Estonia fit to adopt euro

European Commission backs Estonia’s case for membership of the eurozone.

The European Commission today recommended that Estonia be allowed to adopt the euro at the start of next year.

José Manuel Barroso, the Commission’s president, said Estonia “meets the conditions and should join the euro on 1 January 2011”.

The Commission’s recommendation was expected, given Estonia’s efforts to get its budget deficit and debt in line with membership criteria over the past few years, during which time it has managed to get its public finances within the eurozone’s reference limits.

Today’s go-ahead is the first step to a political agreement by EU governments. They may approve the Commission’s recommendation at a summit on 17-18 June. Estonia would also need the legal approval of EU finance ministers, which is expected in early July.

Olli Rehn, the European commissioner for economic and monetary affairs, said Estonia had achieved “a high degree of sustainable economic convergence”, but added that the Baltic republic had “to remain vigilant and react early and decisively” to keep its budget deficit under the eurozone’s 3% of gross domestic product (GDP) limit.

Estonia is forecast to post a 2.5% deficit this year and in 2011 amid a deep decline in economic growth that has put additional pressure on government coffers.

Rehn praised Estonia, however, for bringing its debt levels well below the eurozone average of 60% of GDP. Estonia’s debt stands at only 7.5%.

The Commission’s backing comes despite doubts among economists and the European Central Bank over whether the country will meet the criterion of keeping its rate of inflation within 1.5 percentage points above the average of the three member states with the lowest inflation over the previous year. The inflation limit is one of the five criteria set out in the Maastricht treaty for joining the eurozone.

Estonia’s inflation in 2009 is currently estimated by the Commission at 0.2%. The average of the three ‘best performers’ (Ireland, Spain and Portugal) was -0.96%.

Estonia’s entry is seen as a crucial test of credibility of the euro. Rehn said the Commission recommendation should also be seen as a “strong signal” that the single currency remains attractive despite the recent instability of the euro amid the Greek debt crisis. “It underpins the role of the euro as medium-term policy anchor and confirms that sustained policy efforts and a long-standing record of stability-oriented policies generate concrete results,” said Rehn.

Estonia will become the eurozone’s 17th member if its bid is approved by member states. Given the worsening public finances in other member states aspiring to join, it would quite possibly be the last to join for some time.