Euro Area’s Newest Member Stands by Currency, Estonian Premier Ansip Says

By Ott Ummelas (December 21, 2011)

Estonia, the newest member of the euro region, will stand by the single currency because its benefits outweigh the uncertainty caused by the region’s debt crisis, said Prime Minister Andrus Ansip.

“The euro remains more trustworthy than small national currencies,” Ansip said yesterday in an interview in the Estonian capital, Tallinn, citing a run this month on Swedbank AB (SWEDA)’s offices in neighboring Latvia, which doesn’t use the euro. “The euro’s exchange rate, looking over the longer term, doesn’t indicate any significant weakness.”

Estonia, a Baltic state that boasts the European Union’s fastest-growing economy, has clearly benefited from its adoption of the euro, Ansip said. Increased investor confidence, easier access to export markets and the elimination of currency risk for 90 percent of borrowers whose loans were already denominated in euros, can all be attributed to the single currency, he said.

Ansip’s comments underscore the 17-nation euro’s resilience and the attractions of membership even as the sovereign debt crisis that emerged in Greece more than two years ago poses a risk to the global economy.

The single currency has gained 3.9 percent since then-Greek Prime Minister George Papandreou requested outside aid in April of last year. The euro rose 0.5 percent to $1.3151 as of 11:44 a.m. in Frankfurt.

“While I’m not overly pessimistic about the future, I’m far from denying that problems are there,” Ansip said.

The debt crisis will take as many as two decades to end and private companies will have to play a bigger role to resolve it, he said. Estonia rejects increased intervention by the European Central Bank, and rather supports reducing public spending and boosting the efficiency of the economy in part through more effective tax collection, he said.

“I absolutely don’t understand how some hope to regain the markets’ trust by borrowing money from the same markets that don’t trust them or piling up even more debt or by trying to borrow to erect some kind of firewalls,” Ansip said. “The crisis developed over 10 or 20 years in some countries and it can’t end overnight.” Resolving the problem “is a long and rather painful process that will take 10 or 20 years.”

Europe’s economic growth shouldn’t be driven by public spending, Ansip said, rebuffing economists including George Magnus, a senior adviser at UBS AG, who argue that Europe-wide austerity would push the region deeper into the crisis.

Less government stimulus would allow “bigger creative freedoms” for private companies, boosting the region’s competitiveness, Ansip said.

“I’m convinced that the private sector will take on a larger role as soon as the public sector shrinks,” Ansip said. “Estonia, Latvia and Lithuania show that this can be done. Falling public-sector spending has led to a significant activation of the private sector.”

About a fifth of the 5,000 companies set up with Finnish capital in Estonia were founded in the past two years, he said.

Estonia will have a budget surplus this year after being the only member of the trading bloc except Sweden to avoid a 2010 deficit, Ansip said. Year-end public debt will be 5.8 percent of gross domestic product, the lowest in EU, while government reserves make up 12 percent of GDP.

Latvian spending cuts and tax increases since 2008, its international bailout, will reach 17.8 percent of GDP by the end of next year, Finance Minister Andris Vilks said earlier this month. Lithuania’s deficit reduction totaled 12 percent of GDP in 2009-2010, while Estonia narrowed its budget gap by more than 10 percent in 2008-2009.

The $19 billion economy grew 8.8 percent from a year earlier in the first nine months, driven by export demand from Sweden and Finland.