Posted by: Dirk | June 13, 2010

Eurostonia

As reported by the BBC, Estonia can adopt the euro in 2011:

The Commission said Estonia’s deficit and debt were well within the acceptable limits set by the Maastricht Treaty that launched the single currency.

The deficit was 1.7% of total output (GDP) in 2009, despite a 15% drop in GDP.

Estonia’s government debt stood at 7.2% of GDP in 2009 – well below the eurozone average of 60%.

So, the Maastricht criteria are fulfilled. But is it wise for a country which is small and open to join the euro now, after a 15% drop in GDP and with unemployment just below 20%?

Estonia will lose the option of using monetary policy to stimulate demand via investment, and also will lose the option to either use the exchange rate to export more or to let it float in order to let the market determine the equilibrium. In a time when the euro zone lacks a mechanism for adjustment of external balances and no clear way out, with a ECB running without rules, do you really, really want to join the euro? People from Estonia, think about this hard. Your future might depend on it.

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