A little more than a year ago, the tiny Baltic state of Estonia adopted the euro—at a time when the Greek crisis, and the Irish, Spanish, Portuguese, and Italian crises, were exposing the common currency’s weaknesses. Slovakia, another Eastern European state that had joined the euro, was angry that it had to help the Greeks. The Poles and the Czechs were dragging their feet on joining.
Today, Estonia’s economy is the fastest-growing in the currency bloc, consumers and businesses are paying lower interest rates, and business ties with Finland—a euro member state and Estonia’s main trading partner—are tighter than ever. “Lots of Finnish producers seek cooperation partners here now as things are more transparent for them,” says Ermo Saks, owner of an audiovisual production company in the capital of Tallinn, where costs are still 48 percent lower than in Finland.
Estonians, only two decades removed from their long entrapment inside the former Soviet Union, feel safer in the euro club. Says Andres Kasekamp, a political science professor at Tartu University: “For a small and poor state on the periphery with Russia as its neighbor, being a member of the European core is still very valuable, even if the euro zone is in a time of great difficulty.”
Before joining the euro zone, Estonia achieved a level of fiscal probity that Greece could only dream of. Estonia’s economy shrank by almost a fifth in 2008 and 2009, after its property bubble burst and the global financial crisis sucked all credit out of the economy. In response the government cut public sector wages 10 percent, raised taxes, took bigger-than-planned dividends from state-owned companies, and froze pension contributions to meet budget deficit requirements for euro entry.
By yearend 2011 public debt was 5.8 percent of gross domestic product, the lowest rate in the EU, and the government budget was actually in surplus. Estonia’s economy in 2011 grew an estimated 7.9 percent from the previous year: Adopting the euro boosted the comfort level of its EU trading partners, who imported more from Estonia as a result.
“The most important thing was that we ended all the speculation about a possible devaluation” of the kroon, says Priit Perens, the chief executive officer of Swedbank AS, Estonia’s biggest lender and a part of Stockholm-based Swedbank (SWEDA:SS). Fears that all the Baltic countries would eventually devalue had hampered investor confidence for a long time. Devaluation would have been ruinous, since Estonia’s banks had started lending in euros before the country switched to the common currency. Paying off euro-denominated loans in devalued kroon would have imposed a crushing burden on businesses and consumers.
Fifty-six percent of Estonia’s 1.3 million inhabitants still back the adoption of the single currency, while 42 percent regret the move, according to a government-commissioned poll in October. Opponents of the switch resent the pain they went through to qualify for the euro. Says Hannes Valja, 30, a printer: “I don’t see what the point was of adopting the euro. The associated cost was too high considering what we got in exchange.”
That resentment might flare up in the next two months, when the Estonian Parliament discusses the use of funds raised by the European Financial Stability Facility to bail out Greece (the fund needs permission from its backers to bail out a specific country). All euro member states are expected to chip in to the EFSF. Estonia has already guaranteed €2 billion ($2.6 billion) in EFSF loans—a hefty sum for a government whose 2011 budget was only €6 billion.