Estonia: Senior banker supports early unilateral adoption of euro

  • 2000-01-20
In a proposal that has split the small Baltic country's political and
business elite, some senior bankers are mooting the idea of
introducing the European Union's single currency even before the
country becomes a member of the EU, the London business daily The
Financial Times wrote Wednesday.

Forget the two-year probation period Brussels expects of its new
members or the EU's concern that early euro entry might hurt an
entrant nation's chances of restructuring and reforming its economy.
Estonia, which is on the fast track to EU admission and is slated to
join in 2003 at the earliest, some in Estonia want to cut through all
the Euro-tape and join as soon as the common currency becomes a paper
reality in January 2002, paper reported.

"It's a great idea," Indrek Neivelt, head of Hansapank, told The
Financial Times. "It lowers interest rates, makes our country
transparent to foreign investors – and does make some sit up and take

Along with other bankers and some politicians, Neivelt has stimulated
public debate on the subject. With Estonia's currency, the kroon,
pegged to the D-Mark under a stringent currency board since it was
introduced in 1992, the move would be a natural extension of its
monetary policy once the D-Mark ceases to exist.

"We could either re-peg our currency to the euro in 2001 or just take
on the euro, which is more interesting," he said.

Among the benefits, according to Neivelt and his colleagues, would be
lower interest rates.

As long as there is currency risk interest rates are vulnerable to
rumours of devaluation, which has happened twice in the past two

Just after a stock market crash in 1997 and after the Russian crisis
interest rates shot up to more than 20 per cent, squeezing credit and
leading to a contraction in GDP this year.

Adopting the euro would also make the country more transparent to
outside investors.

And although Neivelt does not say as much, a successful introduction
of the euro would be a great publicity stunt for Estonia. "It would
guarantee our accession (to the Union)," says Hardo Pajula, an
economics expert and former adviser to the prime minister. That might
be the reason most leading politicians have either quietly endorsed
the idea – or refused to speak out against it.

Mart Laar, the reform-oriented prime minister, has said he has not
made up his mind and needs to assess the situation in more detail.
Other influential politicians, including Toomas Ilves, the foreign
minister, have supported the move in principle.

"It's a good idea," Ilves is quoted as saying. "It needs more discussion."

The lone vocal critic is Siim Kallas, the finance minister, who is
seen as the "grandfather of the Estonian kroon".

He has called the proposal rash, and claims that losing monetary
control at such an early stage might be dangerous. His critics point
out though that Estonia lost much of its monetary control when it
instituted its currency board system in 1992, against the wishes of
the International Monetary Fund.

However, a recent internet poll showed that almost 80 per cent of
Estonians are against abandoning the kroon, which is seen as a symbol
of the country's rapid economic progress.

An early move to the euro might have to be put to a referendum.

Given that support for joining the EU itself is just under 50 per
cent, according to recent polls, it might not be so easy to push
aside the kroon.