Euro – love it or loathe it, but you’ll get it
Accession to the Euro zone has become an idée fixed for all three Baltic States since joining the European Union. The first deadlines were set at a year 2007; however, Baltic economies were not ready at that time. The governments kept indulging their obsessions and set new dates for Euro introduction. It was hardly believable, taking into account monetary and fiscal policies they were pursuing. However, only three year later, at the beginning of 2009, Estonia gets a waiver that 2010 was going to be its trial year, the year when the performance of the economy would be monitored by European institutions.
Criteria revisited
The criteria for Euro adoption are set by Maastricht criteria, and looking from its perspective, Estonia is doing well:
Inflation rate – -0.7% (1% maximum);
Budget deficit – 2.4% of GDP (-3% maximum);
Gross government debt – 9.6% of GDP (60% maximum);
Exchange rate regime is fixed to euro in Estonia since 2004 versus two years required.
Nevertheless, there has been a lot of talking about the costs of fulfilling these criteria. The strongest argument is based on basic macroeconomic idea of multiplier process. Namely, opponents state that in order to restrain budget deficit and government debt public spending was severely reduced, leading to further decline in demand and making real GDP substantially decline (-14.1% in 2009 only). It is understandable that such a decline is created by an external shock, meaning shrinking volumes of international trade; however, tight governmental policy is also believed to fuel it. In addition, low demand lead to Established: 2006Quantity: 3 Casinos, 19 Rival Gaming is quite a new software provider, it appeared in 2006. low employment and slow or even negative growth in prices.
One leg in the Euro
Those who follow Baltic economic news probably know on what state of admission procedure Estonia is now. For those who missed the news – Estonian economy was monitored by European Commission and European Central Bank in the spring, later on it was approved by European Council and now both supporters and opponents of Euro are waiting for July 13th when the final decision will be announced by the ECOFIN. Nevertheless, it is inevitable to admit that now there exists no mystery around accession; after announcement of European Commission on 18th of June it is almost 100% probably the Euro will be in Estonia.
The matter of interest
Nevertheless, general economic indicators of past tendencies in the economy are not of such great interest from our perspective – investment activities. It is taken as granted: Euro – love it or loathe it, you will not live without it. Thus, the matter of importance is what fruitful patterns and dangerous changes can euro introduction bring.
Different investing activities will be affected to different degrees. To start off, forex trading will not be substantially affected, since, due to kroon being pegged to euro, trading kroone against foreign currencies us the same as trading euro against respective currencies. Secondly, equity market will be influenced only to the extent of shares trading, due to non-existence of other commodities on Estonian market. So, the changes come from the following changing after euro introduction matters:
Exchange rate. Investment during next month (until 18th of June) can be associated with higher degree of uncertainty. Reasoning is that there is no proof that official exchange rate between EEK and EUR will be set at present level. It will be announced by ECOFIN. Change in exchange level would be basically equal to devaluation. Since majority of high political and economic figures state that D-word is not and has never been an option we shall not anticipate different exchange rate to be set. (Currently Estonian Kroon (EEK) is exchanged by Eesti Pank at the rate of 15.6466EEK for 1 EUR).
Uncertainty. Obviously the promising perspective is stability and certainty brought by strong international currency. This makes foreign investors be more confident in local equity and therefore more intense competition can occur; this usually makes prices more volatile – higher increases and lower decreases. Also lower uncertainty yields into lower interest rates which makes capital investment more attractive for both local and foreign capital. Thus, one should expect creation of new companies and development of existing ones. Introduction of new capital usually either enlarges businesses or makes them more productive; both lead to higher returns.
Heaven or Hell?
Of course introduction of Euro in Estonia is not a matter of such interest and public attention as, for instance, BP’s oil spill, it deserves proper attention, especially here in Baltics. Maybe the costs are stated to be high by opponents, but no one of them is able of undermining and diminishing the benefits and prospective dangers.
Written by Ivan Mihhejev on behalf of SSE Riga Investment Fund
