credit-default swap spreads on five-year Estonian debt declined to 143.5 basis points (1.435 percent) from 144.2 basis points on Jan. 20, the lowest level since August 2008. Estonian Finance Minister Jurgen Ligi said he was confident that the country met the EU’s budget requirement in 2009. Olli Rehn, the EU’s commissioner-designate for economic and monetary affairs, said on Jan. 11 that Estonia is the “next likely candidate” to join the bloc.

Initial data from the finance ministry show that the state budget collected 85.7 billion kroons (5.4 billion euros) in income and had 87.3 billion kroons in expenditures in 2009, delivering a deficit of 1.6 billion kroons. On a cash-flow basis, this number represents 0.75 percent of expected GDP, says Bloomberg. The Statistics Office’s data will be published, according to European Union standards, on March 26, when it will become clear whether Estonia fulfilled the Maastricht’s criterion.
Nordea, in its new Economic Outlook, says that while Estonia’s entry to the eurozone in 2011 is a possibility, the risks of a postponed entry are significant, reports news wire bbn.ee. A decision on whether Estonia adopts the euro in 2011 would have to be made by the EU by early summer. The inflation target has been reached and government debt is very low, so the biggest problem is the government budget deficit, which threatens to exceed 3 percent. In comparison to many euro-area countries, however, the deficit is still moderate, but in order to grant EMU membership, the EU also needs to be convinced that the consolidation measures achieved by Estonia constitute permanent improvements.

“The euro will not solve all the problems of the economy, particularly as regards any improvement in competitiveness. Therefore it is likely that the high expectations attached to the euro are exaggerated. Even if EMU membership was delayed, we expect the Estonian currency to remain stable against the euro. The risk of a change in the country’s currency policy remains fairly low, as competitiveness is improved by slashing wages and prices,” says the report.

Though private consumption, for example, remains below last year’s levels, many indicators, such as monthly foreign trade statistics and industrial production, have shown signs of stabilization or even growth from the previous month. The steepest decline has been seen in investment, and this is expected to continue. The drop in exports is expected to slow as foreign demand picks up, giving support to the economy. The Nordic countries in particular play a key role in driving Estonia’s export numbers.

Domestic demand, or lack thereof, is expected to still weigh on the economy, as unemployment rises and wages continue to fall. The number of registered jobless is 90,671, up 1,261 from the previous week. This represents 13.8 percent of the workforce. The decision on Estonia’s application for the euro ultimately depends on the finance ministers of the euro-area countries, notes the Economist Intelligence Unit. “If they are intent on keeping Estonia out for the present, the criteria provide them with sufficient wiggle-room, even if Estonia achieves the fiscal target,” it said.