Estonia joins the Eurozone

The past year has been a bad one for the Euro.  Financial crises have rocked the peripheries of the Eurozone and Greece and Ireland actually required bailouts from the EU and and the IMF.  Regardless, the Eurozone is continuing its expansion with today’s addition of Estonia, the northernmost of the three Baltic states.  This latest addition brings the number of Eurozone countries to 17 and makes a bizarre postscript to a year of disasters for the monetary union.

Estonia’s two Baltic-speaking neighbors to the south, Latvia and Lithuania, are currently a part of the European Exchange Rate Mechanism (ERM II), the precursor to Eurzone membership, but their budget deficits mean that their accession won’t come for a few years.

Nonetheless, the question remains: with the turmoil in Europe’s finances, what is the future of the Euro?

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About Meng Bomin

Real name Benjamin Main, I am a graduate of Grinnell College with a degree in Biological Chemistry.
This entry was posted in Current events, Politics and tagged , , . Bookmark the permalink.

10 Responses to Estonia joins the Eurozone

  1. Hail says:

    They keep saying the Euro is in trouble, the Euro has declined, the Euro is in its death-throes.

    Talk is cheap.

    Have you tried to use your U.S. dollars to buy Euros lately? In the past two years, 1 USD has bought ~75 EUR cents or less all but for a short period last summer.

    The real value of the currencies is 1-to-1.

    So, if the Euro is “in trouble”, what does that make the USD?

  2. Meng Bomin says:

    I’d say that the U.S. has some very serious problems of its own. However, it also seems that the day of reckoning lies much closer for the Eurozone, where the issues they dealt with in the economies of Greece and Ireland will have to be dealt with again barring some very rapid turnaround.

  3. Infidel753 says:

    The situations of the dollar and the euro are rather different. The dollar is the currency of a single large country; the euro is the currency of many small and medium-sized countries with very different economies. The euro is only a decade old and was imposed on the participating countries by political elites with little or no input from the masses.

    More importantly, the euro prevents individual countries from boosting exports by allowing their own currencies to depreciate, closing off an escape route from the high unemployment that grips many of them.

    In the richest and most important country in the euro-zone, 57% of the public now thinks it would have been better off never adopting the thing, while serious economists debate the idea of giving it up. The equivalent for the dollar would be if 57% of Californians wanted to renounce it for a state currency and proposals to actually do so were being seriously debated by economists. Neither phenomenon is conceivable in the real world.

    The unfortunate Estonians have climbed onto a sinking ship.

  4. Meng Bomin says:

    Infidel753 put it much better than I did, but I thought I’d throw in a link to another related story from the Financial Times:

    Portugal forced to pay high price in debt sale

    One of the major problems with the way the Eurozone is laid out is the fact that they have monetary unity but no fiscal unity. This means that there is not a corrective for the differences between the subeconomies of the Eurozone as there is in the United States, which has a large, powerful federal government. In the Eurzone, monetary policy is run from Germany and has fit Germany’s priorities pretty well, but has been problematic for countries in the periphery, which go by the unflattering acronym PIIGS (Portugal Ireland Italy Greece Spain).

  5. Hail says:

    RE: Infidel753 and Meng Bomin,

    “Money talks”. Right? If the Euro is in as much trouble as you (and “The Economist”, and so on) say, then why have the big-boys — the currency-speculators and big banks — kept the Euro much stronger than the USD? (In the Asian Crisis of the late ’90s, didn’t those currencies lose half their value?). I just don’t understand that. Unless both the USD and EUR are concurrently in serious trouble!

  6. Meng Bomin says:

    I’d say that the unity of the Eurozone is more of an issue than Euro devaluing, though I would also suggest that the U.S. is not without its troubles with the dollar. In some ways, the U.S. has a worse debt position than Greece. But one of the problems with the Euro is precisely that it is not flexible to the needs of the subeconomies of the Eurozone. If the drachma were still around, it would have surely devalued quite a bit more than the Euro has. Likewise, the Euro is probably more devalued than the Mark would be were the Eurozone never formed.

    The reason that Estonia’s addition to this monetary union is so incongruous with current events is that the crises of the past year underline the instability of the monetary union, though not necessarily the value placed in the currency in the short term.

  7. Hail says:

    Estonia has been planning to enter the “Eurozone” for years. It’s not as if they held a referendum in 2010 which passed; if that were the case that would be bizarre.

    Estonia’s currency has been pegged to the D-Mark and then the Euro since independence in ’91, anyway.

    I have some experience with Estonians and I can tell you that their entrance into the Eurozone is something they would want for symbolic reasons, far more than for any economic reasons. They have always looked to the Germanic West (Sweden and Germans) as a “big brother” to protect them from the dangers to the east.

  8. Meng Bomin says:

    A fair point. However, just as joining the Eurzone is a symbolic step for Estonians, the expansion of Europe’s monetary union represents strange symbolism in a time of crisis.

  9. Hail says:

    Meng Bomin,
    Do you think the Euro will weather the storm and exist “as is” in January 2016, or will some countries drop out, or what?

    How does one exactly “pull out” of a currency union, anyway? Imagine if your state in the USA wanted to get out of the USD. It’s sort of inconceivable. (Maybe Infidel753 is right that one cannot compare the two).

  10. Meng Bomin says:

    I have a difficult time imagining what will happen over the course of the next decade. I suspect that in one form or another, there will have to be a change in the agreements that have been laid out between countries in the Eurozone thus far. I don’t know if this will take the form of countries such as Greece leaving the Euro or if Europe will instead move toward greater fiscal unity in order to mirror the more centralized nature of the United States economy (which is what, in part, makes it difficult to imagine California, for instance, dropping the USD in favor of its own currency).

    You are right that there is no simple path visible. Certainly there isn’t a “get out” clause in the treaty that established the monetary union, so countries attempting to leave the union would be on unsure legal ground. On the other hand, I doubt that transfers of capital will be incredibly popular in the donor countries (Germany in particular), so I’m not sure where that leaves us.

    I guess we’ll see what happens over the course of the next few years when either unexpected economic growth rescues Europe from its financial crises or European leaders find a way to improvise around these problems.

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