When I heard the news today that the European Commission had recommended that Estonia adopt the euro as its currency on January 1, 2011, I was pleased.
Though I appreciate the aesthetics of Estonia's national currency, the kroon, the euro is the money that most of Europe uses. There is a belief that the adoption of the euro will allay any concerns about investing in an insecure economy, turning the FDI tap back on next year.
Local leaders haven't yet done the happy dance on Toompea. They are being cautious, reserved, taciturn. Eesti Pank President Andres Lipstok warns that Estonia's work is pole tehtud -- not finished. We won't know for certain whether Eesti really will join the troubled euro zone until July. But people are talking nonetheless. Here's a roundup of what they are saying:
Edward Altman, finance professor at New York University’s Stern School of Business, calls the adoption "ill timed" in Business Week. "Expansion at this time is not a good idea," Altman is quoted as saying. "There may have been internal political pressures that we don’t know about that caused this to happen or maybe it shows they are still a dynamic entity and want to show the world they’re not finished."
Peter Garnham blogs on the Financial Times website that euro adoption is better for Stockholm than it is for Tallinn: "The adoption of the single currency will not change much for the denizens of Tallinn, whose currency, the kroon, has long been fixed against the euro in a currency board ... But the EC’s enthusiasm for Estonia to join the single currency did have an effect on the wider market, helping the Swedish krona to rally across the board."
Garnham cites UBS analyst Geoffrey Yu: "We believe this is a major positive for Swedish krona as the risk of [Estonian] devaluation will no longer exist."
Jack Ewing writing in the New York Times notes an "unusually blunt" report from the European Central Bank that seems less convinced of Estonia's readiness for euro adoption. "While the country is well within the limits on government spending and debt, the Baltic country has a history of high inflation that raises concerns," Ewing states, citing the ECB's position.
Meantime, The Wall Street Journal's Richard Barley writes that the EC's decision "sends a signal that the euro zone is here to stay—but it may be a while before there are any more entrants."
According to Barley, the move is "due reward for the extremely severe recession it has endured." He writes that it will "remove the risk of any foreign-exchange mismatch in private-sector lending, a key concern for Western European banks in the depths of the crisis." Still, he argues that there will be "big challenges on the monetary-policy front: euro-zone interest rates may well be too low to restrain inflation as the Estonian economy reaps the benefits of euro membership. And at some point, Estonia may get an expensive call to support other euro-zone states in trouble, as the current members are doing for Greece."
With the EC saying one thing and the ECB saying another, Estonia's favorite analyst Lars Christensen at Danske Bank said that "though Estonian euro membership is likely it is still not a done deal due to the ECB’s obvious reservations." Said Christensen, "This is now entirely a European political decision."
UPDATE. Here are some more:
Russian analyst Igor Kostikov tells the Voice of Russia that Estonia is well prepared for euro adoption: Noting that Estonia's public deficit is well within the 3-percent of the GDP, as required by the Maastricht agreement, Kostikov says that Estonia is an "even better budgetary performer than Belgium and France, let alone Greece and other countries in Southern Europe." According to Kostikov, Estonia's entry would be a "signal of Eurozone readiness to encourage frugal economies" and the "lure of the euro remains irresistible."
For some, Estonia's status as a former Soviet country is no longer something of which to be ashamed, at least when it comes to euro adoption. Ahto Lobjakas writes in Radio Free Europe/Radio Liberty online that, "assuming no late reverses, Estonia will be the third former communist-bloc country to join the euro after Slovenia and Slovakia." Poland and Romania are currently on course to accede to the single currency in 2015, he notes.
Edward Lucas, I presume, in The Economist reveals that the real remaining hurdle to Estonian euro adoption is political. "Some euro zone members (France is often mentioned) think that allowing an obscure and volatile ex-communist economy to join a currency union that has too many dodgy members already should not be a priority. If Estonia is really so solid, why not wait a year to be sure?"
By the way, The Economist leader had great artwork, so I decided to steal it for my own nefarious purposes. Credit where credit is due ...