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Bloomberg_Estonia's Premier Targets 2011 for Adoption of Euro (January 9)

09.01.2008

By Ott Ummelas
Last Updated: January 9, 2008 09:10 EST

 

Jan. 9 (Bloomberg) -- Estonian Prime Minister Andrus Ansip said the country will strive to adopt the euro in 2011, his strongest promise since soaring inflation prompted the former Soviet republic to delayed the move in 2006.

The inflation rate, at a nine-year high of 9.6 percent in December, ``should decline rather quickly'' in the second half, helping the government fulfill the requirements for the currency switchover, Ansip, 51, said in an interview in the capital, Tallinn, yesterday.

Estonia twice abandoned its goal of adopting the euro after economic expansion of 11.2 percent in 2006 drove prices up. Ansip said a January tax increase on tobacco, alcohol and fuel will make it unnecessary for further levies that would boost those costs in 2009 and 2010.

``Forecasting inflation for longer than two years ahead is generally a thankless job, but we are working with the goal that Estonia could adopt the euro in 2011,'' Ansip said.

Estonia, Lithuania, Latvia and Bulgaria, four former Soviet East Bloc countries that have joined the European Union since 2004, have the fastest inflation in the 27-nation group because they use so-called currency boards -- monetary systems that restrict central banks from using interest rates to control inflation.

Limited Time

Neil Shearing, emerging Europe economist at Capital Economics in London, said the new goal means Estonia's government will have a little over a year to get inflation down to the required level for an assessment period by the European Commission that would run from ``spring 2009 to spring 2010.''

``EMU entry in 2011 is not impossible, but it is certainly ambitious,'' Shearing said in an e-mail. ``While the government's continued commitment to meeting the EMU targets is welcome, entry in 2012 looks a much better bet.''

The Estonian central bank conceded in October that the nation is unlikely to meet the rules for joining the euro region before 2011.

Euro candidates need to keep price increases within 1.5 percentage points of the 12-month average inflation rate of the three EU nations with the slowest consumer-price growth. That target was 2.7 percent in December, according to the Finance Ministry.

`Artificial Measures'

Ansip said the government won't use ``any artificial measures'' to damp inflation, such as freezing drug and food prices or cutting some retail taxes, because it is crucial to keep conservative economic policies in place.

Fuel prices, which have reached record highs, ``don't have much more room to keep growing,'' he said, citing increasing use of nuclear power and environmentally friendly technologies.

Finance Minister Ivari Padar last month forecast the inflation rate will top 10 percent in the first half because of the January tax increases.

Ansip also said there is little risk of a ``hard landing'' in the economy as exports maintained a ``good pace.''

Accelerating inflation and a widening current-account deficit triggered quarterly economic growth of as high as 10.1 percent during the past year and a consumer spending boom increased the risk of an abrupt slowdown in Estonia, economists have said. Third-quarter growth, though, was 6.4 percent, compared with 11.2 percent for all of 2006.

That slowdown has been the government's target ``all along,'' Ansip said, the result of coordinated action with the central bank to cool lending growth, slow soaring property prices and support non-inflationary sources of growth.

``The slowdown in the economy was the government's aim and the present level was expected,'' he said. ``There's enough potential in our corporate sector, despite high wage growth, and our success should be built on exports rather than lending growth and the property sector.''

To contact the reporter on this story: Ott Ummelas in Tallinn at oummelas@bloomberg.net

http://www.bloomberg.com/apps/news?pid=20601085&sid=axBtIU8KZZwI&refer=europe#

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