Estonia embraces euros

On Jan. 1, 2011, Estonia becomes the 17th euro country. What does this mean for the former Soviet republic – and for the euro?

Ints Kalnins / Reuters
A plate at a Christmas market in Tallinn, Estonia, displays price tags in Estonian kroonas and in euros, Dec. 31. On January 1, Estonia will join the Euro zone.

Defying the predictions of a collapse or a break-up, the euro area will tomorrow expand with its 17th official member (in addition, a number of smaller countries like Andorra, Monaco, San Marino and Kosovo use the euro without being formal members): Estonia.

This will have almost no effect in terms of macroeconomic policy since Estonia has pegged its currency to the euro (or the D-mark before 1999) since June 1992, which means that they have already adopted the monetary policy of the ECB (or the Bundesbank before 1999) since then. The difference will be mainly symbolic, but it will also mean that transaction costs will be removed and the credibility of the elimination of exchange rate risks will be strengthened.

Estonia, like Latvia and Lithuania, had a depression in 2008-09 following a long period of rapid growth. Now, like Latvia and Lithuania, Estonia is recovering fast. The recovery is however so far even stronger in Estonia compared to Latvia and Lithuania, with Estonia having at 5% the fastest GDP growth in the EU in the third quarter after only Sweden (and possibly also Luxembourg who hasn't yet published third quarter numbers, but grew by 5.3% in the second quarter). Industrial production is growing even faster than in Sweden (up as much as 35.1% in November compared to a year earlier).

Meanwhile, its fiscal situation is one of the strongest in Europe, having the third smallest government deficit (after Sweden and Luxembourg) and the smallest public debt.

Thus, while Estonia is still suffering from the after effects of the 2008-09 depression with an unemployment rate which despite recent declines remains far too high, it has a bright future overall with its strong fiscal situation and high growth rate.


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