December 21, 2010 / 10:26 AM / 9 years ago

Estonia to adopt crisis-hit euro but others wary

TALLINN (Reuters) - Estonia, which adopts the euro on January 1, is likely to be the last new entrant to the currency zone for some years as bigger eastern European states such as Poland and the Czech Republic watch the bloc’s crisis warily.

Visitors observe the Euro exhibition marking the official launch of the Euro Campaign Estonia 2011 in Tallinn September 20, 1010. REUTERS/Ints Kalnins

For the Baltic state of 1.3 million, being in the euro zone club is preferable to uncertainty linked to its outgoing kroon currency and is seen as a way to attract further investment.

Adopting the euro is also the culmination of Estonia’s move westwards away from the dominance of mighty neighbour and former ruler Russia after entering the European Union and NATO in 2004.

Ordinary Estonians are also hoping for the smaller benefits of saving money on currency transactions.

Homeowners, too, will benefit as most mortgages, which are mainly provided by big Nordic banks such as Swedbank (SWEDa.ST), SEB (SEBa.ST) and Nordea NDA.ST are already in euros.

Fellow Baltic states Latvia and Lithuania have set their sights on euro entry in 2014.

“In Estonia we are also sure that the euro will support trade,” Prime Minister Andrus Ansip told Reuters Insider, pointing to gains for ordinary people. “Now people are just wasting their money in the currency exchange, why do they have to do that?” he said.

But elsewhere in the former Communist bloc, governments are not so certain. All the central and eastern European EU members have to join the euro zone one day, but they are in no hurry.

They want to see how the debt problems of Ireland, Greece, Spain and Portugal, which are struggling with big budget deficits, are solved and fear the cost of losing exchange rate flexibility. They have also seen that being a euro zone member does not guarantee lower borrowing costs, investment bank JP Morgan said in a research note.

“There are more risks to being in the euro zone than being outside,” Polish central bank governor Marek Belka said last week..

A flexible exchange rate, which allowed the zloty to decline, has been seen as one of the main reasons why Poland was the only EU country to avoid a recession last year.

Belka said Poland should not rush to join the currency bloc, although the strategic goal was still to switch from the zloty.

Similar sentiments have come from the Czech Republic, where Prime Minister Petr Necas has said adopting the euro would not be to the country’s advantage for a long time.

“The Czechs have always been more cautious and the Poles are getting more cautious too,” said Capital Economics senior economist Neil Shearing.

He said that if the euro zone survived in its current form the next new entrant would not be until 2015 in the shape of Latvia and Lithuania, whose economies, outlooks, currency pegs and historical experience were similar to Estonia’s.

JP Morgan said it had pushed back its forecast for euro adoption in Hungary and Poland to 2019, and to beyond 2020 for the Czech Republic. “This is five years later than our forecast at the start of the year,” it said.

ESTONIA READY

Estonia’s debt and budget deficit are among the lowest in the euro zone. To meet euro entry terms, Ansip’s centre-right government made budget deficit cuts equal to more than 9 percent of GDP. Inflation also fell as the economy contracted nearly 14 percent in 2009 after a pre-crisis boom.

Estonia, like Latvia and Lithuania, is used to having little currency flexibility. The kroon has been fixed, to the German mark and then to the euro, since its launch in 1992 when Estonia became the first ex-Soviet state to quit the rouble zone.

It also expects its economic prospects to improve after the 2009 recession, which was worsened by the austerity measures. The central bank expects growth next year of 3.9 percent.

Andres Kasekamp, director of the Estonian Foreign Policy Institute, said euro adoption would be a security watershed given continued tetchy relations with Russia.

“The foreign policy goals of Estonia have been to embed itself in as many international organisations and clubs as possible, so that it will never find itself isolated or without friends ever again,” he said.

“Membership of the euro zone will not only boost Estonia’s economic prosperity, but will enhance security,” he said.

SOME SCEPTICS

Despite official enthusiasm, opinion polls have given a mixed picture of support for the changeover.

“We are joining at the worst possible time and cannot be sure the euro zone will exist in the same form as it does now. Even next year there could be very big changes or reforms,” said lawyer Anti Poolamets, who leads an anti-euro campaign.

Poolamet commissioned an opinion poll which showed 53 percent of people were against the euro. A poll taken for the government showed support for the euro at 54 percent.

A steady rise in inflation in recent months has also caused some worries, although the government and central bank have blamed it on factors such as food and energy prices.

In general, Estonians are calmly preparing for the switchover, as they calmly suffered crisis and recession after the collapse of the Soviet Union and in 2009.

“I will miss the kroon, but only because I am used to using them. I will get used to euros quickly enough and they are more useful for travelling,” said student Reio Maesalu, who at 18 is the same age as the outgoing currency.

Writing by Patrick Lannin in Stockholm; editing by David Stamp

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