Possibilities for adopting the euro in Estonia, Report by the Government's working group 14:46, 15.06.2000

15.06.2000 | 00:00

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Possibilities for adopting the euro inEstonia

Report by the Government´s working group



The objective of the working group,formed at the request of the Prime Minister of the Republic of Estonia, was toanalyze the different scenarios for adopting the euro and to find the mostoptimal solutions. Members of the working group were: Tunne Kelam (Parliament),Aavo Kokk (Eesti Ekspress), Kalev Kukk (Parliament), Heldur Meerits (PrimeMinister´s bureau), Indrek Neivelt (Hansabank), Alar Streimann (Ministry of ForeignAffairs), Meelis Virkebau (Kreenholm), Madis Üürike (Ministry of Finance).Urmas Varblane (University of Tartu) was also asked to participate. AnneSulling (Hansabank), Tanel Ross (Bank of Estonia) and Märten Ross (Bank ofEstonia) participated as experts at the working group meetings.


Following is the opinion of the workinggroup on Estonian and European monetary integration and on the use of theEuropean currency, the euro, in Estonia:


1.      The main concern of Estonia´s economic development is the maintenanceof macroeconomic stability. Fiscal balance and the completion of structuralreforms, which are also prerequisites for the successful functioning of a fixedexchange rate regime, are important in achieving this. Macroeconomic stabilityhelps to create the conditions that favor continued inflow of foreign directinvestments.

2.     The enhanced integration of Estonia´s monetary policy with the EuropeanUnion and the adoption of the euro help to accelerate Estonia´s economic growth

a)     Foreign exchange and hedging costs will decrease directly (today about170 million EEK per year).  However,adjusting the accounting systems and cash-handling machines will necessitatesome expenses.

b)     Interest rates in Estonia will approach the "European average".Therefore, fluctuations in the interest rates will be smaller than they are inthe case of the kroon and, consequently, interest related expenses will belower. It should be borne in mind that interest rates reflect to a great extentthe borrower´s risk, which is determined by the borrower´s activities andeconomic environment. Therefore, possible weaknesses in the Estonian economycould appear in ways other than by an increase in interest rates.

c)     Price comparisons between different countries will be easier. Use ofthe euro facilitates price comparisons, thereby giving Estonia an additionaladvantage due to its lower price level. As a result, exports of goods andservices (including tourism) will increase. Some entrepreneurs may findthemselves exposed to increased competition, which will lead to increasedefficiency in the Estonian economy.

d)     The adoption of the euro will also improve Estonia´s transparency anddecrease the fears of foreign investors about possible negative monetary policydecisions. This will attract new investments to Estonia. Lower and more stableinterest rates also favor investments.

e)     It is important to note the change that will occur in the Estonianmindset: Estonia will feel more a part of the European common market. Also, therest of the world will see Estonia more clearly as part of Europe.

3.     The best way to adopt the euro is by the normal accession process tothe European Economic and Monetary Union. The second stage of the accessionprocess may start after joining the European Union. During the second stage,which is expected to last for 2 years, exchange rate stability between thenational currency and the euro must be secured within the framework of theERM2. According to the statement of the ECB on 13.04.2000, it is possible touse a currency board system during the second stage. The appropriateness of thecurrency board is assessed on a case-by-case basis. The ECB decision alleviatedthe concerns that important changes within the monetary policy framework needto be undertaken for the transition stage.

4.     The working group based its opinion on the assumption that accession tothe European Union will happen in 2003 or 2004, the Maastricht criteria will befulfilled, and during a transition period of 2 years the euro will replace thekroon. Thanks to a currency board system tied to the deutschemark and a strongbanking system, it is possible to consider other options. In a case of delayedaccession, adopting the euro in accordance with international agreements mightprove to be useful already prior to accession to the European Economic andMonetary Union.

a)     The earliest adoption of the euro can happen on 1.01.2002, when theeuro notes and coins are put into circulation. In this scenario, the kroon cashand bank accounts will be converted to the euro at the current rate of 15.6466.Unless a special agreement is established with the ECB, the income of Bank ofEstonia will fall by 300 million EEK per year.

b)     The steps to be taken must be coordinated with the European Commissionand the European Central Bank. Their positions must be taken into account.

c)     Unilateral adoption of the euro is no substitute for joining theEuropean Economic and Monetary Union or meeting the Maastricht criteria, but itwould be a complementary step in this process.

d)     To guarantee the success of unilateral euroisation, it is of criticalimportance to continue the present economic and monetary policies and to stayon the track of European accession. Abandonment of current policies wouldadversely affect the movement of capital flows.

5.     The working group did not arrive at a consensus on whether to encouragethe use of the euro in parallel to the kroon. It was agreed that the use of theeuro will increase next to the kroon and, consequently, the revenues of Bank ofEstonia will diminish. It was not possible to estimate exactly what the shareof kroon will be in circulation. The working group did not take a position onwhether the government should encourage the use of the euro in parallel to thekroon.

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