By Agency Reporter

Monday, 3 Jan 2011

Estonia has become the first former Soviet republic to join the euro, putting at least a temporary cap on the currency bloc‘s expansion as the sovereign debt crisis ripples through Europe.

Wedged between Russia and Latvia on the Baltic Sea, Estonia, according to Bloomberg on Friday, will at midnight become the 17th country to switch to the currency. Gross Domestic Product of ¤14bn ($19bn) makes it the second smallest euro economy after Malta.

As Europe grapples with the financial crisis, Estonia is likely to be the last addition to the euro club for several years. Lithuania and Latvia, the next in line, are aiming for 2014 and bigger eastern countries have shied away from setting target dates.

”The euro is still generally seen as a positive for the applicant countries as long as the conversion rate is somewhat competitive,” Elisabeth Gruie, an emerging-markets strategist at BNP Paribas SA in London, said in an e-mail. High deficits are keeping Poland out and an ”inner desire for independence” is the obstacle in the Czech Republic, she said.

Debt estimated by the European Union at eight per cent of GDP in 2010 will make Estonia the fiscally soundest country in a currency bloc plagued by budget woes that forced Greece and Ireland to fall back on European and International Monetary Fund aid.

”It is a sign of the confidence of Estonia toward the euro, despite the current difficulties, which will be a positive signal to the markets,” Joseph Daul of France, floor leader of center-right parties in the European Parliament, said in an e- mailed statement.

Estonia‘s central bank chief, Andres Lipstok, will join the European Central Bank‘s policy-setting council, taking part in his first interest-rate vote on January 13 in Frankfurt.

Some ¤85m coins featuring a map of Estonia and 12 million banknotes go into circulation tomorrow, according to the central bank, starting a two-week phase out of the national currency, the kroon. One euro buys 15.6466 krooni.

The 1.3 million Estonians have little experience of monetary autonomy. In June 1992, less than a year after regaining independence from the Soviet Union, Estonia shifted from the Russian ruble to a national currency that it immediately pegged to the German mark.

The exchange rate was locked to the euro when the first 11 countries began using it in 1999.

 

Source: Punch