Estonia Prepares to Join the Eurozone

At a time of considerable upheaval in the eurozone, one small Baltic nation remains anxious to join the currency union.

In the new year, tiny Estonia is set to become the seventeenth country to adopt the euro as currency. The expansion of the eurozone comes at a time of considerable upheaval. Policymakers have had to invest billions in bailouts and stabilization funds this year to preserve the stability of the single currency.

Estonia has only been a member of the European Union for six years. Since gaining independence in the 1990s but especially during the last decade, the small Baltic nation with a population of just 1.3 million has enacted significant market reforms, producing impressive GDP growth rates before the recession hit in 2009. Estonia maintains a flat income tax rate, low corporate taxes and open borders to international trade and investment. It has performed particularly well in finance and information technology and built strong trade relations with Finland, Germany and Sweden.

The global downturn severely affected Estonia. Its economy contracted by as much as 14 percent last year but is already showing signs of recovery. Impediments remain in the shape of rigid labor regulation and remnants of corruption however.

While larger countries in Central and Eastern Europe, including Poland and the Czech Republic, now have doubts about joining the single currency bloc as a result of the debt crises that rocked Greece and Ireland this year, Estonia is confident that adopting the euro will usher in an era of renewed prosperity. Its neighbors, Latvia and Lithuania, also still anticipate to enter the eurozone between 2013 and 2015.

Public support among Estonians for joining the euro has decreased, down from a peak of nearly 60 percent to somewhere around half of the population today. Prime Minister Andrus Ansip of the free-market Estonian Reform Party nonetheless assured lawmakers this month that joining the euro “will bring along more jobs, higher pensions and faster economic growth. It will bring us stability,” he predicted.

Despite disappointing growth rates and high unemployment, Ansip’s government has enacted deep budget cuts in order to balance the books. Estonia has among the lowest levels of sovereign debt in Europe and reduced public-sector salaries with as much as 10 percent. Its deficit next year is expected to reach 1.6 percent of GDP, well below the European limit.

Whether Estonians, subject to harsh austerity measures, will approve of further rescue efforts for eurozone countries facing sovereign default is doubtful. Slovakia, which pursued a similar economic and fiscal policy in the wake of the downturn, previously refused to help bail out Greece. In either event, Estonia’s finance minister is convinced that the currency will survive. “Talking about splitting the euro is not the way out,” Jürgen Ligi told The New York Times. “There would be huge immediate losses for both sides.”