Estonia: Ready for the Euro Club

While Europe convulses over its deficits, one country has been pinching pennies. The Baltic nation of Estonia (pop. 1.3 million) will outperform the 16 euro nations on the European Union's fiscal criteria this year, according to the European Commission. On May 12 the EC backed Estonia's bid to join the euro zone. Says Christian Keller, chief economist for emerging-market currencies at Barclays Capital (BCS): "Estonia seems a model of the fiscal discipline that the EU now wants for the entire euro area."

Since independence from the Soviet Union in 1991, Estonia has adopted a convertible currency, free trade, privatized industry, and a flat tax. To join the euro zone, it cut its debt to 7.2 percent of gross domestic product and its budget deficit to 1.7 percent of GDP.

Estonians, though, gained an appetite for imports, which resulted in a huge trade deficit. The government struggled to contain inflation, a weakness the European Central Bank has warned Estonia about. Finally, a property bubble burst when credit got tight. Estonia's economy contracted 14 percent in 2009. It's expected to return to growth in 2010.

The bottom line: A tightly controlled budget is the fastest ticket into the euro zone, but it doesn't always guarantee a smoothly functioning economy.

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