Estonia has been a member of ERM II for two years

Estonia has successfully participated in the exchange rate mechanism ERM II for two years now, which means that Estonia has met another prerequisite for the introduction of the euro.

"Estonia’s monetary policy framework has been functioning smoothly and our national currency has been stable. Estonia’s participation in ERM II has proceeded without problems for our monetary system. The exchange rate of the Estonian kroon has remained unchanged under ERM II and the present euro-kroon exchange rate is suitable for the adoption of the single currency," said Märten Ross, Deputy Governor of Eesti Pank. "The reliability of the kroon reflects in the levelling off of interest rates in Estonia and in the euro area," he added.

Estonia will remain a member of ERM II, the "antechamber" to the euro, until the adoption of the single currency. The country has a realistic opportunity to be fit for joining the euro area in spring/summer 2007. According to the forecast of the European Commission, the Ministry of Finance and Eesti Pank, at that time Estonia will be able to meet the inflation criterion, the only problematic requirement for us.

Ross says the fixed exchange rate is an effective tool for suppressing long-term inflation expectations. However, in order to make this tool work, the economy has to maintain its flexibility and the wage growth has to be in line with productivity growth.

"The introduction of the euro calls for an economic policy that prevents an increase in the already strong domestic demand. The central bank has to closely monitor the loan market and take steps to restrain credit growth if necessary. From the government, we expect a surplus budget policy," said Ross.

ERM II is an agreement between states aimed at supporting the stability and coordination of the exchange rate policy in Europe. During ERM II participation, every country that wants to join the euro area has to maintain the stability of its national currency vis-à-vis the euro and meet the Maastricht criteria on inflation, interest rate, exchange rate, budgetary balance and public debt. Every country wishing to adopt the euro must participate in ERM II for at least two years, whereas the length of that period depends on the country’s success in fulfilling the Maastricht criteria. The other members of ERM II besides Estonia are Denmark, Slovenia, Lithuania, Latvia, Cyprus, Malta and Slovakia. The last four have been participating in ERM II for less than the two years required.

Estonia joined ERM II within the framework of the currency board arrangement, maintaining a unilateral commitment to keep the exchange rate unchanged. The standard fluctuation band for the exchange rate in ERM II is +/-15 per cent.