beyondbrics

Estonia could hardly have picked a worse week for European authorities to consider its application to join the euro next January.

With the ink barely dry on a €500bn stabilisation package to prevent the Greek debt crisis spilling into the rest of the eurozone, bureaucrats in Brussels and Frankfurt would be forgiven for thinking now may not be the best time to invite another country into the club.

Yet, it is hard to see what excuses the European Commission and the European Central Bank could come up with to say no to Estonia on Wednesday when they issue their report on the country’s readiness to join.

Setting an example

Despite suffering a deep recession last year, Estonia has made painful sacrifices to remain within the Maastricht criteria for euro entry. In fact, its public finances are among the strongest in Europe, with a budget deficit of just 1.7 per cent of gross domestic product — well within the 3 per cent Maastricht limit — and government sector debt of just 7.2 per cent of GDP. Estonia could pay off all its government debt and still have reserves left over.

Once bitten, twice shy

With finances like that, perhaps it should be the eurozone begging Estonia to join rather than the other way round.

Still, EU officials are sure to cast a sceptical eye over the numbers in light of the trouble caused by Greece’s dodgy data. The entry rules also require the fiscal performance to be sustainable — a potential stumbling block considering the tough budget cuts made to keep the deficit down.

Deal or no deal?

Olli Rehn, European commissioner for economic and monetary affairs, cautioned last week that Estonia’s entry was not “a done deal”. But Tallinn says it is confident of winning approval on Wednesday, with a final decision by the European Council in July.

EU policymakers are aware that Estonia’s application is viewed as a test case for other former Eastern bloc countries planning to join the euro in future. Ed Parker, head of emerging Europe at rating agency Fitch, says: “If [Estonia] were rejected, despite meeting all the reference rates, that would create a damaging precedent and negative signal for central and eastern Europe as a whole.”

So while the timing may be awful, eurozone authorities would need a very good reason to put up the ‘no entry’ signs now.