Estonia is set to become the first Baltic EU member state to join the eurozone. If everything goes according to plan, Tallinn will be able to adopt the euro as from the beginning of 2011.
Despite the current financial turmoil and the effects of the global recession, the European Commission yesterday gave its official green light so that the 1.3 million population of Estonia will cease to use the kroon and instead start doing business with the euro in a few months time.
The Commission's favourable recommendation follows an in-depth analysis of the current state of the Estonian economy and will now need to be followed by an official decision by the leaders of the eurozone during a summit next month. If confirmed, the decision will be formally adopted by EU finance ministers in July.
Estonia will become the 17th EU member state to join the euro.
In its opinion, the EU executive said that it is backing Estonia's eurozone entry despite doubts among economists over whether the country will meet the criterion of keeping its rate of inflation within 1.5 percentage points above the average of the three member states with the lowest inflation over the previous year. Estonia's inflation in 2009 is currently estimated by the Commission at 0.2 per cent. The average of the three "best performers" (Ireland, Spain and Portugal) was -0.96 per cent.
The inflation limit is just one of the five criteria set out in the Maastricht treaty for joining the eurozone.
At the same time, the Commission said that Estonia's deficit and debt levels are well below the limits set out in the Maastricht criteria.
According to the Maastricht criteria, a eurozone entrant must have a deficit of no more than three per cent of gross domestic product (GDP), and debt of no more than 60 per cent of GDP.
Estonia and Sweden are currently the only EU countries within the debt and deficit limits, even though Sweden does not intend to join the euro in the foreseeable future.
Meanwhile, more EU member states are in the red according to an analysis of the public finances carried by the Commission.
Yesterday, the Commission officially decided that Bulgaria, Denmark, Luxembourg and Finland are in breach of the limits, and should be made subject to "excessive deficit procedures" in which they are given deadlines to consolidate their public finances. Twenty-one countries are already subject to EDPs.
This means that now almost all EU member states, including Malta, are under an EDP.
Malta was given until the end of 2011 to correct its structural deficit and bring it back to under the three per cent of GDP limit.