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Estonian Accession to the Eurozone – Boarding a Sinking Ship?

January 26, 2011

This past Friday, WEST hosted IU professor Toivo Raun at the first brownbag discussion of the semester. Professor Raun spoke about Estonia’s accession to the eurozone, which took place on January 1 of this year. As a member of the EU, NATO, the Schengen border agreement, and now the eurozone, Estonia joins the most integrated core of European countries. This move furthers the country’s ambition of “returning to Europe”, a goal set after restoration of Estonian independence from the Russian Federation in 1991. Estonia endeavors to further integrate into Europe not only economically and politically, but culturally as well. Yet the question hanging over Estonia’s eurozone membership remains – is this really the best time to be joining, or is Estonia boarding a sinking ship?

Estonia was the first former Soviet republic to adopt its own currency, the kroon, in 1992. The country became a poster child for successful economic transition by tying their currency first to the German Deutsche Mark and then to the euro, reducing inflation, retaining a consistent exchange rate, and maintaining fiscal stability. Since Estonia didn’t have time to develop an advanced welfare state during or after the Soviet period, the reduction of services necessary for meeting eurozone criteria was no big shock to the population. In fact, Paul Krugman of the New York Times noted that other EU Member States could learn from the so-called “Baltic model” – fiscal austerity, budget cuts, and a reduction wages.

Despite its fiscal strength, Estonia is still the poorest member of the eurozone. A degree of nostalgia still exists for the Estonian kroon, which existed for only 18 years but left its mark on the national identity of the population. To ease the monetary transition, the Estonian government sent kroon-to-euro conversion calculators to every home the country. Many Estonians have previous experience dealing with the euro, and an overall optimism and receptivity is pervasive.

Estonia’s relationship with neighboring Finland has also played an important role as a model of a country with an awareness of the outside world, particularly in the form of accepting foreign investment, which Estonia also hopes to attract more of. In addition, Finnish tourists have a strong effect on the Estonian economy, and policymakers hope that eliminating the need to exchange currency between the two countries will encourage more tourism and spending by Finns in Estonia. The case of Finland indicated to Estonians that a small country could maintain its own national identity within the EU, as Finland had also been wary of losing its identity within the supranational construct, but in reality, this did not occur. Still, the typical gap exists between the elites and the population in Estonia on the topic of EU membership. Public opinion is, however, more positive than that of the other Baltic states, although fear of inflation and higher prices still exists within the general public.

So what about timing? The pro-eurozone argument contends that a small country like Estonia needs the security and assurance of a strong currency like the euro. Although the recession has somewhat weekend the currency’s position, the EU always seems to muddle through, an “unidentified political object” with the ability to adapt to its changing situation. With the euro appearing especially vulnerable, many people have asked, “Why not wait a few years?” By joining now, Estonia takes on the costs of participating in bailouts and surrenders its economic flexibility. Once meeting the stringent requirements of eurozone entry, however, the EU has virtually no means to enforce these conditions, so perhaps Estonia is better off joining while it can.

Estonia also has an impressively low public debt – the lowest in the EU – at only 7% of GDP. When compared with other EU Member States (such as Greece at 127%, Italy at 116%, and Belgium at 96%), another potential reason for Estonia’s recent eurozone accession comes to light. If the eurozone does not survive the current recession, when realignment occurs, a two-track solution is a possibility. If so, Estonia will be in an excellent position to join the strong countries; bottom-line, Estonia will be with Germany. The Wall Street Journal recently hailed Estonia as the “anti-Greece”, which is perhaps exactly what the eurozone needs to turn itself around in the near future.

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One Comment leave one →
  1. David Wilson permalink
    June 21, 2011 4:34 pm

    Reading this on 21 June 2011 makes anyone wonder why you would want to board a sinking ship!

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