Estonia′s recession-hit economy prepares for euro introduction | Business| Economy and finance news from a German perspective | DW | 29.12.2010
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Estonia's recession-hit economy prepares for euro introduction

Estonia will adopt the euro on January 1, but experts and citizens are wary of the fact. Once known for its ascendant economy, Estonia's financial prospects were changed drastically by the global economic crisis.

Euro coins and bills

The euro will become the currency of Estonia in January

Starting in the late 1990s, Estonia, Lithuania and Latvia enjoyed an unprecedented economic boom. Dubbed the "Baltic Tigers", these three republics grew as much as 12 percent per year.

While tiny Estonia is the smallest of the three states, it was regarded as the poster child of these emerging economic hotbeds. With a flare for technology, the country was often jokingly called "E-Stonia".

One of the government's key economic goals was to become a member of the eurozone. Following years of negotiations, Estonia will introduce the common currency on January 1, 2011.

Unfortunately for many residents, the global financial crisis has wiped out many of the telltale signs of economic prosperity in Estonia.

Euro already recognized

For Marina Wolkowa, who sells a variety of goods from a market booth at Tallinn's central railway station, the euro is already part of daily reality. Sitting on a stool and waiting for customers, she explains that she has been required to list prices in both Estonian kroons and the euro for a year now. She sells Estonian pickles for 25 kroons or 1.60 euros.

Estonian kroons

Estonia's kroon became a symbol of independence from the Soviet Union

"But the euro won't help us forward. It's only going to drive up prices," she told Deutsche Welle.

At the end of the year, however, Estonia's 1.3 million inhabitants will have to part with the kroon, which has served as a symbol of the country's independence after the collapse of the Soviet Union.

Estonia's economic boom was fueled in part by its enthusiasm for technology. The country was an early adopter of computer-based financial systems. Then there were neoliberal market reforms: Estonia's flat income tax rate is an across-the-board 22 percent.

Low deficit

Ultimately it was the global economic crisis that brought the "Estonian Tiger" to its knees. In 2009, the country's economy shrank by 13 percent.

But the euro is coming to Estonia anyway. This is mainly because of the country's low budget deficit, which for the past two years has been well below the 3 percent stipulated by the Maastricht treaty. Additionally, the kroon has been pegged to the value of the euro since 2004.

That's why Estonian President Toomas Hendrik Ilves has said the change from kroons to euros will have a psychological effect more than anything. It will help to differentiate Estonia from the other Baltic states, which are often perceived by outsiders of as a single unit.

"When Latvia has a problem, then there is immediately a 'Crisis in the Baltic'," Ilves said.

Estonian President Toomas Hendrik Ilves

Estonian President Toomas Hendrik Ilves says the euro will be good for Estonia

In 2009, Latvia narrowly avoided insolvency multi-billion-euro lines of credit from the International Monetary Fund (IMF) and the European Union. The country's largest financial institute, Parex-Bank, was rescued from collapse by being nationalized.

Easy credit and overspending

Estonia may have fared better than Latvia, but it still has its own share of problems, and not just in the eyes of its own population. Many independent economists see the country's situation as precarious.

Rainer Kattel from of the Tallinn University of Technology says the country would have run into problems even without the global economic crisis because many Estonians were living beyond their means. When times were at their best, banks doled out easy credit – often via cell phone text message and without seriously checking their customers' creditworthiness.

"In principle, the situation in the Baltic region isn't much different than in Greece or Spain," Kattel told Deutsche Welle. "On the one hand we don't have that high level of debt, but on the other hand Estonia has an unemployment rate of 18 percent."

Kattel argues that an alternative to introducing the euro in 2011 would have been to devalue the kroon. Instead, Estonia is now experiencing an internal devaluation through decreased salaries, he said.

There are plenty of reasons to be skeptical about the direction Estonia is currently moving in, according to Kattel. The global economic crisis is far from over, and many of the country's citizens will carry immense amounts of debt for years to come.

"I'm afraid that large areas of Estonia will become more and more depopulated, because the people there will move into the cities or move away completely," he said.

Author: Christoph Kersting (gps)
Editor: Sam Edmonds

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