As euro wobbles, Estonia holds steady on adopting it

So what if international investors are fleeing the euro in droves, judging it too risky and unstable? Jurgen Ligi is running in the opposite direction: into the currency’s arms, with his entire country in tow.

On Jan. 1, Estonia is expected to bid goodbye to its beloved kroon and become the 17th country to adopt the euro after an arduous eligibility process. At a time when some economists are questioning the currency’s very survival, the Estonian government insists that the euro remains a desirable commodity and that switching over would rebrand this Baltic nation.

“Estonia … is unknown. Markets do not believe in us,” Ligi, the country’s finance minister, said in an interview in his office here in Tallinn, the capital. Adopting the euro would stamp Estonia with “the quality mark of the European economy” and instantly make his country more attractive to investors as a member of the club.

But that “quality mark” has taken a major hit lately as Greece teeters on the brink of insolvency and nations such as Spain, Italy and Portugal wrestle with enormous budget deficits. Their leaders have scrambled to cut spending and increase taxes to calm investors, while richer, more stable countries, including Germany and France, have grudgingly set up a multibillion-dollar rescue fund to bail out their troubled neighbors if the need arises.

Only a year ago, the euro was being touted as potentially muscling aside the dollar to become the world’s most trusted currency. But so swift and dramatic has been its fall from grace that countries once eager to join the Eurozone,” such as Poland, are now balking.

Not Estonia.

Membership in the zone has been one of Tallinn’s stated goals for more than a decade, and now lies within its grasp: European economic authorities say the country meets all the financial criteria. The Eurozone’s finance ministers Monday endorsed its bid to join the euro; the official green light is expected to be given in July.

To qualify, Tallinn has had to exhibit the kind of stern fiscal discipline that Athens, Madrid, Rome and Lisbon have blithely cast aside, precipitating the current crisis. Estonia’s government deficit of 1.7% of gross domestic product is well below the Eurozone limit — Greece’s is 13.6%, by contrast — and its public debt burden is one of the lowest in Europe.

“There’s a long record of very conservative fiscal policy in Estonia. We have exceeded the deficit criteria only once in 15 or more years,” Ligi said. “This is our tradition to be conservative.”

Yet Estonia’s example is one that other countries might not be so eager to follow, a path that has inflicted plenty of economic pain and hardship on Estonian society.

A real estate crash two years ago and the government’s determination to keep a tight lid on public spending through recession caused the economy to shrink by a whopping 14% last year. Growth this year is forecast to be just 1%. About 1 in 6 Estonians is out of work.

Many here remain unconvinced that bringing in the euro will make life better. Some fear things will actually get worse.

Maire Uibo, 49, is a painter who, like many of her compatriots, worries that prices of goods will rise when the euro makes its expected debut next year. Consumers in other Eurozone countries, including Germany, certainly complained of a spike in prices when the euro was introduced, although studies have since shown that the perceived increases were often greater than the real ones.

Still, Uibo says any price rises would squeeze her hard. Because of the economic downturn, she has already been forced to charge less for the watercolors she sells on the cobbled streets of Tallinn’s medieval Old Town to the camera-toting cruise ship passengers who stroll by. A mid-size painting that used to go for about $30 now fetches $25.

“I’m afraid of the euro,” Uibo said. “For an artist, it’s very hard. I pay rent, taxes, frames, glass. For me, it’s very, very expensive.”

The government insists that prices will stay stable because the kroon has been pegged to the euro for years.

Starting in July, mandatory price tags in both kroons and euros, to help consumers get used to the conversion rate, should also discourage shopkeepers from trying to fiddle with prices after the switch-over, officials say.

Besides economic anxieties, many Estonians, especially older ones, harbor an emotional attachment to the kroon. More recent history, however, has pushed Estonia’s leaders toward the euro, and underscored how the common currency is as much a political project as an economic one.

The government has diligently tried to wipe out traces of the country’s past under Soviet domination. Joining the European Union and North Atlantic Treaty Organization, in 2004, was a major part of the campaign to look west instead of east; the euro continues it.

“It’s part of this progress of moving from the former Soviet Union to the center of Western Europe or the European Union,” said Allan Sikk, an expert on Baltic politics at University College London.

For Eero Raun, a software consultant, adopting the euro would certainly be convenient. He has contracts in neighboring Finland, a Eurozone member; travel and accounting would be that much easier.

He’s under no illusions as to how important Estonian membership would be to the rest of the Eurozone.

“Estonia is such a small player, I think it almost doesn’t matter,” said Raun, 36. “Whether Estonia joins or not is not going to make or break the euro.”

henry.chu@latimes.com