Estonia in the euro? Why?

zapatero_ansip.gi.top.jpgSpain's Prime Minister Jose Luis Rodriguez Zapatero (L) welcomes Estonia's Prime Minister Andrus Ansip before a EU-LAC summit on May 18, 2010 in Madrid. By Shelley DuBois, reporter


(Fortune) -- Despite the turmoil in the eurozone, there's a bit of a love fest going on across the Atlantic. Estonia has worked hard and behaved well, and it's now time for the little country to adopt the euro. And the euro, right now, just wants to be wanted.

The European Commission announced last week that it supports Estonia's bid for the euro. The European Central Bank will need to approve to finalize the deal. If all goes well, Estonia will join the eurozone at the beginning of 2011. That'll probably happen, even though the central bank has expressed some concern over potential inflation problems in the country. They can't really say no: Estonia has done right by all the financial requirements of the Maastricht Treaty, which established the European Union in 1992.

To meet the Maastricht mandates, the Estonian government sliced the national budget, and cut civil service by about 20%, battling their way back from a huge recession. They've been eyeing a spot in Europe's premier financial league for a while, and now, it looks like they're going to earn the promotion.

Members of the eurozone are glad that anyone still wants to join the team.

"Estonia is too small for the EU to gain anything but the symbolic," says economist Barry Eichengreen from the University of California, Berkeley. "But, in terms of symbolism, a vote of confidence in the euro is timely, even when it comes from a country as small and distinctive as Estonia."

The euro could use a vote of confidence right now. The eurozone is taking a big financial hit, trying to bail Greece out of bankruptcy caused by too much government spending. Spain and Portugal are hurting. Germany, which has carried the currency, is trying to maintain some discipline by banning naked short-selling on government bonds.

Unfortunately, Estonia doesn't really have the manpower to offer much financial clout. The country only has 1.3 million people, and a GDP of $27.7 billion. It doesn't stack up next to a power player like Germany, which has a GDP of $2.9 trillion, and is still growing, or even floundering Greece, at $330 billion.

But Estonia has gotten a global pat on the head for admirable financial policies for some time. It's ranked 16th in the world on the Wall Street Journal's 2010 Index of Economic Freedom, and 7th in its region.

"I think Estonia brings that voice of fiscal conservatism to the table, which always makes everybody squirm, but that's a healthy thing," says Jeremy Hildreth, a former economist who now advises countries on their image and reputation. (See editor's note.) "It's a great time for smart little Estonia to pop up on to the scene."

Estonia's been waiting for its breakout for quite some time. Things were looking good from 2004-2006, when Estonia's growth numbers were in the double digits. But the country isn't entirely immune to global pressures. When the property bubble burst in 2007, Estonia spun into a recession.

Estonian prime minister Andrus Ansip's term started in 2007. He banked his campaign on getting the country on the euro. "A year ago, there didn't seem to be any light at the end of the tunnel with the recession, then the euro became that [light]," says Andres Kasekamp, the director of the Estonian Foreign Policy Institute in Tallinn.

The benefits of being a member

Estonia will reap the rewards from switching to the euro on several levels. Their current currency, the kroon, is already pegged to the euro, but without any of the many benefits, large and small, of being in the eurozone.

The currency switch would most likely boost foreign investment and tourism. Something as simple as removing the fee for exchanging money could effect the economy, says Oliver Loode, a marketing director at Consumetric, an Estonian tourism and marketing consultancy agency. "It just basically groups Estonia as a tourism destination more with Scandinavia than it does with the Baltic countries." See you on the flip side, Latvia.

That's a big psychological shift, Kasekamp says. And there are others.

"Joining the eurozone is sort of this seal of being first class Europeans, not second class like the typical eastern European."

"It's something that they've earned from scratch, whereas other countries had to fudge numbers," says Hildreth. And Estonians are proud of that distinction, according to Kasekamp, who says that Estonians "have zero sympathy for the Greeks."

"A year ago had anyone said that Estonia joining [the euro] would be welcomed as a boost, it would have seemed to be a great exaggeration, but thanks to the Greek crisis, that's the case."

Note: In an earlier version of this story, Jeremy Hildreth was identified as having worked on Estonia's branding campaign. He has worked for other Baltic states, but not Estonia. To top of page

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