Estonia's Entry Expands Euro Into Former Soviet Union

Estonia celebrated its entry into the euro with a midnight fireworks display, shrugging off the sovereign debt crisis rippling through Europe to extend the currency block into the former Soviet Union for the first time.

Wedged between Russia and Latvia on the Baltic Sea, Estonia became the 17th country to switch to the currency. Gross domestic product of 14 billion euros ($19 billion) makes it the second-smallest euro economy after Malta.

“I hope other countries will notice that we met the euro- entry terms despite difficult times and this will improve Estonia’s reputation,” Kaspar Nuut, a 24-year-old student, said in central Tallinn, where temperatures dropped to minus 7 degrees Celsius (19 Fahrenheit). “We would have had to adopt the euro anyway, so better sooner rather than later.”

As Europe grapples with the financial crisis, Estonia may be the last addition to the euro club for several years. Lithuania and Latvia, the next in line, aim to adopt the currency in 2014, and bigger eastern countries have shied away from setting target dates.

“For Estonia, the choice is to be inside the club, among the decision makers, or stay outside of the club,” Prime Minister Andrus Ansip told reporters yesterday in Tallinn, the nation’s capital. “We prefer to act as club members.”

Ansip is scheduled to withdraw the first euros from a ceremonial cash machine at 16 minutes after midnight. All of the nation’s roughly 800 automatic teller machines have been loaded with euro notes so residents can follow suit, the local unit of security company G4S Plc said in a statement.

Estonia, with debt estimated by the European Union at 8 percent of GDP this year, will be the fiscally soundest country in a currency bloc plagued by budget woes that forced Greece and Ireland to seek European and International Monetary Fund aid.

Confidence in Euro

“The euro is still generally seen as a positive for the applicant countries as long as the conversion rate is somewhat competitive,” Elisabeth Gruie, an emerging-markets strategist at BNP Paribas SA in London, said in an e-mail. High deficits are keeping Poland out and an “inner desire for independence” is the obstacle in the Czech Republic, she said.

Estonia’s central bank chief, Andres Lipstok, 53, will join the European Central Bank’s policy-setting council, taking part in his first interest-rate vote on Jan. 13 in Frankfurt.

Some 85 million euro coins featuring a map of Estonia and 12 million bank notes go into circulation tomorrow, according to the central bank, starting a two-week phase out of the national currency, the kroon. One euro buys 15.6466 krooni.

Easier Travel

“I definitely support euro adoption as it will make traveling easier when all of Europe has the same currency,” Ivi Normet, a 45-year-old civil servant, said as crowds gathered for the celebrations. “I hope it will also benefit other aspects of life in Estonia.”

The 1.3 million Estonians have little experience of monetary autonomy. In June 1992, less than a year after gaining independence from the Soviet Union, Estonia shifted from the Russian ruble to a national currency that it immediately pegged to the German mark. The exchange rate was locked to the euro when the first 11 countries began using it in 1999.

Estonia in 2004 was in the initial wave of eastern European countries to join the EU, seeking a western anchor as an insurance policy against Russia.

“Estonia’s entry means that over 330 million Europeans now carry euro notes and coins in their pockets,” European Commission President Jose Barroso said yesterday in a statement. “It is a strong signal of the attraction and stability that the euro brings.”

Growth Returns

Economic growth averaged 7.2 percent between 1995 and the onset of the global financial crisis in 2007. Reliant on foreign investment, Estonia was hit harder than most in the global slump, with the economy shrinking 5.1 percent in 2008 and 13.9 percent in 2009, the sharpest contraction since its transition to a market economy at the beginning of 1990s.

Estonia’s path to adopting the currency was marred by high inflation. Consumer prices soared 10.6 percent in 2008, missing one of the five economic tests for euro entry. The other targets are for deficits, debt, long-term interest rates and exchange- rate stability.

While the deficit, at 2.8 percent of GDP in 2008, was under the euro’s 3 percent limit, the government kept up the austerity drive. Tax increases, spending cuts and higher dividend collection from state-owned companies whittled the shortfall to an estimated 1 percent in 2010.

Opportunity in Crisis

Unlike in Latvia or Lithuania, Estonia’s neighbors along the Baltic coast, the belt-tightening didn’t provoke public unrest. Growth rebounded to 2.4 percent in 2010 and will reach 4.4 percent next year, the EU predicts.

“The Estonian government early in the crisis realized that it provides a great window of opportunity,” said Andres Kasekamp, a politics professor at Tartu University. “The austerity and cuts in the public sector were necessary anyhow, but to make it more palatable, the government created a vision that these cuts are in the name of joining the euro.”

Backing for the euro ebbed to 52 percent this month from a record 54 percent in November, according to a government- sponsored poll of 501 people with a margin of error of 4 percent. The Finance Ministry on Dec. 21 blamed the slippage on nostalgia for the soon-to-be abolished kroon.

By contrast, support for the single currency is plunging in Germany, which designed the euro as the successor to the deutsche mark. Some 49 percent of Germans want to bring back the mark and 41 percent want to keep the euro, according to a Bild newspaper poll last month.

“This really is a coin with two sides,” said Tiiu Braman, a 65-year-old pensioner in Tallinn. “Of course the kroon is very important to us historically and beautiful and so on, but we probably can’t make it without the euro. Still, everyday life will be a bit more complicated for a while.”

To contact the reporter on this story: Ott Ummelas in Tallinn at oummelas@bloomberg.net

To contact the editor responsible for this story: Willy Morris at wmorris@bloomberg.net

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