Convergence reports of the European Central Bank and the European Commission assess Estonia's readiness for the changeover to the euro
Today the European Central Bank (ECB) and the European Commission published their regular convergence reports on those EU member states still to change over to the euro. The reports analyse compliance of the countries' economies with the requirements for the introduction of the euro (the Maastricht criteria) along with their legal framework. In addition to Estonia, the euro readiness of eight other countries is assessed.
"The ECB convergence report presents, as we could expect, that Estonia meets all the criteria for the launch of the euro except one - inflation. However, Estonia stands out in respect of public finances which are expressed in a significant budget surplus and low foreign debt. The primary objective of Estonia in the coming years will be economic stability, and convergence to the inflation criterion without allowing any compromise regarding other convergence criteria," stressed Andres Lipstok, Governor of Eesti Pank.
For the fulfilment of the inflation criterion, annual consumer price growth should have been 2.8% but it actually reached 4.3% over the reference period.
The ECB report notes that in public finances the government budget surplus in Estonia amounted to 2.3% of GDP and thus the reference value criterion was easily met. Estonia, Latvia and Sweden alike have budget surplus while six countries' budgets show deficit. Estonias public debt fell to 4.5% of GDP in 2005 and forecasts for 2006 show a further decrease amounting to 4%. This is the lowest debt rate in the European Union and remarkably below the 60% reference value.
The exchange rate of the Estonian kroon has remained stable against the central parity of the euro, that is 15.6466.
The report also notes that while the kroon bond market has not yet matured, long-term interest rates of Estonia cannot be measured against other countries rates on the basis of a comparable indicator. Nevertheless, a low public debt rate along with the financial market situation do not suggest a negative assessment of the interest criterion.
The ECB report maintains that in order to ensure price stability and competitiveness, Estonia should apply a sufficiently strict budgetary policy. Also, current credit growth should be closely monitored as it increases household consumption and current account deficit which may imply overheating of economy. The ECB also underlines the importance of a flexible labour market and a moderate wage growth.
The ECB convergence report looks at the countries' economic indicators over a period from November 2005 to October 2006. The latest report includes the following member states: the Czech Republic, Estonia, Cyprus, Latvia, Hungary, Malta, Poland, Slovakia, and Sweden. A report on Lithuania was released in spring 2006.
As a rule, a convergence report is compiled every two years and it assesses a country's convergence to the euro area in terms of economic, political and legislative indicators based on the Maastricht criteria. Such reports provide a basis for the European Commission to submit proposals to the ECOFIN and the European Council listing the member states ready to launch the euro.
The ECB report has been translated into Estonian and is available on the Eesti Pank website at http://www.eestipank.info/pub/et/dokumendid/publikatsioonid/EKP/convergence/_2006.pdf.