Estonia poised for euro entry, exports lead recovery

The Bank of Estonia said on Tuesday that exports were shoring up the domestic economy, the day before the Baltic state is due to learn if it has met the standards required to enter Europe's economic and monetary union (EMU).

"The first quarter GDP received a positive impact from increasing exports. Goods exports in current prices went up by nearly a sixth compared to last year," said Peeter Luikmel, an economist at the central bank. However, the economy remains mired in recession, with output in the first quarter 2.3% lower than in the same quarter last year.

The central bank released the assessment ahead of the European Commission's publication of its 2010 Convergence report. Based on the report's findings, the commission can propose the inclusion of candidate countries to the European Council, leaving euro-area heads of state to make the final call. Estonia has set 1 January next year as its target date for adopting the euro.

Fitch, a ratings agency, said in March that it expected the country to be recommended for euro adoption. Estonia has performed well with respect to the Maastricht criteria. According to Eurostat, the Commission's statistical bureau, it had the lowest ratio of government debt to GDP at the end of 2009. At 7.2%, Estonia's government debt to GDP ratio comfortably outstripped that of the second best performer, Luxembourg, by 7.3 percentage points. With a deficit of 1.7%, Estonia was also one of only two European states in which the state of public finances improved last year, due to supplementary budgets which have implemented hefty cuts. The figures place Estonia well within the EMU deficit and debt to GDP limits, at 3% and 60% respectively.

Inflation
In part due to the economic recovery, however, Estonia falls outside the price stability criterion, which states that price growth must not exceed the mean of inflation in the three best performing member states by 1.5 percentage points. According to Eurostat data published on 16 April, the mean of annual inflation in the three best performing eurozone countries- Ireland, Slovakia and Malta- comes to -0.5%. At an annualised rate of 1.4% in March 2010, inflation in Estonia is outside that limit. However, the country still had the third lowest 12 month average rate of inflation among European Union members, at -0.7% in March. The inflation ceiling, as specified by the criterion, is low partly because inflation was -2.4% in Ireland.

The Estonian kroon joined the Exchange Rate Mechanism in June 2004, pegging the currency to the euro at EEK15.64, with a 15% band either way.