Estonia defies critics to join the euro zone

While it might seem bizarre given Greece’s current troubles, other European countries are still keen to join the euro zone. Yet just this week the European Commission has given its blessing to Estonia to take up the common currency. The commission announced yesterday that it would recommend that EU governments let the Baltic country switch to the currency in January 2011. Estonia, which currently uses the kroon, would become the 17th nation to adopt the euro. The announcement was accompanied by a report showing eight other EU countries do not yet satisfy the conditions for euro area membership - Bulgaria, the Czech Republic, Latvia, Lithuania, Hungary, Poland, Romania and Sweden. (photo by tm-tm)

Estonia meanwhile was also invited this week to join the Organisation for Economic Cooperation and Development alongside Israel and Slovenia bringing its membership to 34 countries. All three countries were reviewed by 18 OECD Committees with respect to their compliance with OECD standards and benchmarks. OECD Secretary-General Angel Gurría said Estonia has been receptive to OECD recommendations on important issues. “The OECD accession process has delivered real policy changes and reform in all candidate countries,” Gurría said. “Once countries become members, this transformational process continues.”

There is little doubt that Estonia has undergone an astonishing transformation in the last 20 years. After a 51 year absence, it returned to the world map in 1991 as an independent country during the collapse of the USSR. According to The Economist Estonia confounded its critics in the years that follow. It had a fast-growing economy, based on flat taxes, free trade and a currency board. In 2004 it joined the EU and NATO. Despite property values collapsing last year, the economy stabilised with the help of flexible wages and prices. It said Estonia was one of two EU countries (with Sweden) that met the common currency’s rules.

The European Central Bank has issued a cautionary note offering amore negative assessment of Estonia’s qualifications. It says that while Estonia is well within the limits on government spending and debt, the country’s current low inflation rates reflect mainly temporary factors. The ECB says Estonia has a history of high inflation that raises concerns. “Maintaining low inflation rates will be very challenging given the limited room for manoeuvre for monetary policy,” said the ECB. “Once output growth resumes, with a fixed exchange rate regime, the underlying real adjustment is likely to manifest itself in higher inflation.”

However the ECB did not explicitly say that Estonia should be denied and its opinion is not binding on the final decision makers, the EU governments. The New York Times said political leaders have form in brushing brushed off central bank concerns in their eagerness to expand the zone. “Greece won admission even after the central bank reported in 2000 that the country’s debt equalled 104 percent of gross domestic product, far above the limit of 60 percent in the Maastricht Treaty,” the NYT said. That decision has of course rebounded on the EU as it embarks on a $106 billion rescue of Greece’s wrecked economy in conjunction with the IMF.

Estonia has no such worries at the moment. Its inflation rate is 2.9 percent and its economy has rebounded out of the GFC with expected growth of 1 percent in 2010. BusinessNewEurope said judicious use of reserves accumulated during the boom years means government debt levels are currently the lowest in the EU. It also said the country’s pioneering adoption of a flat-rate tax system in 1992, combined with the "safe haven" label that membership of the Eurozone confers (Greece notwithstanding) “should make Estonia an interesting investment destination in the future.”

The Estonian finance minister has been playing down negative impacts of the euro to his country. Jürgen Ligi said that there is no real danger of the euro bringing major price increase to Estonia despite the temptation of traders to round prices up after the conversion. There will be parallel posting of prices in both euros and kroons for the obligatory six months before adoption of the euro. Ligi said that the country’s planned sales tax might mess up things but general studies show that “we don’t have the room for price increases for anything substantial to take place”.

Estonia has two more hurdles to jump before it is confirmed as a member. An EU committee meets at the end of May to discuss the move, followed by a finance ministers’ summit in early June for final confirmation. By January next year they will join the 329 million people that use the euro every day, nearly two-thirds of the EU population.

Ansip wins Estonian e-vote

Prime Minister Andrus Ansip has extended his grip on power after Estonia’s general election last weekend. Ansip leads the centre-right Reform Party who won 31 seats of the 101 seat parliament, an increase of 12 from the previous election. While 31 seats is not enough for an outright majority, it does leave Ansip in a strong position to dictate terms with any potential coalition party. Ansip is keeping his options open and told Estonian TV “at this stage, you do not find a party leader who rules out cooperation with another party and I do not either”.

