ESTONIA

Impact on Estonia's Economy after Joining Euro Zone



Impact on Estonia's economy after joining euro

Introduction

In December 1991, Europe's leaders took a bold step: they agreed to abandon their countries' national currencies and adopt a shared single currency. In a treaty signed in Maastricht, the Netherlands, the leaders of 12 nations--Great Britain, France, Germany, Italy, Ireland, Belgium, Denmark, the Netherlands, Spain, Portugal, Greece and Luxembourg--agreed to form "an ever closer union" that will pursue common economic, defence and foreign policy goals. The integrated union would become the largest economic entity in the world.

The most controversial aspect of the pact, known as the Treaty on European Union or simply the Maastricht Treaty, has been its provision to establish a single European currency, to be called the euro. Since the treaty took effect in November 1993, most members of the European Union (EU, the body formed by the treaty) have pushed forward with the single-currency plan, while others, notably Great Britain, have been reluctant to commit to the euro and have not yet announced plans to adopt it.

Of the now 15 EU nations--Finland, Sweden and Austria joined in 1995--11 are expected to join the common currency, beginning in January 1999. The governments of prospective euro member nations must meet strict economic criteria laid down in the Maastricht agreement, including specific limits on budget deficits, public debt and national inflation rates. Over the past few years, EU member governments have struggled to bring their economies in line with the requirements.

Discussion

By some measures, tiny Estonia is Europe's model of a successful economy: a rock-bottom debt load of 6.7 per cent of GDP (compare that to Greece's 152 per cent), employment growth of 7.7 per cent year-over-year, and a second-quarter GDP growth of 8.4 per cent.

But those gains represent a long journey back to pre-recession levels after a very steep dive. The country's pro-market agenda has led it to keep its debt down at all costs, forcing other measures to plummet. Estonia's unemployment rate in the second quarter of 2011 was 12.8 per cent, a big labour gain from 2010's average of 16.9 per cent -- but still far higher than the 4.7 per cent unemployed in 2007.

Of course, all this is in the shadow of Estonia's decision to adopt the euro, the country's biggest economic move since gaining independence 20 years ago after the collapse of the Soviet Union. Estonia joined the shared currency in January, after years of running a tight fiscal ship to meet membership requirements.

But membership comes with a cost, as profligate European countries are discovering. In a common currency, you can't devalue your way back to prosperity. A brutal internal austerity program is about the only option -- and one that mature Western economies may not have the stomach to impose (Talani, 2008).

Greece and Italy, now seen to be dragging their heels in implementing austerity, have suffered more than if they had begun dealing with their debts in the early days of the recession, as Estonia ...