IMF Says Estonia is Ready for Euro

Well, it looks like Eesti's Euro hopes aren't over just yet. A staff visit from the International Monetary Fund this week pointed out some items of concern, but overall gave Estonia the thumbs up for joining the European Monetary Union and adopting the Euro as a currency.

However, the IMF did highlight three key risks.

· The possibility of overheating. While productivity improvements could support high rates of growth for many more years, growth is now well above current estimates of potential growth (around 7 percent) and is thus not sustainable. Unchecked, this could lead to labor market pressures and, possibly, higher inflation.

· External imbalance. The large external current account deficit-the counterpart of private capital inflows-is a side effect of catch-up growth, but is not sustainable in the long run. In time, the deficit will shrink as households and firms need to stabilize or reduce their foreign liabilities. This could require sizeable resource reallocations. The key to a smooth adjustment will be to sustain Estonia's liberal economic institutions and flexible labor market, which are the basis for a nimble, fast-growing economy.

· Rapid credit growth. Low interest rates and strong investment demand have sparked exceptionally rapid credit growth, which raises prudential concerns, particularly since most borrowing is in foreign currency, albeit in euros. The authorities' concern is appropriately focused on the credit-financed real estate boom, possibly a bubble, which could end with financial stress for households if growth stumbles or interest rates rise sharply.

Still, the IMF sees the adoption of the common currency as benefiting Estonia's economy in the long run, rather than being just another obstacle.

Overall, Estonia is well placed to join the EMU and would benefit from membership. Early euro adoption is an appropriate target since this would reduce, if not eliminate, the risks faced by the economy as it continues on the path to real convergence. Nevertheless a delay would not create significant risks so long as the CBA continued to be underpinned by strong financial and structural policies.

Still, there is always the chance that Estonia could go the way of the other northern EU members, Sweden and Denmark. Of all the Nordics, I think that Estonia is politically most similar to Denmark - and the Danes have remained Euroskeptics through and through.

So don't be surprised by opinion polls like this one that show limited enthusiasm for Euro adoption.

According to a survey by TNS Emor, 40% of people aged 15–74 are in favour of the introduction of the euro in Estonia. 50% of the population is opposed to the European single currency.

The survey conducted in March showed that the introduction of the euro in Estonia is supported more by men, Estonians, people less than 51 years old and those with higher incomes.

People see benefits of the euro mainly in the fact that travelling to the euro zone countries will become simpler.

According to this survey, only one-third of the population is aware that upon the introduction of the euro, Eesti Pank will exchange kroons to euros for an indefinite term.

According to the survey, the support of citizens for Estonia’s membership in the European Union remains stable: it was 68% in March.