WIREDGOV

The European Commission has issued its 2010 Converge Report.  It assesses progress with convergence in countries with derogation from euro area membership.

The assessment takes place against the background of the global financial crisis, which has affected the prospects for nominal convergence.

The nine Member States with a so-called 'derogation' have made uneven progress on the road to the single currency, and eight of them do not yet meet all the conditions for euro adoption. However, Estonia stands out from the group, fulfilling the criteria cleary, as a result of determined and efficient efforts by the Estonian government and Estonian people.

Therefore, the Commission concluded that Estonia meets the criteria for adopting the euro and made a proposal to the Council to this effect.  The Council of EU finance ministers (ECOFIN) will take the final decision on the adoption of the euro in Estonia in July, after the Parliament has given its opinion and the EU Heads of State and Government have discussed the subject at their summit meeting in June.

“Estonia has achieved a high degree of sustainable economic convergence and is ready to adopt the euro on 1 January 2011. We commend Estonia for its long-standing commitment to prudent policies. To ensure that the adoption of the euro is a success, Estonia must pursue its efforts to maintain a prudent fiscal policy stance. Estonia needs also to remain vigilant and react early and decisively in case signs of build-up of macroeconomic imbalances and/or losses of competitiveness were to appear. It must now speed up its practical preparations to ensure that the changeover takes place smoothly", said Olli Rehn, EU Commissioner for Economic and Monetary Affairs.

He added: "The assessment and our proposal is also a strong signal about the euro area and to the EU more broadly. It underpins the role of the euro as medium-term policy anchor and confirms that sustained policy efforts and a long-standing record of stability-oriented policies generate concrete results”.

The nine EU countries covered by the Report are Bulgaria, the Czech Republic, Estonia, Latvia, Lithuania, Hungary, Poland, Romania and Sweden¹. According to the Treaty, the Commission reports every two years on the subject.

The criteria for euro adoption consist of four stability-oriented economic conditions regarding the government budgetary position, price stability, exchange rate stability and convergence of long-term interest rates, which need to be fulfilled in a sustainable manner. The national legislation on monetary affairs must also be in line with the EU Treaty.

Assessment of Estonia

Inflation

The average inflation rate in Estonia during the 12 months to March 2010 was -0.7%, well below the reference value of 1.0% for the same month, and likely to remain below the reference value in the period ahead. Considering the large distance to the reference value, relatively flexible markets and prudent polices, Estonia's price performance is assessed as sustainable. However, Estonia will need to remain vigilant to keep inflation at a low level, notably by maintaining an ambitious fiscal policy stance and by keeping domestic demand in line with fundamentals.

Public finances

Estonia is not the subject of a Council decision on the existence of an excessive deficit. The deficit and debt are well within the acceptable limits for the convergence assessment: the deficit was 1.7% of GDP in 2009 despite an unprecedented 15% decline in nominal GDP. The deficit is expected to amount 2 ½% this year and in 2011 according to the Commission's spring forecasts. The general government debt stood at 7.2% of GDP in 2009, which is also well below the Maastricht limits and will remain so even though the public debt is forecasted to increase further by 2013.

Interest rates

The long-term interest rate criterion is not directly applicable for Estonia, as no benchmark long-term government bonds or other appropriate securities are available to assess the durability of convergence as reflected in long-term interest rates. The absence of suitable bonds reflects a very low level of gross public debt, reflecting the budget surpluses in 2002-2007. While financial market risk perceptions vis-à-vis Estonia increased at the height of the crisis, their development during the reference period, as well as a broader assessment on the durability of convergence, including Estonia's continued prudent policies, supports a positive assessment on Estonia's fulfilment of the long-term interest rate criterion.

Exchange rate

As for the exchange rate criterion, Estonia has been a member of ERM II since 28 June 2004. In the two-year period ending 23 April 2010, the Estonian kroon has not been subject to severe tensions and there has been no deviation from the ERM II central rate since kroon's participation.

Finally, Estonia's legislation in the monetary field is compatible with the EU legislation.

Based on this assessment, and on the European Central Bank's own Convergence report, the Commission proposes that Estonia adopts the euro in 2011.

Other Member States with derogation

None of the other eight countries assessed in the report is found to meet all the convergence criteria for adopting the euro.

The assessment of the progress made can be consulted in the Convergence Report 2010, including its technical annex, available on the internet at the following address:

http://ec.europa.eu/economy_finance/articles/eu_economic_situation/2010-05-12-convergence_report_2010_en.htm

The UK and Denmark have a legal opt out.