Estonia's euro joy dampened by EU debt crisis

[December 27, 2010]  TALLINN, Estonia (AP) -- Despite a hellish year for the euro, the tiny Baltic nation of Estonia will be joining the single currency club as the champagne corks pop at midnight on New Year's Eve.

Estonia will become the eurozone's 17th member and instantly claim the mantle of the poorest as well as one of the smallest -- representing just over one-tenth of a percent of the bloc's $12.5 trillion economy.

But Estonia's membership carries symbolic value, it is hoped, demonstrating that Europe's grandest financial project remains an appetizing prospect despite the worst crisis in its 12-year history.

Estonia is even vowing to lend a hand, no matter how small, to other members in need. Finance Minister Jurgen Ligi said recently that the Baltic state would soon start negotiations with the European Union on granting a loan guarantee of up to euro130 million ($174 million) to bailed-out Ireland -- a major commitment for a nation with a state budget of only euro6 billion ($8 billion).

In November, Ireland became the second eurozone country, after Greece, to require emergency support from its partners in the European Union and the International Monetary Fund to avoid effective bankruptcy.

The worry, particularly in the bond markets, is that other countries will get sucked into the mire -- Portugal and Spain are widely considered to be the most endangered eurozone countries with both grappling with their hefty debt burdens.

To many outsiders, adopting the euro during the current turmoil may be akin to the age-old story about the conformist who decides to jump off the bridge because everyone else is doing so.

But a large part of Estonian society regards the common currency as the culmination of 20 years of western integration that began after the country achieved independence in 1991 and despite the traumas experienced in 2010, there are many who still trumpet the economic benefits that come from joining the euro club.

"Without any doubt, joining the eurozone is the most remarkable achievement of this government," Estonian Prime Minister Andrus Ansip told lawmakers earlier this month. "Membership will bring along more jobs, higher pensions and faster economic growth. It will bring us stability."

For many Estonians, the pursuit of closer European integration acquired a greater urgency three years ago after key websites in the country came under a cyber-attack orchestrated in Russia -- an event that followed the removal of a Soviet war memorial from downtown Tallinn, Estonia's capital.

As a result, Estonians re-experienced the very vulnerabilities that led them to closer cooperation with the West in the first place.

Still, the euro isn't loved by everyone: polls show support for adopting the euro has dropped to just above 50 percent from nearly 60 percent at its highest. Many believe prices will go up, like they did in other members that joined the bloc.

"I don't like it," said sales clerk Evely Jaanson, 22. "I think many Estonians are not ready for it. We should have waited for a couple of years."

On the other hand, it could be seen as remarkable that euroskepticism isn't more widespread after a year of bad news, with Greece requiring a euro110 billion ($144 billion) rescue package and Ireland -- once roundly hailed in the Baltics as the ideal economy to emulate -- another euro67.5 billion ($88 billion).

"I feel genuinely sorry for the Irish taxpayers," Ansip told The Associated Press in late November. "They've been paying taxes in the belief of getting social benefits from the state only to find out that a large part of their taxes has gone to cover losses of commercial banks."

By European standards, Estonia is a poor place. The average monthly salary was euro760 ($995) in the third quarter of this year, while unemployment is 15.5 percent, compared with an average of 10.1 percent in the euro area. And last year the economy saw its worst fall ever, with output plummeting nearly 14 percent -- one of the steepest falls in the 27-member EU.

A handful of economists argue that given such disparity with developed euro area members, Estonia should refrain from joining and instead concentrate on catching up by running deficits -- something that the euro rules theoretically prohibit.

Estonia's economy -- known for its embrace of innovation and new technologies -- is emerging from the crisis. Third-quarter growth was 5 percent year-on-year, largely thanks to a surge in exports, while the International Monetary Fund forecast next year's growth to be 4 percent.

"Estonia has recovered and adjusted itself in a tremendous way after the crash," said Bank of Finland Governor Erkki Liikanen in an interview with Finnish national broadcaster YLE.

To its credit, Estonia, which joined the EU, along with NATO, in 2004, has been a model of fiscal discipline, consistently maintaining budgets with surpluses recorded for seven years straight from 2002. Estonia will also boast the lowest public debt per GDP of all euro area members.

According to Kai Stukenbrock, an analyst at Standard & Poor's, Estonia will be able to show the EU "the very positive example of an economy that through political cohesion, prudent policies, decisive reforms and great flexibility managed to make its way into the eurozone."

On the downside, inflation is likely to increase next year, while the IMF says that no major inroads against joblessness will be made due to "mismatched skills and low labor mobility" among job seekers.

Despite that, Estonians and foreign businessmen take some consolation from the fact that it is generally perceived as the most successful of the Baltic trio.

"Latvia has gone bust, the situation in Lithuania is not much better but Estonia still shines," said Michael Stenner, the German manager of the Hotel Telegraaf in the medieval Old Town of Tallinn.

Latvia and Lithuania have said they seek to adopt the euro in 2014 -- another sign that the euro dream remains alive.

[Associated Press; By JARI TANNER]

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