EUobserver

Estonian Euro Zone Membership Has Risks


European governments have pledged their support for Estonia to join the eurozone at the start of next year, but accession is not without risks, says the country's finance minister.

Speaking to EUobserver on Tuesday (8 June) after gaining membership approval from EU colleagues, Estonian finance minister Mr Jurgen Ligi said the Baltic state's decision to join the single currency still makes sense, despite recent market turmoil and a weakened euro that has fallen 17 percent versus the dollar this year.

"We are not concerned by the euro's fall. Currency values change from time to time," said Mr Ligi. "The problem is the general debt burden and ageing population."

One immediate consequence of joining the heavily indebted club could be that Estonia is compelled to contribute to the eurozone's recently agreed support mechanism, although the minister says this is not a major concern.

He adds that Estonian membership is unlikely to raise the EU's average debt level, with Tallinn's total debt pile currently clocking in at a minuscule 7.2 percent of GDP.

The northern state is also one of the few EU members to have a budget deficit below three percent, the maximum allowed under EU rules, after the government implemented an austerity programme last year despite a deep recession, a sign of its strong ambition to join the single currency.

"The problem of a small country and currency is that no one believes in it, we do not have the reliability of the eurozone," says Mr Ligi. "Investors are very cautious about Estonia...markets do not know that we have a very low debt level."

The country's decision to push ahead with membership in a bid to gain extra security comes in contrast to Poland where officials have recently signaled plans to put their application indefinitely on hold due to euro area turmoil.

Estonia's population of only 1.3 million citizens makes it harder for Tallinn to conduct an effective monetary policy, says the country's finance minister, while Poland's situation with a population of 38 million creates a different situation.

Since its creation in 1992, Estonia's kroon has been pegged first to the German Mark and then to the euro, so its governments have essentially lived without monetary flexibility since the country gained independence.

Mr Ligi welcomes the current discussion on how to revamp the EU's budgetary rules, despite the fact that tougher laws are likely to have greater 'bite' inside the eurozone and result in more fiscal decision making being taken at the European level.

"We are happy the changes are happening at the moment. That's one of the reasons why the message of support today is so good, as the eurozone is changing," he says.

Other candidate countries may indeed take heart in the fact that Greece's debt crisis has not raised the barriers to new members joining, although the next expansion is not expected for at least another four years.

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