By: Dr. Mike Campbell
With the last round of the sovereign debt crisis barely a month old and some commentators being openly sceptical about the long-term viability of the single European currency, it might seem an odd time for the Eurozone to expand. However, that is just what has happened. On New Year’s Day, Estonia became the 17th member of the Eurozone, officially relegating its currency, the Estonian Kroon, to history.
Estonia is the first former member of the Soviet Union to adopt the Euro and the third former communist state to do so. Estonia joined the European Union in 2004. Estonia believes that joining the Euro will help it to attract increased foreign investment since the move makes it (nearly) impossible for the country to devalue its currency; thereby offering investors the guarantee that the value of their investment will not evaporate overnight.
It is clear from last year’s experiences in Greece and Ireland that the rest of the Eurozone block act as guarantors of this fact.
Estonia has a population of just 1.3 million and the country has had to endure some pain to ensure that it met the convergence criteria which are applied to new members of the single currency venture.
Arguably, this could put the nation in a very healthy position going forward as the slow-burn global recovery gathers some momentum. The cuts that Estonia needed to make to join the Euro have seen unemployment in the nation rise to 16%.
Estonia has always pegged its currency to an external standard; firstly the Deutschemark and then the Euro and the rate has remained fixed at 15.65 Kroons to the Euro, so the changeover will be easy to manage.
Many Estonians expect prices to rise when the cost of products (in Euros) is rounded up – after all, this was the experience of all of us living in the Eurozone when the currency was first launched.