World Bank: Estonia next to adopt the euro
19.11.2009, 15:05Estonia is set to become the next euro member as years of fiscal prudence help it to recover faster than neighboring Latvia and Lithuania, a World Bank economist said, reported Bloomberg.
“It’s doing everything it can to keep the deficit within 3 percent of GDP this year,” Thomas Laursen, the World Bank’s country manager for Poland and the Baltics, said in an interview in Warsaw. “Estonia will be the next country to adopt the euro.”
The former Soviet state has cut its budget at the expense of domestic demand, exacerbating the second-deepest recession in the European Union, to ensure the currency switch. The government is betting euro membership will support trade and encourage investment, justifying the economic pain needed to pass the bloc’s budget tests. Estonia would become the third east European state to join the monetary union after Slovenia and Slovakia.
Laursen is adding his voice to a group of analysts predicting Estonia will achieve euro membership by its target date of January 2011. The International Monetary Fund said this week the country is “well on its way” toward adopting the euro in 2011. Nordea Bank AB, the biggest Nordic lender, said on Nov. 17 the Baltic state’s target is a “realistic dream.”
EU rules require countries wanting to join the euro to keep their budget gaps within 3 percent of gross domestic product and debt levels below 60 percent of GDP. Estonia’s budget gap will be 2.8 percent of GDP in 2009 and 2.95 percent in 2010, the government estimates.
The country’s debt to GDP ratio will be 7.4 percent in 2009, the lowest in the European Union, and compares with an estimated average in the 27-member bloc of 73 percent this year, the European Commission said on Nov. 3.
The government has cut public spending, including freezing mandatory pension contributions, raised taxes and booked higher dividends from state-owned firms to reduce the budget deficit by 9 percent of GDP this year. The measures contributed to a 15.3 percent annual contraction in the third quarter, following a 16.1 percent slump in the second.
Estonia will meet the EU’s inflation target by December, the central bank and Finance Ministry said last month. The bloc’s requirement on long-term interest rate convergence doesn’t apply because the government has no outstanding bonds, the European Central Bank has said.
Estonia is “doing much better” with regard to its euro- adoption bid “than the other Baltic countries,” Laursen said.
The economies of the Baltic nations are suffering the EU’s deepest contractions as budget cuts undermine demand and currency pegs stall an export recovery.
The three countries, which had targeted becoming the first eastern European states to adopt the euro after joining the EU in 2004, had to shelve plans after an economic boom in the region boosted inflation above entry targets.
Latvia, which is relying on a 7.5 billion euro ($11.2 billion) IMF and EU loan to stay afloat, says it won’t be able to adopt the euro until 2014 while Lithuania has no official target.
Estonia, which accumulated reserves from previous budgets surpluses, has weathered the crisis better than Latvia and Lithuania.
“The main problem in the Baltics was overheating and excessive expansion of domestic demand. But they’re also very open economies, and so they had a real double whammy this time round,” said Laursen. “The party got out of hand there and now they’re having to live with the hangover.”
Latvia’s economy contracted 18.4 percent in the third quarter from the same period a year ago, while Lithuania’s output shrank 14.3 percent.