Single Currency

Has Estonia boarded a sinking ship?

Published on 3 January 2011 at 16:49

On New Year’s Day, Estonia became the 17th member of the eurozone. “Switching to the euro isn’t going to fundamentally change the lives of Estonians, but they are going to have to grow accustomed to knowing how much items cost in euros,” says Postimees of the transition in simple terms. “People are probably going to be more cautious about spending for a while and calculate closely to figure out whether the price in euros corresponds to the price in Estonian crowns. Experience will put them on their guard against prices that are a little too ‘rounded-off’.” “With the country’s entry into the eurozone, Estonians won’t have to worry about devaluation any more, a fear that was very real only a year ago,” adds the daily.

But the skies over the eurozone haven’t been entirely unclouded over the past few years. The crisis has revealed the dearth of fiscal discipline in several states, and pessimists are mooting a possible breakup of the zone. “This context makes us wonder why Estonia bent over backwards to board a ship that is going to be wrecked,” wonders Postimees. “If the eurozone does indeed break up, that would be such a huge collapse that it wouldn’t really matter whether one is inside or outside the zone.”

“Little Estonia is going to bolster the euro,” predicts Edin Mujagic from the University of Tilburg in the Netherlands. Writing in Amsterdam daily De Volkskrant, the monetary economist points out that even if the Baltic republic is not an economic superpower, it is a “wonder” in matters of public finance. Its public debt comes to a mere 7%, significantly less than those of the eurozone’s economic powerhouses. In fact, adds Mujagic, Estonia’s entry into the single currency club is good news for Germany, the Netherlands and Finland. For these self-styled fiscal rigourists, the fact that the European Central Bank is admitting to its ranks a country “that encourages healthy public finance, does not want to finance its debt by selling government bonds and prioritises keeping inflation under control is not a bad development”.

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