EU Economics: Estonia joins the Euro

The New Year sees the seventeenth country join the Euro with the arrival of Estonia into the single currency bloc. Read Estonians prepare to join the euro and ditch the kroon The Baltic State with just 1.3 million inhabitants experienced and then suffered an unsustainable inflationary boom in the years immediately after entering the EU in 2004 and that boom came to a spectacular end in 2008.

In the depths of the recession real GDP was falling at an annual rate of nearly 15% and the rate of unemployment has more than trebled. Severe fiscal austerity measures have cut government spending costing thousands of jobs in the near term although Estonia is a country with the lowest state debt of any nation inside the EU. Estonia’s centre-right government made budget deficit cuts equal to more than 9 percent of GDP

The country is extremely small in the context of Euro Area GDP as a whole - is it too small to pursue it’s own independent monetary policy? The Estonian kroon has been fixed (or pegged) to the German mark and then to the euro, since its launch in 1992 when Estonia became the first ex-Soviet state to quit the rouble zone. So in effect Estonia has been part of the Euro Area for many years - now it decides to allow the Euro to become the median of exchange for all transactions.

The standard arguments about the costs and benefits of locking a nation into a single currency have been a common feature of political debt in Estonia for some time but her entry into the Euro becomes a reality in a few days. In many ways the decision is built more around its political significance. Changing to the Euro is the culmination of Estonia’s move westwards away from the dominance of neighbour Russia after entering the European Union and NATO in 2004.

Latvia and Lithuania look to be the next entrants to the Euro but this may not happen until 2015. Three major economies - Poland, the Czech Republic and Hungary all have big reservations about entering and wish to retain the flexibility of having their own currency.

More articles here on Estonia’s accession to the Euro:

Estonia still keen on single currency (Financial Times)

Estonia prepares to join the the single currency (BBC news video)

As Euro Struggles, Estonia Readies for Entry in Currency (New York Times)

Updated video - April 2013 (Financial Times)