Estonia received the final okay from eurozone finance ministers on Tuesday to enter their currency union next year. It will become the 17th European Union member to do so when it joins on January 1, 2011.
And yes, it appears the country was not put off joining the monetary bloc due to the fiscal woes of Greece.
Indeed, its pension funds were supposedly even buying Greek debt as recently as January this year.
(Although, surely a straight Greece for Estonia swap would have more made sense, eh?)
To be serious though, Estonia does come across as a bit of a poster child for the eurozone, having itself — as the FT reports – emerged from fiscal austerity measures via its quest to meet eurozone debt criteria in time for euro entry:
Estonia has been hailed as an example for the rest of Europe after battling to keep its public finances within the EU’s criteria for euro entry in spite of a deep recession last year.
Its budget deficit was 1.7 per cent of gross domestic product in 2009, well within the 3 per cent Maastricht limit, while its government sector debt was the lowest in the EU at 7.2 per cent of GDP.
Although, that’s not to say the country doesn’t face other issues.
According to analysts at Danske Bank, Tallinn still stands a very real chance of breaking Maastricht rules on inflation. Here, for example, is what they observed last week on that front:
The current consumer price dynamics pose additional threats to inflation in Estonia. Where previously we had thought that the main risk had come from external markets, it is now clear that domestic market inefficiencies may bring some surprises as well.
It seems that the latter shock in communication service prices was determined mainly by market inefficiency and poor competition in this area, although the official explanation was “ending of the special offers”. Obviously, a rise in consumer prices could complicate the recovery trend. There is a growing risk that Estonia might not fulfil the Maastricht criterion on inflation.
While it is clear that the European Commission will not change its opinion regarding Estonian euro adoption in 2011, the current inflation trend confirms the ECB’s concerns that Estonia might not fulfil the necessary criteria within this timeframe.
Either way, though, we’re sure they’ll still be celebrating in Tallin come New Year (even if the champers is a little more expensive).
Related links:
A CEE stress snapshot - FT Alphaville
Estonia wins approval to join eurozone – FT