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International Internet Magazine. Baltic States news & analytics Thursday, 28.03.2024, 10:17

Ivari Padar: Estonia must review euro-entry plans

Juhan Tere, BC, Tallinn, 01.04.2009.Print version
Estonia must review its plans to adopt the euro by July 2010 as the Baltic country's recession threatens to push the budget deficit wider than European Union limits, Finance Minister of Estonia Ivari Padar said.

Ivari Padar.

Gross domestic product will shrink 8.5% this year, the Finance Ministry said. In November, it forecast a contraction of 3.5%.

 

Estonia had a budget deficit of three% of GDP last year, when the economy shrank 3.6%. That shortfall matched the threshold allowed by the EU, one of the conditions for euro entry, and may be wider this year as revenue wanes because of the recession, informs Bloomberg/LETA.

 

"The government will definitely have to cut spending more to keep the budget deficit below three%," said Maris Lauri, chief macroeconomic analyst with the largest Baltic lender, Swedbank AB, in Tallinn.

 

European Monetary Affairs Commissioner Joaquin Almunia said on March 19 that Estonian Prime Minister Andrus Ansip's plan to join the euro by July 2010, announced earlier this month, is too ambitious, according to a government spokesman.

 

Estonia, which is going through its worst recession since regaining independence from the Soviet Union in 1991 is trying to move forward the entry date to help its economic recovery and attract new investment. Gross domestic product may shrink 10% this year, SEB, the second-biggest Baltic lender, and Royal Bank of Scotland Group Plc forecast. The central bank said last month GDP may drop as much as 8.9%.

 

"Certainly the options for adopting the euro must be reviewed in the light of the new forecast, as well as the longer-term budget policies," Padar said in the statement.

 

The Cabinet agreed last month to cut the fiscal deficit by about 8 billion kroons, or eight% of the total budget, saying this would ensure the shortfall doesn't exceed 3% of GDP.

 

"Moody's central expectation is that the government will manage to control expenditure such that the 3% Maastricht deficit criterion is met," Kenneth Orchard, Moody's senior analyst for the Baltic region, said in an e-mailed response to questions. "However, further deterioration of the regional economy would place significant additional pressure on government revenues and could force a delay in euro adoption."

 

The budget gap may reach five% of GDP this year unless the government cuts spending further, said Violeta Klyviene, the senior Baltic analyst with Danske Bank said.

 

Together with Lithuania, another Baltic state, Estonia had to postpone euro membership from its initial goal of 2007 after an economic boom boosted the inflation rate too high. Latvia, which eyed entry a year later, also put off the currency switch.

 

Prices will probably rise 0.4% this year, compared with the November forecast of 4.2%, the ministry said.






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