Estonian Premier Says Nation May Delay Euro Entry Date 2nd Time

Estonian Prime Minister Andrus Ansip said the Baltic country probably will have to delay plans for adopting the euro a second time as inflation won't slow enough for the nation to qualify. The nation of 1.3 million people is looking to Jan. 1, 2008, as a new date for making the switch to Europe's common currency, after it dropped plans on April 27 to give up the kroon at the beginning of next year.

The Baltic nations of Estonia, Lithuania and Latvia, are feeling the sting of having the fastest-growing economies in the European Union because the resulting soaring inflation caused them to give up plans to be the first new EU states to take on the euro. Officials complain that euro-adoption rules are outdated because they don't take into account the need for fast growth to catch up with living standards in western Europe.

"We would like to join the euro zone as soon as possible," Ansip, 49, said in an interview at the government building in Tallinn yesterday. "We have some possibilities to join from Jan. 1, 2008, but it is quite unlikely." Ultimately "it is very difficult to say some very concrete dates when Estonia will join."

Euro candidates need to keep inflation to within 1.5 percentage points of the 12-month average rate of the three European Union nations with the slowest consumer-price growth. The July target was 2.8 percent, while Estonia's was 4.4 percent.

Euro Benefits

Ansip said having the euro will draw foreign investment and boost economic growth while Estonians won't have to waste money changing currency when they travel. Inflation in the $13.1 billion economy, the second-fastest growing in the European Union, is being driven by rising wages, spending and export growth.

Estonia's gross domestic product expanded 11.7 percent and Lithuania's GDP grew in the first quarter. Latvia's economy soared 13.1 percent in the second quarter, compared with the 2.4 percent growth rate for the 12 nations that now share the euro. Ansip repeated Estonia will not use "artificial measures," such as cutting value-added taxes, as a way to slow inflation.

He said Estonia will abide by the rules, though he repeated criticism that the inflation criteria set out in the euro-adopting blueprint, called the Maastricht Treaty, is calculated based on all 25 EU members and not just the 12 euro region countries.

"It is quite difficult to understand why we will say that a zero rate is the best inflation," Ansip said. "It is quite difficult for me to understand why it is not only the club members making the decision, should we join the euro zone or not."

IMF Skepticism

The International Monetary Fund said on Aug. 25 that Estonian euro entry "is likely to remain out of reach through 2008." Inflation is the only limit that is foiling the three Baltic states' plans for euro adoption. They meet all other criteria covering budget deficits, currency stability and interest rates. Of the 10 countries to join the EU in 2004, only Slovenia will adopt the euro next year.

Economic growth is keeping Estonia's budget in surplus, at around 3 billion krooni ($246 million) by the end of July. That will enable the country to pay off 1.5 billion krooni of debt next year, reducing it to 2.8 percent of GDP from 4.8 percent, Ansip said. Estonia plans to practically clear all central government debt by 2010.

"For the foreseeable future I can't see any need for a budget deficit in Estonia," he said. "We can't overheat" the economy. "We have to put some money to the reserve to create some funds for the future." He also warned against government spending boosting economic growth.

March Elections

Ansip's three-party coalition, in office since April 13, 2005, after the previous administration collapsed, faces a general election in March. If re-elected, he pledged to continue cuts to Estonia's flat personal income tax so it reaches 18 percent in 2011. Already the tax rate will fall a percentage point annually, reaching 20 percent in 2009.

He also promised to reduce the tax on distributed corporate earnings to 18 percent in the same period from 23 percent now and extend the system of not taxing re-invested company income to individuals. "We don't want to make any difference between private persons and companies," Ansip said. "We would like to attract more private investment into Estonia."

Under plans put forward by Ansip's Reform Party, if a person sold shares in AS Eesti Telekom, Estonia's biggest phone company, for example, and bought within 90 days stock in AS Merko Ehitus, the country's largest construction company, they would not be taxed.

Ansip said his government's aim is to make Estonia among the five wealthiest European countries within 15 years, according to per capita GDP. That would be three decades after Soviet occupation of the country ended in 1991.

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