Estonians Keep Faith in Euro a Year After Currency Switch

Tallinn, Estonia’s capital, benefits from cheap labor and low interest rates. Photographer: Simon Dawson/Bloomberg

A little more than a year ago, the Baltic country of Estonia adopted the euro at a time when the Greek crisis and the Irish, Spanish, Portuguese, and Italian crises, were exposing the common currency’s weaknesses.

Slovakia, another eastern European nation that had joined the euro, was angry that it had to help the Greeks. The Poles and the Czechs were dragging their feet on joining. Yet by treaty all European Union members were required eventually to join the common currency, while two, the U.K. and Denmark, have secured opt-outs.

Today, Estonia’s economy is the fastest-growing in the currency bloc, consumers and businesses are paying lower interest rates, and business ties with Finland, a euro-member state and Estonia’s main trading partner, are tighter than ever, Bloomberg Businessweek reports in its Feb. 6 issue.

“Lots of Finnish producers seek cooperation partners here now as things are more transparent for them,” said Ermo Saks, owner of an audiovisual production company in the capital of Tallinn. Costs were 48 percent lower in Estonia than in Finland in 2010, according to Eurostat website.

Fifty-six percent of the Baltic nation’s inhabitants still back the adoption of Europe’s single currency, compared with 42 percent who regret the move, according to a government-commissioned poll of 500 respondents by Turu-uuringute AS in October. This compares with 60 percent support last January, and 49 percent support a year earlier, according to similar surveys commissioned by the government. No margin of error was given.

‘Small and Poor’

Estonians, two decades removed from their half-a-century entrapment inside the Soviet Union, feel safer inside the euro club.

“A small and poor state on the periphery with Russia as its neighbor, being a member of the European core is still very valuable even if the euro zone is in a time of great difficulty,” said Andres Kasekamp, a political science professor in Tartu University.

Estonia’s $19 billion economy shrank by almost a fifth in 2008 and 2009, after its property bubble burst and the global financial crisis sucked all credit out of the economy. In response, the government cut public-sector wages 10 percent, raised taxes, took bigger-than-planned dividends from state-owned companies and froze pension contributions to meet the 3 percent budget-deficit limit for euro entry.

‘Ended All Speculation’

Public debt was 5.8 percent of gross domestic product at the end of last year, the lowest rate in the European Union, and the budget was in surplus, Prime Minister Andrus Ansip said in December. The economy grew 7.9 percent last year, according to a central bank forecast on Dec. 14, partly as adopting the euro boosted the confidence of its EU trade partners.

“The most important thing was that we ended all the speculation about a possible devaluation” of the kroon, says Priit Perens, the chief executive officer of Swedbank AS, Estonia’s biggest lender owned by Stockholm-based Swedbank AB.

Fears that all the Baltic countries would eventually devalue their currencies had hampered investor confidence for a long time. A devaluation might have given only a minor boost to exports, according to the International Monetary Fund and the government, as Estonia’s exports largely depend on import costs, adding little value.

In 2009, when devaluation rumors peaked, more than 90 percent of all bank loans were already in euros. Paying back those loans in a devalued currency would have been very hard, potentially triggering an even deeper crisis.

‘Convenient Travel’

The average lending rate to companies fell to 4.48 percent at the end of November from 6.49 percent at the end of 2008, according to Estonian central bank data. Rates on mortgages in euros dropped to 3.4 percent in November from 5.26 percent at end-2008.

“Making travel more convenient for our clients was the clearest effect of the euro entry for us,” said Luulea Laane, a spokeswoman for ferry company Tallink Grupp AS. Tallink is Estonia’s largest company by revenue, which increased 10 percent in the financial year ended Aug. 31, to 897 million euros.

Estonia has no outstanding bonds, so investors speculate on its creditworthiness by trading credit-default swaps. Five-year Estonian CDS traded at 131 points at 11 a.m. in Tallinn, according to prices from data provider CMA. The third-riskiest of the European Union’s 27 members three years ago, it’s now among the six safest. Standard & Poor’s Ratings Services on Jan. 13 affirmed Estonia’s AA-rating, the fourth-highest investment grade and the highest rating in eastern Europe on par with the Czech Republic.

Opponents of the switch resent the pain they went through to qualify for the euro.

“I don’t see what the point was of adopting the euro,” said Hannes Valja, 30, a printer. “The associated cost was too high considering what we got in exchange.”

The resentment might flare up in the next two months, when the Estonian Parliament discusses the use of funds raised by the European Financial Stability Facility to bail out Greece. Estonia, with a 2011 budget of 6 billion euros, has committed to a maximum of 2 billion euros of guarantees.

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