The two sides of the Euro coin *
Estonia would like to be one of the first new members of the club – we would like to become a member of the euro area at the earliest possible moment. That would mean joining the Exchange Rate Mechanism (ERM2) as soon as possible, with the present EUR/EEK exchange rate and the currency board arrangement in place.
Provided nothing adverse happens, Estonia might be in a position to submit its application for ERM2 membership as early as mid-2004. It should, perhaps, also be mentioned that at the present moment, Estonia is in a relatively advantageous position among the candidate countries as to its ability to meet the Maastricht criteria and other important requirements.
Comparing the level on nominal convergence among the present accession countries to the respective levels in some of the former accession countries five years prior to their EMU accession, there should be no serious concerns as to most of the present accession countries’ ability to fulfill the nominal criteria over the mid-term. But Estonia’s choice of a currency-board-based monetary regime holds some inherent advantages in this respect. Fiscal balance is a very important prerequisite for a smoothly operating and effective currency board arrangement, and that has had a strong impact on Estonian fiscal policies. The main goal of Estonian fiscal policy is balancing the budget over the cycle and absorbing the possible fluctuations in the private sector savings rate. We believe that a balanced fiscal stance together with strong financial system is also the most efficient way to avoid short-term speculative capital inflows within the context of EU accession. At this point, we expect no great difficulties in meeting the sovereign debt and budget deficit criteria.
In that sense, Estonia will most likely be technically ready to join the euro area as early as 2006. The biggest challenge for the public sector, in that context, would be to avoid a lax macroeconomic policy mix that would over-stimulate domestic demand and result in significant real appreciation.
*The article is based on a presentation given at an international conference on September 30 in Tallinn.