Estonia and the Euro

12.05.2010

In accordance with the accession agreement with the European Union, all the countries that joined the EU on 1 May 2004, including Estonia, became members of the European Monetary Union (EMU), within the framework of which the transition to the common European currency the euro takes place. On 12 May 2010, the European Commission evaluated Estonia’s readiness to adopt the euro and proposed that Estonia join the euro zone in 2011.

Estonia would like to join the euro zone because it would support the growth of our competitiveness, economic stability, and employment, thereby also ensuring an increase in the quality of life. The euro will also increase the confidence of foreign investors in the Estonian economy, and investing money in Estonia will become easier and safer.

Maastricht criteria

In order for Estonia to join the euro zone, it is required to successfully fulfil the Maastricht criteria:

EXCHANGE RATE

The country must, for at least two years, participate in the currency exchange rate mechanism ERM II and keep the exchange rate of its currency stable against the euro without serious problems. The Member State may not devalue the exchange rate fixed in ERM II on its own initiative. Estonia joined the ERM II on 28 June 2004 and has kept the Estonian kroon on a steady exchange rate with the euro (1 EUR = 15.6466 EEK).

European institutions approved the Estonian Monetary Committee’s suitability for the ERM mechanism. This was essential for the stability of Estonia’s economy, as it allowed it to retain the structure of the Monetary Committee, which has proved to work well, until accession to the euro zone. The fixed exchange rate system helps Estonia comply with the standard exchange rate fluctuation band.

PRICE STABILITY

A state’s annual inflation rate averaged over one year must not exceed the average of the three best-performing member states in terms of price stability by more than 1.5 percentage points. Estonia fulfilled the Maastricht price stability criterion in November of 2009, when the 12-months average harmonized consumer price index (HICP) was -0.7% (the reference value of the criterion was 1%).

INTEREST RATES

The interest rate of at least 10-year kroon-denominated government bonds must not exceed the average of the three best-performing Member States in terms of price stability by more than 2 percentage points. Estonia lacks this instrument for assessing the fulfilment of the criterion, but the European Commission stated in its convergence report that, despite this, Estonia does not have problems with meeting the interest rate criterion.

SUSTAINABILITY OF PUBLIC FINANCES

The general government deficit must be lower than 3% of GDP. The general government debt must be lower than 60% of GDP. For years Estonia has followed a balanced budget policy and kept a low debt burden. In 2009 the government sector’s budget deficit was 1.7% of the GDP, which is considerably smaller than the Maastricht criteria’s 3% limit. The debt burden of the Estonian government sector is the lowest among EU member states, and thus there are no problems with fulfilling this criterion. In 2009, the debt burden of the Estonian government sector posted 7.2% of GDP.

2010 Plan

March-April – The European Commission and the European Central Bank conducted a regular assessment to ascertain Estonia's readiness for the adoption of the euro.

12 May – The European Commission unveiled the convergence report for 2010, in which Estonia’s readiness to join the euro zone received a positive assessment. The Commission recommends that Estonia adopt the use of the euro because Estonia fulfils all the economic criteria.

8 June – The Council of Economics and Finance Ministers of the EU (ECOFIN) will meet to discuss Estonia’s compliance with the euro criteria

18 June – The European Council will discuss Estonia's eligibility for joining the euro area

13 July – ECOFIN should make the final decision regarding Estonia’s accession to the euro area and confirm the exchange rate as of 1 January 2011.

Ever since it was put into circulation again, the Estonian kroon has been pegged to another currency—first the Deutschmark and later the euro. Therefore replacing the kroon with the euro will not bring about any major economic changes. However, adopting the euro will reduce transaction fees and risks that could threaten Estonia as a country with a small fixed currency. The Estonian kroon has had the unchanging exchange rate 1:15.64664 since 1999.

As of 2010, the euro is the common currency of sixteen European Union member states: Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain.

At the beginning of 2011, Estonia hopes to become the 17th EU member state to join the euro zone.

The Estonian euro coin will be adorned with the outline of the country of Estonia:

Additional information:

Estonian EuroWeb: euro.eesti.ee
Estonian Economy at a Glance
Summary of the 2010 Convergence Programme of Estonia