Estonia readies for euro transition

TALLINN - On New Year’s day, Estonia will become the 17th country to adopt the euro as its official currency. Estonia has ordered around 45 million banknotes and 194 million coins to introduce the euro in cash at midnight on Jan. 1, 2011. The banknotes will be borrowed from a National Central Bank in the euro area (Finland), in line with the practice in the recent changeovers. The euro coins are provided by the Mint of Finland. Both notes and coins are already being front-loaded to Estonian banks. As of Dec. 1, businesses that have signed an exchange contract with their banks will also be provided with euro cash in an attempt to ease the transition and make it gradual.

While long-term success is certain, and even short-term ease of transition likely, banks are warning customers against imminent disruptions on Jan. 1. Many banks will be open on New Year’s day to assist customers due to the euro adoption. Fliers, television commercials and large posters in bus shelters and on billboards advise of the changes and recommend that people put aside cash for the New Year festivities because banking services may possibly be disrupted from Dec. 31 through Jan. 1 due to the currency conversion.

Although there will be a gradual phasing out of the Estonian kroons, planning ahead is advised.  There is not much concern or worry seen in Tallinn, and polls show that 84 percent of Estonians feel prepared for the currency switch. Artjom Sokolov, owner of NuWave Capital, points out that there was a much bigger, global anticipation of the millennium change, and nothing happened. 

“This [caution and warning to withdraw funds] is standard procedure. With the adoption of a new currency, the aim is to avoid a situation where 1.3 million Estonians would have to visit a bank branch on the same day. As the euro will be adopted on the 1st of January, banks and enterprises are currently working on technology and service plan changes. In realty the systems’ changeover does not take that much time. Credit and debit cards, for example, will work with almost no disruptions. Bank transfers will work normally. Some transactions may take a little longer, for example changing currencies in ATMs, but basically [the PR campaign] was just an appeal for the general public to start preparing early and to have some cash available for a period of time to be able to continue their lives without any disruptions,” said Karl Anton, Development & Marketing Director at Citadele banka Eesti.

There is a general consensus that the coming of the euro will make Estonia a more popular place to invest and the changeover itself is not expected to negatively impact the economy. Banks are expected to absorb a changeover cost of 0.14 percent of their annual turnover due to IT, book-keeping, price labels and other change-related goods and services. The expected ease of euro adoption is mainly due to the fact that the Estonian currency had been pegged to the Deutsche mark, and then the euro, from 1992. So the adoption is in name and appearance of money, but not in substance. Yet the actual changeover to the euro is expected to make a difference to the economy. Andres Vesilind, Ph. D, CFA, Head of Private Banking at Nordea Bank Estonia, points out that “by adopting the euro, Estonia becomes an acceptable country for investors with pre-set restrictions that allow investing only into euro-zone countries. The euro adoption brings the elimination of foreign exchange risk and transaction costs for all euro-based transactions and investments, as well as higher transparency of prices that will fuel competition.”

The Tallinn Stock Exchange index has risen during 2010 in anticipation of the euro, and some experts, including Anton, view the rise as a positive consequence of the news that the euro would be adopted. “The adoption of the euro takes away the currency risk associated with larger investments and makes it easier for the investors to understand local prices levels. Additionally, the adoption of the euro has brought a lot of international attention to Estonia, displaying the healthy economy and reforms that meet the Maastrich criteria.”  As Estonia is poised to join the OECD in early 2011, an additional boost in foreign investment is anticipated. Endriko Vorklaev, fund manager with SEB Wealth Management Estonia, sees the lower capital risk premium for Estonian enterprises as another major benefit of the euro adoption. 

Overall, the news is very positive for Estonia. But concerns linger. Vorklaev agrees that “eliminating devaluation risks enables us to focus on investment projects rather than discussing if and when Estonia will devalue its currency.  But hard work lies ahead to fight for our place in export markets and prove our competitiveness.”

Similar concerns are voiced by Sokolov. “Currency risk will certainly be off the table now. But whether the adoption of the euro increases competitiveness of Estonian exporters is difficult to say. A stable taxation system is much more important for competitiveness. In this respect, Estonia is somewhat more unstable than it had been a couple of years ago, mainly because of the intense discussions regarding possible changes in corporate and private individual taxation. Ullar Jaaksoo, project director at Estonian IT Academy, is concerned that with the arrival of the euro, “[t]here will be no more flexibility on [the] monetary level, in case we ever need it in the future.”

Only time will tell how the adoption of the euro will influence the Estonian economy and how Estonia in turn will influence the economy of the eurozone. One thing is clear: the currency change will finally end the devaluation speculations and thus increase financial stability in the country. And as Jaaksoo noted, it will be 15.6466 times more difficult to become an Estonian millionaire.

The solidarity of the European Union will continue to face tough questions and situations as new countries enter the eurozone, and those with responsible fiscal policies are called upon to support weaker members. Sokolov wonders how soon after the euro is introduced in Estonia will the country see the same state-level debt problems that are prevalent in the eurozone? That is a question that policy makers and financial decision makers hope does not become acute.