Europe View: Euro plus one
Jun 2nd 2010, 16:48 by by E.L. | LONDON
OTHER day, another milestone. Estonia's bid to join the common currency by the end of the year received support from the European Parliament's economic and monetary affairs committee on June 2nd. "In contrast to other eurozone members, Estonia has been a shining example of prudent fiscal policy," said Sharon Bowles, the committee's head.
On Monday June 6th, the ball lands in front of the euro zone finance ministers. Assuming they give the go-ahead, the issue then comes before the EU summit on June 17. Finance ministers take the final decision on July 13.
Estonia is an economic pipsqueak. Its $17 billion GDP is less than 1% of the EU's. On a quantitative level its membership of the euro zone does not strengthen the common currency's credibility the way that, say an application from Sweden or Denmark would. Nor does it weaken it. If Estonia suddenly collapsed, the cost of a bail out would be tiny in comparison to the hundreds of billions of euros being spent on propping up the troubled south European countries.
But Estonia's membership matters in another way. It shows that the EU and the euro zone are still rules-based entities, where decisions are made according to their merits, and according to principles, rather than because of crude political fixes. That credibility has been shaken in recent years. No country in the euro zone meets its rules on public finances; Estonia does. The sight of big countries running big deficits when they only recently promised not to does little to convince outsiders that EU rules are anything more than vague aspirations. If Estonia had been denied membership of the euro, despite meeting all the rules, the damage would have been lasting. It would not just send a horrible signal to Estonia, where astonishing efforts to balance the books would be rewarded with a slap in the face. The whole euro zone's credibility would suffer too.
Estonia's enthusiasm for the euro still puzzles some outsiders. Yet the decision makes perfect sense. Estonia's currency is already pegged to the euro via a currency board mechanism. That creates a monetary straitjacket (for the most part a highly beneficial one: small countries cannot sensibly run their own monetary policies). But a residual devaluation risk remains. That creates a slight brake on foreign investment and trade. In other words, Estonia already has the pain of being in the euro zone. But it does not have all the gain.
Saying goodbye to the kroon will be hard. Your columnist remembers the joy that met its reintroduction in 1992, when Estonians bought new wallets to welcome the crisp new banknotes, so different from the hated and tatty "occupation roubles" (they were collected and secretly sold to Chechnya, which is a rather less uplifting story). But being in the euro zone underlines still further Estonia's integration into the western clubs that matter: the EU, NATO, Schengen and (last week) the OECD.
The big question now is how quickly the country recovers from the recession that followed the collapse of the property bubble. Estonians need to feel some reward from the cuts in salaries and public services that have marked the last two years. Baltic Reports says that Estonian retail sales are crawling back. Sarantel, which makes mobile phone antennas, has just said it is outsourcing manufacturing to the Elcoteq plant in Estonia rather than expanding its factory in the UK. And industrial production in April shot up 18.4% year on year. When that starts to dent unemployment and raise living standards, it will be time to celebrate in euros rather than just use them.
Europe View: Europe View: Euro plus one | The Economist
so hope still lurks!!
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