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Europe

Commission gives green light to Estonia joining eurozone

Text by News Wires

Latest update : 2010-05-12

The EU Commission on Wednesday recommended that Estonia join the eurozone on January 1st 2011, making it the latest EU member state to adopt the EU's single currency.

AFP - The European Commission on Wednesday gave Estonia the green light to become the 17th country to switch to the shared euro currency as of January 1, 2011.
   
"Estonia has achieved a high degree of sustainable economic convergence and is ready to adopt the euro on 1 January 2011," European Union Commissioner for Economic and Budgetary affairs Olli Rehn said.
   
"To ensure that the adoption of the euro is a success, Estonia must pursue its efforts to maintain a prudent fiscal policy stance," Rehn noted, urging Tallinn to "remain vigilant and react early and decisively" if problems emerge.
   
The single currency's future remains uncertain in the eyes of some analysts despite a trillion-dollar economic stabilisation programme for eurozone countries announced on Monday.
   
Worries over the eurozone's debt problems sent gold to a record high on Wednesday while the euro slid as investors looked for safer assets.
   
However, Rehn said that the decision on Estonia "is also a strong signal about the euro area (which) ... underpins the role of the euro as medium-term policy anchor" for the bloc as a whole.
   
The opinion of the European Union's executive arm must be endorsed by its fellow EU nations.
   
If they give the green light, then the eurozone will next year have its first Baltic member and its third ex-communist state.
   
In order to qualify, candidate nations must respect several criteria -- keeping national debt and deficits under control as well as inflation, with limited fluctuations on foreign exchange markets and on interest rate levels.
   
According to the latest EU estimates, Estonia will post a public deficit amounting to 2.4 percent of gross domestic product this year and debt of 9.6 percent of GDP -- levels which most of Europe can only dream of.
   
The eurozone average public or budget deficit this year will be 6.6 percent, with debt at 84.7 percent, well above limits of three percent and 60 percent, respectively.
   
The European Central Bank pointedly warned Estonia on Wednesday that it could struggle to keep inflation under control if it joins the eurozone.
   
"There are concerns regarding the sustainability of inflation convergence in Estonia" because while prices were contained at the moment, that was in large part the result of temporary factors, the ECB's Convergence Report 2010 said.
   
These included "the ongoing severe economic adjustment process" Tallinn has undertaken to adopt Europe's single currency in January, and which played its part in causing its economy to contract by a whopping 14.1 percent last year.
   
The commission said Estonia would "need to remain vigilant to keep inflation at a low level," notably by "keeping domestic demand in line with fundamentals."
   
Estonia, with its 1.3 million inhabitants, had initially hoped to join the euro club in 2007 but was prevented from doing so by high inflation rates at the time.
   
Estonia shifted rapidly from a communist command economy to the free market after breaking from the crumbling Soviet bloc in 1991 and its economy began to grow quickly, especially after joining the European Union in 2004.
   
Hit by the global crisis in 2008, Estonia's government slashed public spending to confront the crisis and maintain its drive to switch from the national currency, the kroon, to the euro.
   
The government has said Estonia has cleared all the EU's hurdles for adopting the euro.
   
There has been speculation, however, that the eurozone's current 16 nations could be wary about taking on a new member given the pressures on them in the fallout from the Greek debt crisis.

Date created : 2010-05-12

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