Estonia joins euro club riven by crisis, others wary

Friday, December 31st, 2010 | Finance News

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TALLINN (Reuters) – Estonia could be the last new entrant for some years when it becomes the 17th euro zone member on January 1, with the club's deepening crisis of confidence likely to put off larger eastern European states for up to a decade.

European Monetary Affairs Commissioner Ollie Rehn and the prime ministers of Latvia and Lithuania meet in Tallinn on Friday to hail Estonia's euro entry from midnight, capping a drive for integration with the West and away from the influence of Russia that began with the collapse of the Soviet Union.

It also brings the euro to a former Soviet state for the first time. Baltic neighbors Latvia and Lithuania hope to join in 2014, cementing the independence they gained in 1991.

But elsewhere in the former Communist bloc, governments are not so certain. Poland, Hungary and other central and eastern European EU members have all promised to join the euro zone one day, but they are in no hurry.

They want to see how the debt problems of Ireland, Greece, Spain and Portugal are solved and fear losing flexibility of their exchange rates will make them less competitive and less able to withstand further financial ructions.

The debt crisis has also undermined the idea that being a euro zone member guarantees lower borrowing costs.

"There are more risks to being in the euro zone than being outside," Polish central bank governor Marek Belka said earlier this month.

Similar sentiments have come from the Czech Republic, where Prime Minister Petr Necas has said adopting the euro would not be to the country's advantage for a long time.

"The Czechs have always been more cautious and the Poles are getting more cautious too," said Capital Economics economist Neil Shearing.

Even if the euro zone survives in its current form, he said, the next new entrant would not be until 2015. Many economists now expect the larger eastern Europeans will not join before the end of the decade.

STRONGER IN THE END

Leaders in Estonia, which will be the currency club's 17th and poorest member after a brutal recession in 2009 knocked almost a fifth off its GDP, have brushed off concerns the project might backfire.

"The euro area debt problems are not caused by the euro and the ongoing economic crisis. The seeds of the problems were sown decades ago," President Toomas Ilves said in a recent speech.

"Therefore the solving of the current problems make the euro only stronger and Estonia has the opportunity to be immediately involved in this process."

Prime Minister Andrus Ansip is set to be one of the first to take euros out of a cash machine set up specially for the event, and the head of the central bank will give a television address shortly before midnight on December 31.

In economic terms, the single currency bloc will barely notice the addition -- Estonia's gross domestic product is just 0.2 percent of the current euro zone's 8.9 trillion euros.

Unlike the Poles, Czechs and Hungarians, Estonia is also used to having little currency flexibility. Its kroon has been pegged to the euro under a tight currency board for 18 years and will be converted at a rate of 15.6466. The Latvian and Lithuanian currencies are also pegged to the euro.

Looking beyond the single currency zone's woes, the Baltic region is hoping euro membership will in time confer greater political and economic stability after the financial crisis set back a previously successful transformation from Communism.

All three Baltic nations went through Soviet, Nazi and then Soviet occupation again, so becoming part of western economic and security structures has been of prime importance. They joined NATO and a self-confident European Union in 2004.

"Over the longer term there are less risk of uncertainties and instability in the euro area than in the Baltic region and thus this should be positive for Estonia, despite the short-term challenges," said Nordea analyst Annika Lindblad.

(Additional reporting by Patrick Lannin in Stockholm; Editing by Patrick Graham and Lin Noueihed)

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