Opinion: rushing into the eurozone is risky
27.11.2009, 11:38Ivar Raig, professor of Nord Academy, warns that rapid accession to the eurozone is a trap for the economic development of Estonia.
Most Estonian politicians on power and economists claim that euro adoption would increase confidence towards Estonia, attract new investments and reduce unemployment. For some strange reason, euro has not made such poorer countries as Portugal and Greece rich nor solved their economic problems. On the contrary, it has stalled their economic growth and structural reforms and increased social problems and unemployment.
Euro adoption is an overpoliticised issue. In Estonia it has become the mantra of parties on power. In spite of that, Brussels will make its decisions by weighing all pros and contras that Estonia's accession could mean for the eurozone.
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It is clear that the euro will come, whether we want it or not because the people voted for it on the September 2003 referendum that amended the constitution. By agreeing to join the EU, Estonians approved all terms of the European Agreement including the adoption of the euro.
The key problem is that, in order for the monetary union to function well, the real income of the nations in the eurozone must be fairly equal. However, the gap between Estonia and Old Europe has been increasing in the recent crisis.
While Estonia seems to be so keen to give up its currency, perhaps we should analyse why Sweden, Denmark and UK are not rushing into it and why Czech Republic, Hungary and Poland have postponed it.
Own currency enables to stimulate domestic economy and achieve new growth. On the contrary, the euro is likely to push up prices in Estonia because of price convergence. As a result, the prices of many products and services will raise to the level of Scandinavia.
With budget cuts the country has postponed solving many acute social, healtcare and educational problems. It has started to restrict modernization of the economy and stopped investments into education and healthcare, two key issues behind making the country's economy sustainable.
Estonia's euro policy does not consider the risks of euro accession for the economy. We need independent research on how the euro will impact various economic sectors and population groups. The government likes to talk about the positive, but the negative will be felt when the euro arrives.
Accession to eurozone wil not bring significant confidence and new investments into Estonia if the country fails to restructure its economy.
Estonia needs new wholesome economic policy, not single measures. The crisis has created new risks that the euro will not remove. With the shortage of skilled and qualified workforce, even low interest and inflation rate will not be enough to attract new investors to Estonia. The result would be stagnation and low income level. Wages could not be raised quickly since it would drive up inflation and Estonia could eventually be fined for violating the criteria.
Rapid accession to eurozone could become a trap for Estonia's economy development. Many people who are now regarding the euro as a miracle cure could be badly disappointed when it falis to cure anything. The best that Estonia can get from the eurozone is low economic growth rate and saying goodbye to hopes to catch up with the EU average.
Although by the end of this year Estonia is likely to meet the criteria necessary for the euro adoption, the country's further economic development may not be sustainable since our development level and economic cycle is in a different phase than the economy of Old Europe. If we fail in modernizing our economy and increasing its competitiveness, Estonia will become a slum with cheap labour in the eurozone. We deserve better that that.
Therefore it is important that we avoid using creative means to make us more eligible for the eurozone. It would be natural for Estonia to adopt the euro at the end of the next growth cycle 2016-2018 since our income level would have climbed closer to the EU average and we could keep inflation low also without a major crisis. Until then we should stimulate new growth by using large amounts of EU aid, reserves and borrowing.