Estonia ready to join eurozone

Commission backs entry into single currency zone.

The European Commission will report today that Estonia has met the requirements to join the eurozone, and should become the bloc’s 17th member country on 1 January 2011.

The Commission’s announcement will be a preliminary step to a political agreement by EU governments at a summit on 17-18 June, and legal confirmation by finance ministers in early July.

The Commission is backing Estonia’s eurozone entry despite doubts among economists over whether the country will meet the criterion of keeping its rate of inflation within 1.5 percentage points above the average of the three member states with the lowest inflation over the previous year. The inflation limit is one of the five criteria set out in the Maastricht treaty for joining the eurozone.

Estonia’s inflation in 2009 is currently estimated by the Commission at 0.2%. The average of the three ‘best performers’ (Ireland, Spain and Portugal) was -0.96%.

Inflation rates

The Commission is expected to emphasise that Estonia’s deficit and debt levels are well below the limits set out in the Maastricht criteria. It is also likely to say that inflation rates were driven abnormally low in 2009 because of the financial crisis.

The Maastricht criteria state that a eurozone entrant must have a deficit of no more than 3% of gross domestic product (GDP), and debt of no more than 60% of GDP.

Estonia and Sweden are currently the only EU countries within the debt and deficit limits. The Commission will today say that Bulgaria, Denmark, Luxembourg, Cyprus and Finland are in breach of the limits, and should be made subject to ‘excessive deficit procedures’ (EDPs), in which they are given deadlines to consolidate their public finances. Twenty countries are already subject to EDPs.

The Commission forecast last week that Estonia will have a deficit of 2.4% of GDP in 2010, and debt of 9.6%. Its projected debt figure is the lowest in the eurozone, while the highest is Greece’s, at 124.9%.

The generally poor state of EU public finances means that Estonia is the only country with a credible chance of joining the eurozone in the foreseeable future.

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