Estonia’s resolve to adopt the euro on Jan. 1 is strengthening as politicians, companies and consumers bet the switch will make them safer, even after the currency quaked under $260 billion of bailouts.
“We are at sea in a small boat tied to an ocean liner,” Finance Minister Jurgen Ligi said by e-mail. “In a storm or otherwise, we’d feel better being on board.”
As countries including the Czech Republic and Poland balk at adopting the euro after members were forced to bail out Ireland and Greece, Estonian support for the common currency is rising. Backing for the euro rose to 54 percent in November from 49 percent the previous month as a government campaign helped blunt concern about the debt crisis, according to a poll commissioned by the Cabinet. A new survey is due out next week.
Estonia will be the first country to join the euro region since the crisis gripped Europe. The former Soviet republic of 1.3 million people, which in the past two decades shaped its economy after Ireland, is counting on eliminating currency risk in a nation already dependent on euro-denominated loans and trade.
“We should move on as a country, and I think this will give more chances to Estonia and its people to improve their life,” said Igor Beloborodov, a 23-year old client-service representative. “I’m not worried by the Irish events.”
‘Big Brothers’
More than 90 percent of Estonian private loans are in euros, with most of them tied to the euro interbank offered rate, or Euribor, central bank data show.
“What the euro zone offers is risk sharing,” said Agnes Belaisch, a London-based strategist at Threadneedle Asset Management Ltd., which oversees $100 billion. “There are clear advantages of having big brothers.”
The euro region “can handle problems better than yesterday and tomorrow better than today” and the cost of reversing European integration would be “acceptable to no-one,” Prime Minister Andrus Ansip said in Estonia’s parliament today. The switchover will bring more jobs, higher pensions and faster economic growth to the country, he said.
The added security of euro-area membership helped persuade Statoil Fuel & Retail ASA, the biggest fuel retailer in the Nordic countries, to set up its financial center in Estonia. It spent 270 million euros ($351 million), the biggest foreign investment in the Baltic country this year.
“We could have located the center in any of the three Baltic states or in Poland,” Chief Financial Officer Klaus- Anders Nysteen said by phone. “Estonia’s entry into the euro zone was very important to our decision and definitely gave added value to the location.”
Resisting Krugman
The kroon’s exchange rate has been fixed since its 1992 introduction, first to the Deutsche mark, then to the euro. The country resisted calls from economists including Paul Krugman and Nouriel Roubini to fight the EU’s second-deepest recession by abandoning the peg, opting to cut costs and raise taxes.
The currency became an advantage among the former communist countries of eastern Europe that agreed to work toward adopting the euro when they joined the trading bloc in the last decade.
Poland, Romania, the Czech Republic and Hungary, the group’s four largest countries, use versions of floating currency regimes and are further from qualifying for euro adoption than Bulgaria, Latvia and Lithuania, which have fixed exchange rates, said Fredrik Erixon, director of the European Centre for International Political Economy in Brussels.
“If there will be another round of expansion before” the second half of the decade, “it is the remaining Baltic countries plus Bulgaria that are in line,” Erixon said in an e- mail.
Following Ireland
Estonia followed Ireland’s example of betting on foreign investment to drive growth. Estonia abolished the corporate income tax on reinvested profits in 2000, attracting Swedish and Finnish companies to its banking, telecommunications and electronics industries.
Ireland was one of the poorest countries in Europe when it joined the EU in 1973. In the 1990s, lured by a 12.5 percent corporate tax, companies such as Pfizer Inc. and Microsoft Corp. helped Ireland export its way into becoming the “Celtic Tiger” as GDP growth in the decade through 2006 averaged about 7 percent a year.
Budget Discipline
Estonia’s economic growth averaged 7.2 percent from 1995 to 2007 as Nordic lenders expanded their influence to more than 90 percent of the financial industry. The country kept its budget deficit within the EU limit of 3 percent of economic output every year except 1999.
Budget discipline helped Estonia keep its public debt at the EU’s lowest level, 8 percent of GDP this year, according to a European Commission estimate. In Ireland, the economic expansion and easy credit fanned a real estate bubble, leading to a 97 percent debt level.
Ireland needed an 85 billion-euro aid package after predicting its budget deficit would swell to 32 percent of economic output this year, the highest in the euro’s 12-year history. With Greece’s 110 billion-euro bailout, the crisis exposed flaws in the euro area’s makeup and fueling doubts whether the 16 countries belong in the same currency union.
The consensus among Scandinavian investors two years ago was that Estonia would have to devalue the kroon to exit one of the world’s worst recessions, halting the flow of investment, said Joakim Helenius, executive chairman of Tallinn-based investment bank Trigon Capital.
‘Soviet Imperial Illusions’
Some Estonians say the country should continue focusing on its own economic development instead of relying on the debt- ridden euro area.
The currency switch may lead to “massive” price increases and its “one-size-fits-all” monetary policy, which “mimics Soviet imperial illusions” are wrong for the country, Anti Poolamets, a lawyer who organized an anti-euro movement, wrote Nov. 21 on the website Delfi owned by AS Ekspress Grupp, the only publicly traded media company in the Baltic region.
A poll commissioned by Poolamets in October showed that 52.8 percent of the 1,524 respondents in the survey opposed euro adoption. While the government asked people if they wanted to adopt the euro, the competing poll also highlighted the loss of the kroon, Poolamets said.
The opposition is myopic, according to central bank Deputy Governor Marten Ross.
“Criticism of the timing of Estonia’s euro entry reminds of cases where strategic decisions have been overshadowed by tactical considerations that in the end haven’t yielded any gains,” he wrote in an e-mail.
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