Government financial sector. The general government budget deficit must be less than 3% of GDP. General government debt must not exceed 60% of GDP or approach that level at a moderate pace.
Exchange rate. The state must participate in the ERM2 mechanism for at least two years and ensure the stability of its currency's exchange rate against the euro.
Price stability. The inflation rate in the country must not exceed by more than 1.5 percentage points the average level of the three EU member states that have achieved the best results in the area of price stability.
Interest rates. The country's long-term interest rate must not exceed by more than 2 percentage points the average level of the three EU member states that have achieved the best results in the area of price stability.
Legal approach. The degree of independence of the central bank and its integration into the euro system are considered.
Estonia joined the ERM2 exchange rate mechanism on June 28, 2004, and for some time fully adhered to its commitments. Estonia's general government budget remains close to balance (in recent years it has rather been in surplus), and Estonia's government debt is small (less than 5% of GDP). The exchange rate of the national currency, the kroon, also remains stable.
To assess interest rates, Estonia, because of its small government debt, lacks an indicator directly comparable with other countries (i.e., at least 5-year government debt instruments issued in Estonian kroons). But on the basis of the low level of interest rates on kroon loans issued to the private sector, the European Commission expressed the opinion that Estonia should not encounter problems in meeting the interest rate criterion. The only problem for the transition to the euro in conditions of rapid economic growth and price convergence in Estonia could be meeting the price stability criterion.
Estonia's problems with meeting this criterion arose when oil prices began to rise rapidly on the world market, as a result of which Estonia's inflation rate, amid the country's continuing rapid economic growth (7.8% in 2004 and about 9% in 2005), began to exceed the limits allowed by the EU. In 2003, inflation in Estonia was only 1.3%, even lower than the EU average (2%). In 2004, due to rising oil product prices, inflation in the country rose to 2.4%, and in 2005 to approximately 3%. For 2006, Estonia's Ministry of Finance forecasts inflation at 2.6%, which fits within the Maastricht criteria, but trends on the world market, as well as the government's refusal to try to hold back price growth by administrative means, could lead to exceeding the permissible level.
According to Estonian Prime Minister Andrus Ansip, the government's goal is to introduce the euro into circulation on January 1, 2007. At the same time, he does not intend to risk the country's long-term development prospects for the sake of short-term ones. 'I am not going to bring Estonia's economy to ruin in the name of common European money. Growth, reliability and predictability of the economy are more important than the introduction of the euro,' Ansip said while speaking in the country's parliament. In any case, according to the prime minister, Estonia will continue active preparation for the introduction of the euro regardless of whether its introduction takes place within the targeted time frame or later.
Along with the financial difficulties on the road to the euro, in Estonian society there are more and more people who do not want the transition to the single currency. According to a public opinion poll conducted at the end of last year by the firm Emor at the request of the State Chancellery of Estonia, only 41% of the country's residents are in favor of introducing the euro, while 54% are against it. Most of all, people are frightened by the possible sharp rise in prices for goods and services associated with the introduction of the euro. Many also associate the loss of Estonia's current currency, the kroon, with the loss of part of their national identity.
Representatives of the financial sector and business in Estonia support the earliest possible introduction of the euro, as the single European currency will allow them to reduce costs. Representatives of these sectors argue that since the Estonian kroon's exchange rate has been firmly pegged to European currencies from the start (first to the German mark and then to the euro), the transition to the new money should be relatively painless.
To ease the process of transition to the euro, the Estonian government has already adopted a special program of measures, including in particular a requirement that, from six months before the introduction of the euro and for six months after, price tags in stores be written in both Estonian kroons and euros. It is also expected that within two weeks from the moment of the monetary reform, both euros and kroons will be in circulation in all retail outlets. Estonian banks will be obliged to exchange kroons for euros without restrictions for a year after the reform, and the country's central bank will do so indefinitely. Money in bank accounts will be automatically exchanged at a fixed rate.
The final decision on whether Estonia will be able to introduce the euro on its territory from January 1, 2007, will be made by the European Commission in mid-2006.
Rodion DENISOV.
IA Rosbalt