Estonia and EMU prospects

Abstract

Since regaining independence, Estonian has carried out its economic and political reforms with dispatch and determination.Estonia has now succesfully completed primary tasks faced by most transition countries, ie. trade liberalization, macroeconomic stabilization, privatization, monetary reform, strengthening of financial sector etc.One of the main challanges presently facing Estonia is the EU membership.If Estonia intends to become a member of the EU in the years ahead, EMU will comprise the framework of development also for the Estonian economy.What then are the implications of EMU memberhip for Estonia ?Benefits include elimination of currency transaction costs, reduction of costs of hedging against exchange rate risk, increased competition due to price transparency, increased foreign trade, elimination of problems related to fluctuating exchange rates, low inflation, and benefits related to increased international role of the common European currency euro. Costs related the EMU and a common currency depend on the structure of Estonia's economy vis a vis other European economies.In general, if EMU member states have similar economic structures and economic problems, then the costs will be low, because a common EMU economic policy suit every country's individual needs.If this is not the case, then the costs of a common currency will be high. Estonia's participation in euro area requires a fulfilment of the Maastricht convergnece criteria on interest rate, exchange rate, price stability as well as public debt.In respect of the government deficit and debt, succesfull economic reform and accompanying economic growth have created a situation wherein Estonia's debt burden is relatively small and the Estonian government can easily borrow money from international markets. Regarding to price stability, inflation rate in Estonia is still considerably above the level of Western European countries.Also, long-term interest rates still exceed the reference value of the EMU criterion.Finally, the criterion of exchange rate stability can be considered to be essentially fulfilled in Estonia because the kroon has already for five years been pegged to the Deutschemark, one of the most stable currencies in Europe. If Estonia remains outside the official euro area after accession, the EMU will still have an enormous impact on its economic and monetary policies.For Estonia, as well as for all new member states, the pursuit of strict macroeconomic and fiscal policies is of essential importance. Keywords:Estonia, EMU, EU, integration, enlargement, monetary policy