Estonia’s determined push to adopt the euro as its legal currency has reached its final stage as the government today approved a convergence program that it believes will pave the way for euro adoption next January. Barring any unforeseen surprises, Estonians will exchange their kroons for euros in less than a year.
The Finance Ministry’s report concludes that Estonia has met the requirements for adopting the euro. Known as the Maastricht criteria, these include a cap on government budget deficits of 3 percent of GDP, maximum government debt of 60 percent of output, and inflation no more than 1.5 percent above the average of the three European Union countries with the lowest inflation rates.
Estonia is not alone in its optimism. Two European political heavyweights — German foreign minister Guido Westerwelle and EU commissioner Olli Rehn — have recently voiced support for Estonia’s euro bid.
So what are the pros and cons for Estonia of joining the euro club? Here’s a concise summary of the arguments on both sides of the debate.
- Estonia becomes a much more attractive target for foreign investment, as foreign investors won’t need to worry that their investments will lose value due to currency fluctuations
- The country is insulated from the unpredictable and potentially devastating forces of foreign currency speculation
- Estonian households and businesses are able to borrow money, free of foreign exchange risk, from any bank in the eurozone; the increased competition could considerably reduce Estonians’ borrowing costs
- Estonians reap the psychological benefit of full membership in every European club
- Estonia loses control over its own monetary policy; decisions about interest rates and the amount of money in circulation will be made in Frankfurt rather than Tallinn
- The process of qualifying for the euro may have made Estonia’s recession deeper by restricting government spending just when it was most needed
- Estonians must endure the loss of a big source of national pride, the kroon
Estonia’s application will be voted upon by the European Commission on June 18th. If it is approved, Estonia will, on January 1, 2011, become the 17th country to adopt the euro as its official currency. And it will be time to wave goodbye to the kroon.
CORRECTION: An earlier post asserted that the euro could be adopted by Estonia as early as June 2010. This is of course the earliest possible approval date; as noted above, the soonest adoption date is January 1, 2011. Estonia on the Map regrets the error.