Vahur Kraft. Estonia on its way the euro area: the position of the central bank

ESTONIA ON ITS WAY TO THE EUROZONE: THE POSITION OF THE CENTRAL BANK

BRIEFING OF THE MONETARY POLICY OVERVIEW ON 27 JANUARY 2000

Vahur Kraft

  1. I would like to begin by reminding the audience that it is the year 2000 today. We have been conducting active accession negotiations with the European Union (EU) for two years already and thus, with the Economic and Monetary Union (EMU) as well. This means that today's tasks and goals are not comparable with those of the beginning of the 1990s; such a comparison would be totally misleading. In the 90s the main idea was to break the shackles of the Soviet command economy and quick, non-standard solutions were necessary for that. Seemingly radical actions brought us success. Today, however, we are operating within the framework of a new set of rules that govern the European common room. These rules are beneficial to Estonia and we have to keep them in mind. The central bank presumes that the prevailing conditions in Europe are acceptable to Estonia; otherwise there is no point in aspiring to EU membership.
  2. Over the years, the issues of the EU and adopting the euro have become increasingly important to the activities of Eesti Pank. Recently, Eesti Pank published an amended version of the activity guidelines of the central bank for 2000-2002. While the mission and main goals of the bank have remained the same, much more attention is paid to the accession to the monetary union. From these guidelines I would like to highlight the principle that Eesti Pank, when formulating and implementing monetary and banking policy, aims at harmonisation with the respective legislative acts of the EU. This principle is directly derived from the main target of the central bank: to guarantee the credibility and stability of the monetary system, which in turn obliges Eesti Pank to find the smoothest and least disturbing way of accessing the eurosystem for Estonian society.
  3. Being certain that Estonia will adopt the euro, I would like to start with the question that most interests the citizens of Estonia: What will our monetary policy be like up to the accession to the eurosystem? There can only be one answer. The credibility and stability of the Estonian kroon will be secured by a monetary policy that is based on the fixed exchange rate and currency board principles that have proved their viability and durability during the different phases of economic development. In addition, today one could claim that the system in force has already gotten us accustomed to EMU conditions; namely, a situation where monetary policy is being considered a 'common concern' and exchange rate and monetary policy are not used to solve problems in the economy. The currency board arrangement is the best option for Estonia to secure stability and confidence.
  4. In Estonia, the stable kroon and currency board arrangement are perceived as something self-evident, as a natural state nobody has doubts about. However, we tend to forget the factors that are behind this: the persistent labour of the people in enhancing their living standards, the Government's clear economic policy and the straightforwardness of the central bank. This should not be forgotten. People also tend to think that the same straightforward understanding prevails abroad, including in Europe. This is not the case: creating an understanding of the principles of a currency board and their compliance with the European exchange rate mechanism (ERM-2) has demanded continuous explaination. Today we are in the position to say that in Europe we have achieved the understanding that a currency board arrangement is also suitable for accession to the monetary union. We cannot allow this kind of positive thinking to be undermined and thus endanger not only our strategic targets but also limit our tactical choices.
  5. In the opinion of the central bank, Estonia's strategic target is to become a full member the EMU. This is what would make it possible for us to fulfil our main task both efficiently and over the long term - to guarantee long-term price stability and exchange rate stability as well as stable economic growth with low inflation. I would like to stress that becoming a member of the eurosystem is something more than unilaterally adopting the euro. The latter we clearly oppose. We are of the opinion that accession to the eurosystem can only be a part of the general development of Estonia. The aim of Eesti Pank and the Government is to concentrate their activities and discussions on scenarios that open up Estonia's way to the EMU and are not limited only to the adoption of the euro. It is clear that scenarios that introduce the euro in Estonia but do not open the door to full EMU membership should be considered strategic failures.
  6. Over the years, Eesti Pank has proceeded from the abovementioned principles in its everyday tactical activities regarding accession negotiations as well as the relations with the European Central Bank (ECB) and members of the European System of Central Banks (ESCB). We take into account the realities that have recently been stressed in statements by Romano Prodi, Pedro Mira and the ECB: namely, that accession is only feasible in accordance with the EU's basic documents and through a three-stage process. It is natural as well – we could hardly think of demanding in the course of negotiations that the EU change the basics of the Common Agricultural Policy (CAP). Once again, the opinion of Europe is based on the core principle of the EMU; i.e., economic and monetary policy is a common concern.
  7. As the path to accession is open and beneficial to Estonia, this is the path we are taking. From here a general approach can be derived: we have to set our goals for each of the three stages and meet them separately. The goal of the first stage is the most important one – to become a member of the EU. Unless we achieve this, we have no business in the EMU. As for accession to the EMU, we have to be ready, if necessary, to join the ERM-2 by the end of stage one. In order to do this, Estonia has to continuously and seriously develop its medium term economic programme and to prepare a joint assessment of the final version together with the European Commission. This year we have to proceed with amending the programme for the following years.
  8. Of no less importance are the continuation and financing of structural economic reforms, first of all the pension reform. At the same time we should also test run the excessive deficit procedure between the European Commission and Estonia. The central bank needs to conduct an additional review of monetary policy legislation (including the Law on the Central Bank) and propose any amendments necessary in order to fully harmonise them with the Amsterdam Agreement. One clear impression can be derived from the recent discussion – Eesti Pank can be very confident about the future because the euro-idea seems to have gained general support. This makes implementing an independent monetary policy and passing the amendments to the Law on the Central Bank in the Riigikogu much easier. This, in turn, can be interpreted as a sign of the wish to quickly access to the eurosystem.
  9. Thus, at present the efforts of both the Government and Eesti Pank have to be directed towards a successful completion of stage I. This is where we are of the same mind as the Prime Minister. We have to analyse different scenarios in order to be ready for the most feasible steps to take at the point of accession. Those scenarios are currently being prepared.
  10. The central bank is not cursed with blindness. Estonian society understands that we do not engage in academic surrealism, but have, rather, combined our analysis with real monetary policy goals. Our alleged 'anti-euroism' which has no grounds in reality, is rather, based on two factors. First, observing the strategic target set and, second, from the wish to in no way endanger the accession to the EMU, which is in all respects beneficial to Estonia. Although each hypothetical pro-unilateral argument for euroization has an equal contra argument, we have not found contra arguments to several of the negative effects. This mainly concerns political and economic uncertainty in case we decide to adopt the euro without the official consent of the EU and thus, unavoidably slam shut the doors of the EU on Estonia.
  11. People talk about euroization in Estonia as a novel step that would positively surprise the world. At the moment the whole world associates simple and unilateral euroization or dollarization with countries that have serious economic problems. We could mention East-Timor, Ecuador or Bosnia. That would be the background in the eyes of analysts all over the world for any steps taken in this direction by Estonia. Tactically, it would be extremely inadvisable to be added to the above list.
  12. Today, Eesti Pank is calling for a balanced approach to these issues. Discussions on the different ways of becoming a member of the eurosystem are beneficial for all of Estonian society. However, in the heat of the argument, all our resources should not be directed at one single idea, but rather we should join all our forces to deal with anything that brings us closer to the euro. This definitely does not mean that within the framework of an agreed strategy, alternatives could or should not be discussed nor preparations for stage II, i.e., accession to the common exchange rate mechanism, not be made.
Vahur Kraft. Estonia on its way the euro area: the position of the central bank