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PREVIEW-Euro zone in crisis, Estonia still wants in

By David Mardiste TALLINN, May 10 (Reuters) - The small Baltic state of Estonia is hoping the European Commission will give a green light this week for euro zone entry next year, even though the currency bloc is battling its worst crisis since its creation. For Estonia, a nation of just 1.3 million people, adopting the single currency would be the economic culmination of its drive West after the collapse of the Soviet Union in 1991 and joining the European Union and NATO in 2004. The Baltic economies of Estonia, Latvia and Lithuania boomed after EU accession, but when the credit bubble burst their output slumped.

^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ For a graphic on Baltic economies and deficits click here: http://graphics.thomsonreuters.com/10/EZ_BLTC0510.gif ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ They hope that the downturn will ease this year. Swedish banks like Swedbank and SEB, which invested heavily in the region only to see their loan books go sour and losses rise, are also getting more optimistic. The European Commission is due on May 12 to say if Estonia has met the Maastricht criteria, which would pave the way for European Union approval in July of euro zone entry next year. In general, Estonian policy makers have driven home the message that Estonia's long-term economic health and investor confidence revolve around adopting the euro. "It is not really love or whatever you want to call it, but it is seen as an inevitable thing," said Rainer Kattel, social sciences professor at Tallinn Technical University, who said that he himself favoured staying out of the euro zone. "It seems many Estonians understand we have an economy which is too little and that the economy and the financial system are quite vulnerable from the outside," added Rein Toomla, lecturer at the University of Tartu Institute of Politics and Government. "Maybe the euro means more stability, maybe that is the main point," he added. Rising prices after the introduction of the euro are one worry people in Estonia have. "I don't know if it will be anything good. I am too old to have to learn new money, I am worried that things will become more expensive," said Aino Saar, 74, a pensioner, speaking in the western town of Parnu. Greece's woes were not seen as a problem by Imbi Hepner, 43, an advertising account manager. "It (euro adoption) would give us more respect as a European Union country and make us equal with other EU countries. Greece? It is a long way from here and our situations are very different as they have huge debts and we don't," she said. Kattel favours a devaluation and staying out of the euro zone as the best way to achieve a competitive boost, in the same way that Poland did during the global crisis, but he concedes he is in the minority. BALTIC GLOOM Estonia sees itself as already having taken the kind of painful budget measures to cap its budget deficit which have now been preached to Athens, thus showing its euro zone credentials. The centre-right government took belt-tightening steps equal to 9 percent of gross domestic product (GDP) in 2009 to keep the public sector budget deficit at 1.7 percent of GDP, despite a drop in output of 14 percent in 2009. Estonian policy makers see entering the euro as a safe long-term bet that will increase investor confidence. It will also remove the currency risk faced by tens of thousands of Estonians who borrowed in euros, but whose income is in Estonian kroons, even though these are pegged to the euro. Estonia's entry to the single currency zone could also help lift the economic clouds which have covered the whole Baltic region, where Latvia, which had to take a 7.5 billion euro bailout in 2008, saw its economy drop 18 percent in 2009. "Estonian euro adoption would increase confidence in the Baltic region as a whole, especially regarding the possibilites of euro adoption and fiscal consolidation," said Nordea Markets analyst Annika Lindblad, though she saw actual investment flows benefiting mainly Estonia rather than Latvia and Lithuania. (additional reporting by Patrick Lannin; editing by Jason Webb) Keywords: ESTONIA EURO/ (Riga newsroom, patrick.lannin@reuters.com, patrick.lannin.reuters.com@reuters.net, +371 29 269 191) COPYRIGHT Copyright Thomson Reuters 2010. All rights reserved.

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