beyondbrics

At the moment it might not seem like the sort of members’ club that has a long waiting list, but Estonia has received the green light from the European Commission to become the 17th country to adopt the euro. But it’s the neighbours who look the benefit the most.

“Estonia has achieved a high degree of sustainable economic convergence and is ready to adopt the euro on 1 January 2011,” according to Olli Rehn, EU Monetary Affairs commissioner.

But the European Central Bank has reservations, saying there are concerns over the country’s ability to hold down inflation.

Both the EC and the ECB published reports on Wednesday on the progress made by member states towards economic and monetary union.

These reports are essential for the ECOFIN Council, which ultimately decides whether new member states join the eurozone.

Before then, the European parliament will be consulted and there will be meetings of eurozone finance ministers.

Lars Christensen at Danske Bank said even though Estonia got a green light from the EC, the concerns of the ECB will nonetheless need to be addressed:

Under normal conditions politicians will follow EC recommendation. But, currently we are not in a “normal” situation. The May inflation data (due in the first week of June) could be an interesting data point giving support to one of the opposing views and, of course, the situation in the European financial markets will no doubt be in the minds of eurozone leaders when the final decision is made.

Thus, we maintain our view that even though Estonian euro membership is likely it is still not a done deal due to the ECB’s obvious reservations. This is now entirely a European political decision.

The adoption of the single currency will not change much for the denizens of Tallin, whose currency, the kroon, has long been fixed against the euro in a currency board.

But the EC’s enthusiasm for Estonia to join the single currency did have an effect on the wider market, helping the Swedish krona to rally across the board.

The news was seen as positive for the currency, given the exposure of Swedish banks to activity in the Baltic states.

As Geoffrey Yu at UBS put it:

We believe this is a major positive for Swedish krona as the risk of [Estonian] devaluation will no longer exist. Estonia’s approval will also encourage Latvia to maintain its austerity measures and join the eurozone in the near future.

The Swedish krona rose 1.2 per cent to SKr7.5320 against the dollar and climbed 0.9 per cent to SKr9.5450 against the euro.

Stockholm must be hoping ECOFIN doesn’t blackball Estonia from its members only club.