European Commission recommends Estonia for eurozone

BNS: The European Commission evaluated Estonia's readiness for accession to the eurozone and made a proposal for the country to be admitted to the eurozone in 2011.

In the Commission's view, Estonia will enter the euro area from a considerably better position than many previous entrants.

The Baltic state has clearly done its homework and has achieved one of the strongest fiscal positions in the European Union, the EU executive said.

"To ensure that the adoption of the euro is a success, Estonia must pursue its efforts to maintain a prudent fiscal policy stance," said Olli Rehn, EU economic and monetary affairs commissioner. Estonia also needs to "remain vigilant and react early and decisively" if signs of macroeconomic imbalance or deterioration of competitiveness emerged, he said.

"Our conclusion on Estonia sends a strong signal to our member states and the broader audience. It will tell that the euro area is functional, attractive and able to respect and deliver on its commitments and objectives, respecting fiscal discipline and prudent economic policies on member states," the Commission said.

Any other conclusion would be utterly unfair, but also a highly detrimental signal to the public and markets, underscoring that the recent events have made the EMU framework dysfunctional, it added.

In the Commission's evaluation, Estonia clearly meets the Maastricht criteria for the euro. The country's inflation rate is -0.7 percent (compared to reference of 1 percent), the public deficit is 1.7 percent of GDP (reference 3 percent), and public debt 7.2 percent of GDP (reference 60 percent), the report says.

The Commission judged that Estonia also meets the long-term interest rate stability requirement even though the country has no government bonds on whose basis to make the evaluation.

Massimo Suardi, the official dealing with euro changeover matters at the European Commission's Directorate General for Economic and Financial Affairs, said the EU executive analysed other indicators related to interest rate stability such as the low level of public debt, Estonia's credit ratings and short-term interest rates.

Price rise in Estonia is at present considerably below the reference value and will in the Commission's opinion remain so in the coming years too, although a factor in future growth in prices is that the Estonian price level by 2008 data forms 75 percent of the eurozone's and continued convergence supports a rise in prices.

The reference value of the inflation criterion was established on the basis of figures of three EU member states with negative inflation. One of them was Estonia, whose average 12-month inflation in March was minus 0.7 percent.

The fact that the Commission based the reference calculation on countries where prices were falling was according to Suardi extraordinary and stemmed from latest economic developments. In ordinary circumstances deflation is seen as abnormal, he said.

Estonia's national currency the kroon has been pegged to the euro since June 2004 without severe tension in recent years, the EU executive said.

Decisions by several more bodies are needed for the plan to switch to the euro from the start of next year to become final.

On June 8 a meeting of EU finance ministers, Ecofin, will take place that will discuss enlargement of the eurozone on the basis of the assessments of the Commission and the European Central Bank (ECB) and the Commission's proposal.

The European Parliament is due to give its opinion on the enlargement decision at the session taking place from June 14-16.

A summit of EU leaders is scheduled for June 17-18 that will offer an assessment of the convergence report by the ECB and the proposal as regards eurozone enlargement.

The final decision about enlargement of the eurozone will be made at a meeting of Ecofin. According to the practice of so far it is the Ecofin meeting taking place immediately after the summit. That would be on July 13, but there is no obligation to make the decision at the meeting immediately after the summit.

The Ecofin decision has to be unanimous.

Before the Ecofin decision a positive recommendation has to come from the euro group, or the finance ministers of eurozone members. This is a step added by the Lisbon treaty that has never been used before. Therefore there is no procedural practice for that decision.

The euro group meets a day before Ecofin.