As Euro Struggles, Estonia Readies for Entry in Currency
On Saturday, Estonia completes its trip from Soviet republic to full-fledged member of the euro zone.
In the first minutes of the new year, Prime Minister Andrus Ansip will slide a bank card into an automated teller machine installed for the occasion in front of the opera house here in the capital.
He will withdraw some euro bills, and Estonia will officially become the 17th member of the zone.
To outsiders, it may seem curious that this Baltic nation of 1.3 million is tying itself to the euro just as the common currency is struggling.
But in fact, Estonia has been a de facto member for some time, pegging its kroon to the German mark and then the euro after giving up the Russian ruble in 1992.
“Whatever happens, our currency is tied to the euro,” said Riho Unt, chief executive in Estonia of Skandinaviska Enskilda Banken, or S.E.B., a Swedish bank that is one of the Scandinavian institutions that dominates banking in the country.
“Being inside is better than being outside.”
Economic arguments aside, in Estonia, the euro is still a symbol — tarnished, perhaps — of hope and prosperity.
“It symbolizes that Estonia has emerged as a full member of the European family,” said Joakim Helenius, chief executive of Trigon Capital, an asset management company. “For people here, that is a very big thing.”
While not naïve about the problems in the euro zone, Estonian leaders remain fierce advocates of the common currency, a reminder that for every bond investor dumping Greek or Irish debt holdings, there is a European bureaucrat equally determined to defend the euro to the last.
“Talking about splitting the euro is not the way out,” Jürgen Ligi, the Estonian finance minister, said during an interview. “There would be huge immediate losses for both sides.”
“There is no alternative” to the euro, Mr. Ligi said. “This is the only boat in the sea.”
Even if it were possible for Estonia to back out of euro membership at the last minute, the consequences could be disastrous.
The kroon might plunge, most likely making Estonians unable to repay mortgages and other bank loans, which are almost always denominated in euros already. The surge in defaults could bring the economy to a standstill.
The Estonian government has already gone to extreme lengths to defend the currency peg. In 2009, after economic output plunged nearly 15 percent, it cut its budget by the equivalent of 9 percent of gross domestic product rather than devalue and put euro membership at risk.
The austerity measures did not provoke civil unrest in the country, unlike in neighboring Latvia. Most Estonians seemed to accept that sacrifices were necessary, and the economy is growing briskly again.
Many Estonians regard themselves as a stoic people who endured much worse during centuries of foreign domination.
“It wasn’t an easy process,” said Henri Kaarma, an employee of a bank in Tallinn that laid off some of his colleagues during the downturn.
“But it is done now, and we reached our goal. I am proud,” said Mr. Kaarma, a muscular 36-year-old whose idea of relaxation is to swim in icy lakes and rivers during the winter.
Among Estonian citizens, support for the euro is far from unanimous. Polls show roughly half in favor of the euro, with the rest either apathetic or opposed.
There is widespread suspicion that shops and restaurants, which have promised not to raise prices in the months after euro membership, have been doing so ahead of time.
The Estonian central bank blames recent price increases on the higher cost of imported commodities. With an average monthly wage of 785 euros, or about $1,030, Estonia will be the poorest member of the euro area.
Though central Tallinn is filled with Audis and Mercedes parting the winter slush, unemployment remains above 10 percent and about a fifth of the population lives in poverty.
Among the less fortunate, there seems to be little hope that euro membership will bring improvement.
“The last years are very difficult,” said Rufina Martinovskaya, a single mother selling knit sweaters and mittens at an outdoor market on the edge of Tallinn’s 13th-century Old Town.
Ms. Martinovskaya, swathed against the cold in a thick scarf and long fleece jacket, said she lost her job as an architect four years ago, when Tallinn’s real estate boom stalled.
“There is no building. It stopped. I’m an architect, and now I work here,” she said, surveying the rows of wooden stands visited by a handful of tourists.
Ms. Martinovskaya said she made just enough for her and her 11-year-old daughter to eat, with nothing left for even simple pleasures.
A few political leaders have tried to tap such sentiments.
Edgar Savisaar, mayor of Tallinn and leader of the main opposition party, told the German newspaper Die Zeit, in an interview published on Tuesday, that Estonia was not ready for the euro and that the sacrifices to join were too great.
But even Mr. Savisaar acknowledged that such sentiments had not coalesced into a serious anti-euro movement.
Despite the severe austerity program, the government led by Mr. Ansip remains popular.
This is a country that continued functioning recently after snowfall that was heavy even by Nordic standards, and many times the amount that crippled transportation in Britain, France and Germany.
After plows swept Tallinn this week, high walls of cleared snow made some streets look like white canyons.
Estonian leaders approach the euro with the same spirit of perseverance. “We have never taken the euro as a short-term project,” said Marten Ross, deputy governor of the Estonian central bank.
He and other leaders portray the country as the anti-Greece, with a history of discipline and willingness to suffer for the euro cause.
Last year, Estonia had the lowest level of total debt of any European Union country, just 7 percent of gross domestic product. The government’s budget deficit will be well under 3 percent of G.D.P. this year, when almost every other country in the euro area is in flagrant violation of limits set by treaty.
The European Central Bank will not need to intervene to prevent a sell-off of Estonian government bonds. There are none, though the government is considering a debt issue to finance expansion of the energy sector.
What little the government has borrowed has come directly from banks.
Estonia is also one of the most business-friendly countries in the world. It is ranked 17th by the World Bank for ease of doing business, ahead of countries like Japan, Germany and Switzerland.
Estonia has no tax on reinvested corporate earnings, and in contrast to most other European countries, there are few restrictions on hiring and firing employees.
“The business environment in Estonia has always been good,” said Bo Henriksson, manager of the Baltic region for ABB, a company based in Zurich that makes power distribution equipment and other products in Estonia.
Hopes are high that euro membership will encourage more investment from nearby Finland. Its capital, Helsinki, is just two hours away by fast ferry, but smaller Scandinavian companies might have feared exchange rate risk if Estonia was ever unable to defend the kroon.
“That has been an issue for foreign investors,” said Priit Perens, managing director in Estonia for Swedbank, a Swedish institution. For many Estonians, such benefits make it worth enduring a sovereign debt crisis or two.
“There is no reason to be afraid,” said Peep Aaviksoo, a consultant and former chief executive of EMT, an Estonian mobile phone company.
“If you look at the not-so-happy history of Estonia, we have had worse experiences. Now we are back in Europe.”