Estonia and euro adoption: Small country challenges of joining EMU

Estonia gave up the exchange rate and monetary policy tools of macroeconomic management when it introduced its currency board in 1992. While the currency board arrangement served the country well during transition in the 1990s, it offers limited flexibility to implement policies that would ease the EU convergence as well as mitigate the global financial and economic crisis.

The ongoing financial crisis has made euro adoption more attractive than ever and put it on the top of the country’s policy agenda. However, shocks affecting Estonia are only weakly synchronized with those of the euro area, and the structure of its economy also notably differs from the euro zone. To benefit fully from joining the EMU, Estonia must strengthen other adjustment mechanisms to shocks, including flexibility of the labour market, further improving its environment to do business and a framework, which allows for anti-cyclical fiscal policies.

• Primary Source

OECD: Economic Survey of Estonia http:www.oecd.org/eco/surveys/estonia

ESO: Background information: Estonia speeds full tilt towards the eurozone http://www.europeansources.info/record/estonia-speeds-full-tilt-towards-the-eurozone/

European Commission: DG Economic and Financial Affairs: The euro: Your country and the euro: Estonia and the euro http://ec.europa.eu/economy_finance/the_euro/your_country_euro9063_en.htm

---