Estonia nudges nearer to euro nirvana

By bne IntelliNews November 5, 2009

Mike Collier in Tallinn -

Estonia moved one step closer to its goal of euro adoption on November 4 when Finance Minister Jurgen Ligi submitted a bill to the parliament paving the way for the replacement of the kroon. In addition to dealing with the bread-and butter issues that accompany a change of currency, the bill serves as another important signal to the European authorities that Estonia really is ready to join Slovenia and Slovakia as emerging Europe's Eurozone pioneers.

Estonia's target of euro adoption in 2011 has become almost an article of faith for the two-party coalition government of Prime Minister Andrus Ansip. The 2009 and 2010 budgets were drawn up with the need to keep within the Maastricht criteria at a time when the temptation to loosen the purse strings in a bid to exit recession and buy popularity must have been a sore temptation. But Finance Minister Ligi believes the public understands why the euro is such a big deal. "I'm sure we will do it. We will join in 2011," he told bne. "How aware people on the street are you never know, but they have strong support for joining the euro and we are explaining the concrete measures we are taking."

Maastricht is for everybody

Ligi said that regardless of Eurozone membership, the government's policy of eliminating the budget deficit and meeting the Maastricht criteria is an admirable goal in its own right. "This is not even a question of whether we are inside or outside. We are a small country and we can't take the risk of being in deficit for a long time," he said.

Speaking in his trademark quiet voice, his words peppered with thoughtful pauses, Ligi even had a subtle dig at Eurozone members who seem to forget the obligations of membership once they are admitted to the club. "Maastricht is for everybody. It doesn't even matter if Germany - or some other countries - are not meeting the criteria themselves, we have to. Our economy would not be so stable and strong otherwise."

In a memorable phrase, deputy governor of Estonia's central bank, Marten Ross, recently described euro adoption as "the cherry on top of the cake, but not the cake itself." It's a sentiment Ligi agrees with as he stresses that a sustainable economy is the long-term goal. "A surplus has to be achieved sooner, not later, because we have to restore the reserves as we did a couple of years ago," he said. "A lot can be done when you have imagination and aim for more than the EU's target of 0.5% consolidation per year. For us the ambition is much, much higher."

Indeed Estonia's accumulation of fiscal reserves during the boom years is what sets it apart from - and ahead of - its neighbours in Latvia and Lithuania, whose own euro adoption hopes have receded as quickly as their budget deficits have swollen. As the man responsible for ensuring Estonia's euro sums add up, Ligi anticipates expenditure of 89.6 and revenue of 84 billion kroons (5.7 and 5.4 billion euros respectively) for 2010, keeping to the 3% of GDP Maastricht limit. However, the International Monetary Fudn (IMF) cast slight doubt on those figures at the conclusion of its most recent mission to Estonia, suggesting that further fiscal consolidation measures equivalent to another 1% of GDP would be needed. Extra structural reforms needed to be introduced "sooner rather than later" the IMF said, and proffered a long list of suggested money-spinners, from broadening the tax base to cutting child benefit payments and introducing environmental taxes.

However, Ligi sees no cause for concern in the IMF's tone, noting that the organization's main message was that euro adoption in 2011 was within reach. "There is no urgent necessity to act," he said. "Of course, all these proposals will have to be discussed but the general attitude was support for our behaviour during the crisis.

"On the tax system the suggestion was for simplification, with which I agree, to abolish exemptions, to press ahead on consumption taxes and environmental taxes - but not on income tax, which is a question of competitiveness."

"There are some other taxes which have to be discussed to see if there is any consensus. Socially they are sensitive. On structural reforms, of course I agree. I have been saying the same thing. But... the IMF has a longer view than this year or next year, not quick fixes," Ligi said.

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