Saturday, January 8, 2011

Estonia's euro bet

Just a brief follow-up on my earlier mention of Estonia's adoption of the euro. The Economist's last Charlemagne column of 2010 discussed "Why fiscally prudent Estonia wants to join the troubled euro." In addition to the standard economic reasons — reduce interest rate premiums, lower transaction costs, attract investment — Charlemagne also mentions Estonia's goal of tying the country ever more closely to (Western) Europe (and underscoring its separation from Russia). I suppose there is some symbolic value in adopting the euro, but I am not so convinced that "[t]o many Estonians, the euro also means security" in the sense of protection from Russia. Currency policy is important, sure, but not that important.

Charlemagne acknowledges that Estonia was able to attain this milestone in part by implementing severe austerity policies when the global economic crisis hit. Its economy shrank by 1/7 during 2009 alone, and the unemployment rate averaged about 17.5% in 2010. Not many governments are secure and stable enough to survive that kind of an economic shock. As Charlemagne suggests, it may be all the more difficult for those states that have already adopted the euro and face similar calls for austerity.

Estonia may calculate that even if such countries end up forced out of the euro, a rump euro-zone will continue, participation in which will continue to be valuable. This is not such a bad guess to make; after all, the Estonian kroon has been pegged to the German mark and the euro since its re-introduction, and apart from the recent (admittedly severe) economic shock, the country has benefited nicely from this choice.

P.S. As an interesting side-note, the author of the column has evidently read (or read about) Timothy Snyder's excellent new book Bloodlands, about Stalin's and Hitler's murderous regimes and what they did to the areas that lay between Germany and Russia. The book has nothing to do with monetary policy, but does bear reading for anyone interested in that region (which includes the Baltic republics). Two informative (and glowing) reviews are here and here.

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