Estonia cleared to join euro zone next year

The European Commission today gave Estonia the green light to become the 17th country to switch to the shared euro currency as of January 1, 2011.

'Estonia has achieved a high degree of sustainable economic convergence and is ready to adopt the euro on 1 January 2011,' European Union commissioner for economic and budgetary affairs Olli Rehn said.

'To ensure that the adoption of the euro is a success, Estonia must pursue its efforts to maintain a prudent fiscal policy stance,' Rehn said. He urged Tallinn to 'remain vigilant and react early and decisively' if problems emerge.

The euro's future remains uncertain in the eyes of some analysts despite the €750 billion economic stabilisation programme for euro zone countries announced on Monday.

Rehn said today's decision on Estonia 'is also a strong signal about the euro area' which 'underpins the role of the euro as medium-term policy anchor' for the bloc as a whole.

The opinion of the European Union's executive arm must be endorsed by its fellow EU nations. If they give the green light, then the euro zone will next year have its first Baltic member and its third ex-communist state.

In order to qualify, candidate nations must respect several criteria - keeping national debt and deficits under control as well as inflation, with limited fluctuations on foreign exchange markets and on interest rate levels.

According to the latest EU estimates, Estonia will post a public deficit amounting to 2.4% of gross domestic product this year and debt of 9.6% of GDP - levels which most of Europe can only dream of. The euro zone average public or budget deficit this year will be 6.6%, with debt at 84.7%, well above limits of 3% and 60%, respectively.

The European Central Bank pointedly warned Estonia today that it could struggle to keep inflation under control if it joins the euro zone.

Estonia, with its 1.3 million inhabitants, had initially hoped to join the euro club in 2007 but was prevented from doing so by high inflation rates at the time. The country shifted rapidly from a communist command economy to the free market after breaking from the crumbling Soviet bloc in 1991 and its economy began to grow quickly, especially after joining the European Union in 2004.

Hit by the global crisis in 2008, Estonia's government slashed public spending to confront the crisis and maintain its drive to switch from the national currency, the kroon, to the euro.

The government has said Estonia has cleared all the EU's hurdles for adopting the euro.