Estonia fulfils all Maastricht criteria, such as price stability, sound public finances and currency stability, shows a new evaluation conducted by the European Commission and the ECB, published Wednesday. This clears the way for a final decision this summer on Estonia adopting the euro next year.
According to Commissioner Olli Rehn, Estonia has shown a high degree of sustainable economic convergence. Last year's budget deficit was 1.7 per cent of gross domestic product (GDP), well below the three per cent Maastricht limit. This year SEB’s economists expect it to end up around 2.5 per cent.
Estonia also has a very good track record on public finances. The budget deficit has exceeded three per cent of GDP only once in the past 15 years (in the wake of the Russian crisis in 1999) and public debt has stayed at very low levels. The strong Estonian commitment of a budget in balance has supported this performance. Estonia also met the important inflation criterion (inflation may not move more than 1.5 percentage points above the three EU countries with the lowest inflation). The 12-month inflation average until March 2010 was a negative 0.7 per cent.
However, the Maastricht criteria are partly flexible. A country must also show sustainable low inflation and sustainable sound public finances. Ahead of the evaluation there was a small risk regarding the inflation development.
“Estonia's phase-in of low inflation was not as reassuring as for example Slovakia's before it joined the euro zone in 2009. However, now this is history. Estonia has got the green light from the EC and the ECB,” says Mikael Johansson, head of SEB’s economic research on Eastern Europe.
The final decision on Estonia's application for the euro is political. In June the European council will discuss Estonia ahead of the EU summit on 13 July. SEB’s Johansson expect yes votes for Estonia to adopt the euro, and at the existing exchange rate, 1 January, 2011.