Ansip has been in power since April 2005. After that election, he formed a coalition with the Centre party and the small People’s Union. Despite the name, the Centre Party is left-leaning and now Ansip is thinking of switching partners to the more ideologically similar nationalist Pro Patria-Res Publica bloc. The Centre Party remains the second biggest party in the parliament with 29 seats but Pro Patria-Res Publica did better than expected to take 19 seats. The People’s Union took 6 seats and could still retain the balance of power in any coalition sharing arrangements.

The general elections were the first since Estonia joined the EU in 2004, but also marked a world first in that citizens were allowed to vote online. Internet polling ended on Wednesday and drew about 30,000 voters of the total of 940,000 Estonians which represents over 3% of the registered electorate. In response to fears from critics of external pressures on e-voters, the law provided a chance to override their internet vote on election day by filling in a paper ballot.

The electronic election marks the confidence of a nation that is enjoying an economic boom. EU membership has transformed the country. Rapid growth has been fuelled by low wages and low taxes, as well as a competitive zeal to make up for the 50 years of stultifying Communism. But there is a downside. Estonia had a record growth rate of 11.5% in 2006 but is grappling with 5% inflation rates. These rates have caused a delay in plans to join the euro this year.

Andrus Ansip is at the helm of this growth. Ansip was a trained chemist and gained his degree at the university of Tartu. He also studied agronomy at the Estonian Academy of Agriculture and did business management at York University in Toronto. After working in chemical labs, he became a private entrepreneur in banking and commerce and laid the foundation for Tartu Radio before entering into politics. He was mayor of Tartu for six years before entering parliament in 2004 as Minister of Economic Affairs and Communications. When prime minister Juhan Parts resigned in March 2005, Ansip was asked to form a government. Ansip is a keen long-distance skier and has been to Australia to take part in a 42km cross country skiing event known as the Kangaroo Hoppet.

But Ansip will more than kangaroos on his mind in the next few weeks as horse-trading begins over the shape of a new government. Whatever government emerges will be a rainbow coalition of competing interests. Res Publica is the party to watch having made a big comeback. Formed in 2001, Res Publica had a meteoric rise when it won its first contested parliamentary elections in 2003. Its leader Juhan Parts became prime minister. But their governing style became arrogant and they veered to the right, alienating their centrist core constituency. It lost the elections for the European Parliament in 2004 and was down to 5 % in opinion polls before conceding office in 2005. But their merger with the nationalist Pro Patria Union in 2006 has produced immediate results in the latest election.

Estonia has made a successful transformation to democracy since the break-up of the Soviet Union. The Russians have been the Estonian big brother since 1710 when they defeated Sweden in the Great Northern War. Estonia declared independence in 1918 after the Russian Revolution and kept the Russians out until Stalin invaded in 1940 after signing his secret non-agression pact with Nazi Germany. But he was betrayed by Hitler and his armies occupied Estonia after Operation Barbarossa. The Soviets reconquered the country in 1944. Estonia launched an armed resistance to Soviet re-occupation after the war which was brutally suppressed with 20,000 Estonians deported to Siberia.

The Gorbachev era saw the re-ignition of Estonian nationalism and Estonia elected its first parliament in 1990. Estonia, like the two other Baltic states, restored its independence peacefully during a short period of power vacuum in the former Soviet Union. But Estonia managed to avoid the violence which Latvia and Lithuania incurred in the bloody January 1991 crackdowns and retained crucial control of its own telecommunications facilities during the 1991 failed coup in Moscow. Once the coup collapsed, Estonia resumed its efforts to gain international recognition. Iceland was the first to acknowledge Estonian independence. Yeltsin's Russia was quick to follow as did the US The Soviet Union finally recognised Estonia on 6 September 1991. The intervening years have been a story of peaceful growth. By 2004 Estonia was finally able to come out of its Russian shadow with a double event: it was accepted into NATO and joined the EU.