FOREX TRADING

European finance ministers have today backed Estonia’s bid to become a member of the eurozone. Estonia will become the 17th member of the euro area on 1 January 2011. The positive decision was made despite the ECB’s concerns that the inflation criterion is not sustainable. The ECB said on 12 May that in its opinion the current low inflation rates in Estonia reflect mainly temporary factors and once output growth resumes, it will be very difficult to maintain low inflation rates, especially given the limited room for manoeuvre for monetary policy.

Estonian euro adoption is, in our view, primarily a political decision rather than an economic one and we would stress that the euro is not a panacea for all economic diseases and euro membership will bring challenges as well as benefits. Ultimately, this will increase confidence in the Estonian economy, but it is also clear that it will not solve the structural economic problems. Estonia should continue with implementation of structural reform and maintaining fiscal discipline, the latter would preserve financial stability in the country and avoid imbalances. As already mentioned, there remain significant upside risks to inflation, which could adversely affect the country’s international competitiveness.

The decision will have a limited positive impact on other Baltic markets and the rest the CEE markets. The increasing risk of debt crises is forcing investors to closely evaluate each individual country rather than region. But it once again emphasises that the other Baltic countries should continue with fiscal tightening.

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