December 31, 2010

Estonia Joins Eurozone in New Year; 2 Years In, Slovakia Reconsiders

Debt contagion makes some Slovaks yearn for koruna’s return

 

As one nation finally gains entry into the eurozone on Jan. 1, 2011, some are reconsidering membership. Estonia, whose finance ministers voted to approve entry to the euro zone on July 13, will say goodbye to the kroon, its national currency, on Saturday when it joins its closest trading partners in a common currency. But in becoming the 17th country to embrace the euro and renounce its financial independence, Estonia will be diving into turbulent waters.

Some in Slovakia, on the other hand, have become tired of being pressed to pay other nations’ debts, and some members of the central European nation's leadership are looking for a way out of the group and its obligations. Richard Sulik, a parliament speaker, argued recently in a commentary in the Hospodarske Noviny business daily that Slovakia should turn its back on the euro and resume trading in its former national currency, the koruna.

While the finance ministry pooh-poohed his advocacy and economist Nicolas Veron of the Brussels-based think tank Bruegel characterized a possible departure from the euro as “economically disruptive,” the idea apparently has legs—this despite the fact that any nation’s departure from the group would likely be punished by investors to the point of possible financial collapse if its assets are converted and devalued.

New to the eurozone—it joined just two years ago, also on New Year’s Day, in 2009—Slovakia has seen country after country in its new alliance beset by debt and struggle, and, accustomed to being frugal, refused to pay its share of the rescue extended to Greece earlier in the year. Slovak Finance Minister Ivan Miklos said in an Associated Press report that it was because the bailout was unfair and, structured as it was, lent itself to being repeated.

“Our main objection was ... that it was only the taxpayers who have to pay,” Miklos said. “But the banks, which contributed to the problem and made profits by providing loans to problematic countries in the past, didn't have to pay a single cent.” He added, “To maintain such practice means to repeat the previous mistakes.” He also said that the euro zone rules as presently structured undermine people’s trust in a free economy.

The profits are privatized but the losses are socialized,” he explained. “When it works, a few make money, but when it collapses because they take too big a risk, we all have to pay. That's a huge problem.” And while it did provide loan guarantees for Ireland, Mediana, a polling agency, has found that 67% of Slovaks were opposed to doing so.

Ironically, Estonia’s entry into the euro zone comes as its own economy is flagging. In a report in Deutsche Welle, Estonia is characterized as having been hard hit by the global economic crisis, no longer worthy of being called one of the three “Baltic Tigers” (as it, Latvia and Lithuania were formerly known). While it grew, however, it modernized much; until 2006 it was one of the fastest-growing economies in the world and its growth rate had sometimes exceeded 10% per annum.

Its commercial banking sector thrived during the boom that preceded the bust; its financial center and capital, Tallinn, saw its electronic stock exchange bought out in 2001 by Finland’s Helsinki Stock Exchange. In addition, its economy includes sectors of engineering, electronics and communications, information technology, chemical products, textiles, food and fishing, wood and wood products, shipbuilding, and transportation. Near Tallinn, Muuga, its ice-free port, offers such modern services as transshipment capability, oil tanker offloading capabilities, a high-capacity grain elevator and chill/frozen storage. Its railroad links it to West and East as well as Russia. Its three main trade partners are Germany, Sweden and Finland.

All this may be to no avail, however, if it is truly infected with the malaise currently running rampant in the euro zone. Its citizens are reported to be only mildly supportive of entry, with a recent poll by Faktum & Ariko finding only 54% in favor of the action.

Other countries scheduled to become part of the cooperative group in the future are also having second thoughts. Poland, which had suggested 2015 as a target date for membership, its budget deficit, forecast at 7.9% of GDP for 2010, is far from the 3% required for entry. Not only that, but Poland, whose economy actually grew in 2009 by 1.7%, seems to be doing well by sticking to its currency, the zloty. Marek Belka, governor of Poland’s central bank, said this month that before Poland throws its lot in with the euro, the European Union (EU) must institute reforms that will better support the currency.

The Czech Republic, also supposedly on course for eventual membership, may also be considering a change in direction. Its currency, the koruna, is weaker than the euro and has provided assistance to the nation’s export sector. Its president, Vaclav Klaus, has called the euro a failure. Just in November, Klaus dismissed the idea that the nation might press forward for membership in the foreseeable future after German President Christian Wulff, during a visit, characterized the euro as a success story. And its prime minister, Petr Necas, has said that to adopt the euro now “would be economic and political foolishness.”

Estonia’s finance minister, Jurgen Ligi, has said that his country was willing to contribute financially “to keep the euro zone stable and the European Union healthy.” Still, citizens are wary as daily headlines bring more bad news. On Friday, according to a Reuters report, a British think tank gave the euro only a one-in-five chance of survival for 10 years in its current form.

The Center for Economics and Business Research said that because of competitive imbalances among members, it was most likely that the euro would shatter. If it does survive, said Douglas McWilliams, the Center’s chief executive, in a forecast for 2011, “this could be the year when it weakens substantially toward parity with the dollar.”

It remains to be seen whether Estonia’s membership will bring its citizens prosperity, as intended, or whether it will just be the latest nation to suffer joint woes.

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