March 13, 2008
BRUSSELS, March 13 (Reuters) – Estonia still expects to adopt the euro currency in 2011 despite high inflation, which the government will fight with tighter fiscal policies, Prime Minister Andrus Ansip said on Thursday.
Ansip told Reuters in an interview he expected Estonia’s 2008 economic growth to slow to around 5 percent from last year’s 7.1 percent, adding the country’s budget surplus would grow more slowly this year than in previous years.
“We are still confident we will meet the Maastricht inflation criteria in 2010 and we can join the euro zone in 2011, but not everything is in our hands,” he said.
A recent Reuters poll of analysts predicted Estonia, a former Soviet republic, would join the euro zone in 2012.
With 1.3 million inhabitants, Estonia has enjoyed rapid economic expansion since it joined the European Union in 2004.
But accelerating inflation partly due to a lax monetary stance, a currency pegged to the rising euro, and high wage growth, forced it to delay its euro zone entry target from 2007.
Talking ahead of an EU summit, Ansip said his government aimed to freeze public expenditure in 2008 to counter inflation.
“I see some spending cuts this year. This year we will try to freeze public spending in Estonia,” he said.
INFLATION TOO HIGH
Estonia now meets the EU’s so-called Maastricht criteria for euro entry on budget deficits, public debt and interest rates, but inflation — at 11.3 percent in February — is far too high.
To join the euro, Estonia’s 12-month average inflation must not be more than 1.5 percentage points above the corresponding average in the three EU states with the lowest inflation rates. This level is now around 3 percent.
Ansip said inflation had picked up so much lately not just because of rising food and oil costs, but also price increases laid down by the EU. Those rises are not over, he added.
“We increased excise duty on fuel, alcohol and tobacco in Estonia from January 1, 2008, and now we have reached the level we agreed to in the EU accession agreement,” he said.
“We did this rapidly. We don’t want to have any administrative pressure to increase inflation in coming years.”
The EU’s executive, the European Commission, has said Estonia could adopt even tighter fiscal policies to curb inflation and stop the economy overheating.
“How deep our surplus will be is still a very big question. Revenues will not drop, but will not increase as rapidly as in the past,” said Ansip.
Out of 12, mostly ex-communist EU newcomers, only Slovenia, Cyprus and Malta have joined the euro zone. Lithuania’s bid to adopt the currency in 2007 was rejected because the country’s inflation was marginally higher than the reference level.
Slovakia hopes to adopt the euro next year.
Bigger EU newcomers, like Poland or Hungary, don’t plan to join the euro zone until after 2010 mainly due to high budget deficits. Their inflation rates are much lower than in Estonia and their currencies are allowed to float freely. (Writing by Marcin Grajewski, editing by Dave Graham)