Estonia and the Euro: A Wedding without Honeymoon

Raul Eamets, Professor of Macroeconomics at the University of Tartu, makes an analogy between last year’s remarkable step for the Estonian economy – the introduction of the euro – and getting married, while admitting the non-appearance of a much anticipated honeymoon, as the timing for the wedding was far from perfect.

Prof Raul Eamets

UT professor of macroeconomics Raul Eamets in his office. Photo by Andres Tennus.

Let’s imagine you’re a doctor and the Estonian economy is coming in for a check-up. What would be your diagnosis?

The condition of the Estonian economy is quite good. Most vital indicators are all right, when we look at the state budget and the debt. But there are problems with immunity – we’re receptive and very dependent on what’s going on around us. Our economy is too small, so it’s not just about our good work.

It reminds me that you have paraphrased a joke, referring to Estonia as the most independent country in the world when it comes to international economics, because there’s not much that depends on us.

Well, yes – our activities don’t influence other countries like Germany influences all of Europe, or other countries that possibly influence the whole world.

Who influences how we are doing?

It depends on our larger trading partners: Finland, Sweden, Latvia, Russia and Germany. We are especially dependent on Scandinavia – on the one hand, because of exports, and on the other, because of the financial system (the Scandinavian banks). It’s naïve to hope that when things go badly for Finland and Sweden, we will flourish.

Looking back at the past year, what was the best thing that happened to the Estonian economy?

It must have been the introduction of the euro.

Recently you compared it to a marriage…

Yes, I did. It was the beginning of union with a very important organization – the eurozone.

But the honeymoon was cut short.

Yes, if there was even a honeymoon at all, because the truth came out about Greece and all that other stuff. It became clear that the family had its thugs who had been stealing and lying – spending too much and living beyond their means. Unfortunately we became a part of the family right when the time came for them to pay their debts.

Unfortunately? Was joining the eurozone a mistake?

No, I wouldn’t say so. Anyway, the currency commission system means that our central bank cannot influence financial politics. We weren’t allowed to devaluate our money or shape our own financial politics before and it hasn’t changed now. In this aspect, the kroons that we had were on par with the current euros. It’s just that back then we had no right to speak at the meeting table at all.

Of course, it seems to people that the kroon was somewhat better – our own currency, the national one, but in the politics of macroeconomics there’s no difference whether it’s a kroon or euro. They’re both just two faces of the same money, like Janus with his two faces.

What did the introduction of the euro change for Estonia?

Surely it allowed some savings for companies, when it comes to converting money between currencies and making remittances.

Our economy became more transparent. Now we have finally realized how poor we actually are, as we can easily compare our prices and salaries to those in Finland or Germany. It gave us a comparison that isn’t always the most pleasant to look at.
Foreign confidence in Estonia definitely grew too, especially when looking outside of Europe.

But what did the introduction of the euro mean to Mari the housewife from Tartu?

Some prices went up. Many things coincided: On the one hand, there was a rise in prices on the world market, and on the other hand, everybody has spotted some numbers being rounded up. I easily noticed that a part at the auto store that had cost one hundred kroons was suddenly worth ten Euros (about 150 kroons).

It reminds me of the slogan: “The Euro Will Not Raise Prices!”

It was well known that the rounding would occur. Of course, attempts were made to calm people down, to assure them that nothing would change, and many prices were already elevated before. I’m not able to say and I’m not sure if it’s even possible to say how much of the raise in prices was connected to the euro and how much to the prices in the world market. The prices in kroons would have increased as well, but probably a bit less.

A longer version of this story in Estonian was originally published in the “Postimees” newspaper.

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