Will inflation follow euro transition?

  • 2011-01-05
  • By Olya Schaefer

LESSONS LEARNED: Authorities discount inflation worries saying they’re actively monitoring price movements.

TALLINN - The switch to the euro on midnight of the New Year was successful, as expected. Twenty minutes after midnight, Estonian Prime Minister Andrus Ansip withdrew 20 euros from an SEB ATM and congratulated the country with this important milestone. “The euro is a clear statement that Estonia is a European nation, with no caveats. We are Estonians, but we are also Europeans, and for the people of Estonia, the euro will be a source of strength for many, many years,” reports DzD.ee. He cautioned against resting on the laurels of the impressive achievement of fulfilling the Maastricht criteria, however, as Estonia is at this time the poorest nation in the eurozone. Ansip, however, expressed hope that this can and will soon change. 

Unlike other countries which experienced a high inflation rate immediately after the arrival of the euro, Estonia is expecting to see only small price increases. One of the reasons is that the kroon was already pegged to the Deutsche mark, and then the euro since 1992. Another is that the costly lessons of Italy and Spain, whose economies experienced difficulties, were heeded and in anticipation of possible inflation issues the Estonian government has actively monitored the stability of prices. Lastly, the rise in costs is said to have taken place already, in the latter part of 2010. The most significant changes came in the prices of food. Vegetable prices rose an average of 75 percent, milk 39 percent, coffee 33 percent, butter 31 percent and bread by as much as 25 percent.

Prime Minister Ansip refuted speculation suggesting the euro’s negative effect on costs, emphasizing that associating the euro with price increases is erroneous. “Price increases and decreases are powered by the market, rather than the transition to the euro,” Ansip asserted. “Any kind of inappropriate pricing in connection with the transition to the euro is malicious and unacceptable. A price increase in general has nothing to do with the transition to the euro. Neither is any price decrease the result of the euro.”

Anecdotal evidence suggests that some changes are nevertheless inevitable. Delicate, a pastry shop on Tartu street has, for example, rounded up the prices of its baked goods, such as croissants. Previously 15 kroons (0.96 euros), they are now 1 euro, or 15.66 kroons. Gas prices have also risen slightly. DzD.ee reports that on average it will cost 0.50 kroons more per liter to fill up your tank in Estonia in 2011. It remains to be seen how the coming of the euro will influence real estate, education, electronics and other goods and services.

Joining the euro zone now, after the financial crises of recent times, bears some risk. As Estonia becomes the 17th nation to adopt the euro currency, other countries hesitate.  Reuters reports a hedging attitude towards the currency in Poland, Hungary and other eastern European EU states.  These countries have all promised to join the euro zone one day, as membership in the Union requires, but want to see how the debt problems of Ireland, Greece, Spain and Portugal are solved. Some economists say the larger eastern European nations may now not join before 2019-2020. And some Estonians felt that way, too, fearing that the euro will not guarantee economic stability for Estonia but instead bind the country to the debt of the eurozone’s troubled nations. In protest, a few vocal dissenters staged a symbolic funeral for the outgoing Estonian currency in front of the Bank of Estonia on New Year’s Eve. 

Despite fears of inflation, the prevailing view remains that the euro is a positive change. Estonians hope that it will entice investors by removing any fears of devaluation and make borrowing more secure for its people. Ansip, in a press statement issued Dec. 31, 2010, stated that the adoption of the euro would create new jobs, raise pensions and enhance economic growth – all reasons why Estonia chose to join the eurozone.