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18 May, 2012

Estonia and Euro: Missed Party or Bright Future?

Despite the euro-zone crisis, euro membership gives Estonia more credibility and makes the country clearly visible among former republics of the USSR.

“Red, red wine...,” we were singing on 19 June 1992, the last day of the Russian rouble in Estonia, as we were drinking the cheap wine that was our last purchase made with roubles. The next day, 20 June 1992 started with the new national currency, the Estonian kroon, and as I remember the last thing I bought for roubles (a lot of wine), I also remember the first item I bought for kroons. It was a bus ticket.

As paradoxical as it may sound, I do not remember what the last thing was that I bought for kroons or the first thing I bought for euros in 2011 when Estonia adopted the currency and became 17th member of the euro-zone.

One of the reasons for that is definitely the fact that almost everything in Estonia can be bought by card. The emotional memory of using cash and holding the fresh bank notes in your hand is thus fading away and leaving the impression that in spite of the change in currency, life continues as usual. In addition, in 1992 the transition was very sharp – one day we lived with the rouble, the next day with the kroon, but in 2011, the kroons were still valid for two weeks making the change less painful and more flexible.

In 1992, it was all about sovereignty. Even though Estonia had gained re-independence in 1991, she was still economically strongly tied to Russia. The currency reform de-anchored Estonia from the rouble-zone and allowed her to start pursuing closer ties with the West.

It was about sovereignty in 2011, too. Estonia gave up her right to emit money and to make fully independent fiscal decisions. However, the transition was formal since the kroon had been tied to the D-mark before and to the euro later. Now the kroon was simply replaced with the euro.

How did Estonia get there? As the economic crisis struck in 2008, some people at the Prime Minister’s office and the Finance Ministry realized the crisis could be used to fulfil the Maastricht criteria so that Estonia would be in the euro-zone by 2011. The austerity measures deprived many of bigger incomes, but allowed Estonia to become the first country of the former USSR to join the euro-zone. Estonians changed their currency twice in less than 20 years.

Unlike in 1992, this time only few people were worried about sovereignty. It is fair to say that more people were worried about rising prices. Even before the transition, some retailers had raised the prices, but the real race started later. The trick is that the exchange rate of kroon to euro (1 euro = 15.66 kroons) made it psychologically easier for customers to pay, say, 10 euros than 160 kroons, since the number 10 is smaller than 160. I do remember that the price for a taxi from downtown Tallinn to home was about 120 kroons. Now it is 10 euros...

In addition, in 2010 Estonia had to follow two parallel tracks. The first, and at the time more important, was the position of the European Commission concerning fulfilling the Maastricht criteria. Newspaper headlines were concerned with the question of whether Estonia would qualify for the euro-zone.

Thus, in 2010 and the first months of 2011, relatively little attention was paid to what was happening in Greece. But when people realized that Estonia would have to offer financial assistance to Greece, a lot of disappointment followed because ordinary citizens could not believe the sacrifice would have to be made since Estonia is far poorer than Greece. And wasn't the principle of the EU that richer countries help poorer ones and not the other way around?

Still, many foreign entrepreneurs have given assurances that despite the euro-zone crisis, euro membership gives Estonia more credibility and makes the country clearly visible among former republics of the USSR. Sceptics have said that Estonia missed the party because the better days in the euro-zone were already gone.

Nevertheless, at the moment Estonia is at least sitting at the deciders’ table. With the kroon, Estonia had faced the same problems during the crisis and had been left out from the euro-zone. Now with euro, Estonia has at least some opportunity to take part in the game. And luckily enough, Estonia shares the vision of Germany who insists on austerity in the EU.

At the same time, it is clear that very little depends on Estonia’s own behaviour. The fate of the euro-zone is up to Greece and other countries with big debts. Even optimistically speaking, it seems that the apocalyptic tone that characterized all of 2011 is declining. Perhaps it is too early to sing ‘Red, red wine’, but the general atmosphere has more positive signs than ever before within the last years.


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