The European Central Bank and the European Commission assessed Estonia’s euro readiness

Today the European Central Bank and the European Commission published their regular convergence reports on the EU countries outside the euro area. The reports analyse the compliance of the countries’ economies with the requirements for the introduction of the euro (the Maastricht criteria) along with their legal framework.

“As expected, the ECB’s convergence report and the European Commission’s report show that Estonia meets all the criteria for entry to the euro area. As a result, Commission submitted a proposal for Estonia’s accession to the euro area. Although it is not a final decision, the proposal is a great acknowledgement for us. Estonia has taken another long step in the accession process. The final decision regarding the introduction of the euro will presumably be taken at the ECOFIN meeting scheduled for 13 July. After that we will be able to use the indicative mood when speaking about the adoption of the euro,” commented governor of Eesti Pank Andres Lipstok.

“Estonia met all the criteria save the price stability one also in the course of the two previous assessments. This time Estonia was among the three countries whose inflation rate was used to calculate the value of the Maastricht price stability criterion,” he added.

“It must be noted that different from the majority of European countries and owing to measures adopted by the government, Estonia has managed to keep its fiscal deficit below 3% of GDP allowed by the respective criterion,” Lipstok said.

According to the European Commission’s Spring Forecast, Estonia will meet the fiscal criterion also in the next years, though the Commission is of the opinion that the deficit will increase to 2.4% of GDP. “The ongoing fiscal deficit shows that this is no time to rest on laurels, vice versa – the government must achieve the objective they have set and turn the budget into surplus. This means retrenchment must continue,” he stressed. The European Central Bank emphasises that Estonia must continue to conduct economic policies geared towards ensuring economic growth and sustainable price stability.

According to the respective Maastricht criterion, government debt may account for up to 60% of GDP or it has to be on a downward trend. In Estonia, the indicator was 2.7% of GDP last year. The Commission’s forecast expects government debt to grow only somewhat – to 9.6% of GDP.

In the reference period from April 2009 to March 2010, the Estonian kroon remained stable at its central rate of 15.6466 kroons per euro. Thus, Estonia fulfils the Maastricht exchange rate stability criterion. On 22 April 2010 the Estonian Parliament adopted the Act on the introduction of the euro, which means Estonia’s legal framework is also in compliance with the requirements to be met to adopt the euro. Convergence is also assessed on the basis of long-term debt securities, but the indicator could not be considered in the case of Estonia, since the country’s financial system is characterised by the absence of a well-developed market for long-term debt securities denominated in Estonian kroons, which reflects the low level of government debt.

The ECB’s convergence report is available here.

The ECB’s press release on the convergence report is available here.

The ECB and the European Commission prepare convergence reports every two years, assessing a country’s convergence to the euro area in terms of economic, political and legislative indicators based on the Maastricht criteria. These reports provide a basis for the European Commission to submit proposals to the ECOFIN and the European Council listing the Member States ready to launch the euro. The 2010 convergence reports assessed the euro readiness of nine European Union Member States: Bulgaria, the Czech Republic, Estonia, Latvia, Lithuania, Hungary, Poland, Romania and Sweden.

Launch of Tallinn-Warsaw passenger train realistic

Estonia’s Minister of Economic Affairs and Communications Juhan Parts and the European Union co-ordinator for the Rail Baltica project Pavel Telicka agreed at a meeting on Tuesday that a passenger train link between Tallinn and Warsaw could realistically be launched within the next few years.
Parts said what this takes is co-operation and will among the three Baltic states and the European Commission, spokespeople for the Ministry of Economy and Communications report.
The minister told Telicka it is necessary to focus on the rail link implementation project so that passenger train traffic on the existing rails could be launched within a few years. “At the same time, it is necessary to see to it that the distance between Tallinn and Warsaw can be covered within a reasonable length of time,” he added. “Estonia has already contributed financially to this and is ready to continue doing so in the future,” the minister added.
According to Parts, joint efforts are required for passenger carriage not to get stuck in red tape and technical obstacles. Telicka agreed with Estonian proposals and the issue will be brought up at the next conference of pan-European transport networks in June, the ministry said.
Estonia will together with EU support contribute close to 1.3 billion kroons (EUR 83.1 mln) to Rail Baltica in 2008-2011.

Source: Estonian Review

EC recommends Estonia for euro zone

The European Commission evaluated Estonia’s readiness for accession to the euro zone and made a proposal for the country to be admitted to the euro zone in 2011. In the Commission’s opinion, Estonia will enter the euro area from a considerably better position than many previous entrants. The Baltic state has clearly done its homework and has achieved one of the strongest fiscal positions in the European Union, the EU executive said.
“To ensure that the adoption of the euro is a success, Estonia must maintain a prudent fiscal policy stance,” said Olli Rehn, EU economic and monetary affairs commissioner. Estonia also needs to “remain vigilant and react early and decisively” if signs of macroeconomic imbalance or deterioration of competitiveness emerged, he said. “Our conclusion on Estonia sends a strong signal to our member states and the broader audience. It shows that the euro area is functional, attractive and able to respect and deliver on its commitments and objectives, respecting fiscal discipline and prudent economic policies on member states,” the Commission said.
Any other conclusion would be utterly unfair, but also a highly detrimental signal to the public and markets, underscoring that the recent events have made the EMU framework dysfunctional, it added.
In the Commission’s evaluation, Estonia clearly meets the Maastricht criteria for the euro. The country’s inflation rate is -0.7% (compared to reference of 1%), the public deficit is 1.7% of GDP (reference 3%), and public debt 7.2% of GDP (reference 60%). The Commission judged that Estonia also meets the long-term interest rate stability requirement even though the country has no government bonds on which to base an evaluation.
Massimo Suardi, the official dealing with euro changeover matters at the European Commission’s Directorate General for Economic and Financial Affairs, said they analysed other indicators related to interest rate stability, such as the low level of public debt, credit ratings, and short-term interest rates.
The reference value of the inflation criterion was established on the basis of figures of three EU member states with negative inflation. One of them was Estonia, whose average 12-month inflation in March was minus 0.7%.
Estonia’s national currency the kroon has been pegged to the euro since June 2004. Decisions by several more bodies are needed for the plan to switch to the euro from the start of next year to become final.
On 8 June a meeting of the EU finance ministers, Ecofin, will take place.
They will discuss the enlargement of the euro zone on the basis of the assessments of the Commission and the European Central Bank (ECB) and the Commission’s proposal.
The European Parliament is due to give its opinion on the enlargement decision at the session taking place from 14-16 June. A summit of EU leaders is scheduled for 17-18 June that will offer an assessment of the convergence report by the ECB and the proposal as regards euro zone enlargement.
The final decision about enlargement will be made at a meeting of Ecofin taking place immediately after the summit. That will be on 13 July, but there is no obligation to make the decision at the meeting immediately after the summit.
The Ecofin decision has to be unanimous. Before the Ecofin decision a positive recommendation has to come from the finance ministers of euro zone members (the euro group). This is a step added by the Lisbon Treaty that has never been used before. The euro group meets a day before Ecofin.

Source: Estonian Review

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