Saying, “It is a small step for the euro zone and a big step for Estonia…” the Estonian prime minister celebrated his country’s formal entry into the Western economic world. On January 1, 2011, Estonia switched from the kroon to the euro (and many bought new wallets because the size of their currency had changed). Looking forward to more trade and greater national security, Estonia very much wanted euro zone membership.
The lowest in the euro zone, Estonia’s debt to GDP ratio during 2010 was 6.6%–far below the euro zone rule that national debt could not exceed 60% of GDP. According to this NPR Planet Money podcast, when Estonia experienced a severe recession during 2009, even the president, who grew up in New Jersey, took a 10% salary cut.
And then we have Greece. Switching from the drachma to the euro in 2001, Greece knew, according to this BBC article, that she would have to display more fiscal discipline as a euro zone member. You know what happened. Her 2010 debt to GDP ratio was 142.8%. The story of Greece’s response since 2009 is here.
The Economic Lesson
Monetary policy involves the supply of money and credit. A country’s fiscal policy relates to taxes, spending and borrowing. Estonia and Greece share the same monetary policy while each has its own fiscal policy. And therein lies the problem.
When countries borrow, they are implementing fiscal policy. But who buys their debt? Banks–the same banks that participate in monetary policy. So, because banks link fiscal and monetary policy, if one goes awry, the other is affected.
An Economic Question: How might Estonia experience the impact of Greece’s fiscal policy?
As a Vodafone New Zealand customer, events in Egypt directed affected you. With a Cairo based call center that had to be closed, Vodafone said that people needing assistance waited 7 or 8 minutes for service that was directed elsewhere. According to The New Zealand Herald, Vodafone also had been instructed by the Egyptian government to “disconnect” its 31 roaming customers in Egypt.
How does a country disconnect? It can instruct service providers to shut down. In Egypt, that meant contacting 5 providers. For the U.S., it would be much more difficult, because in addition to the 10 firms that dominate the market (70% concentration), so many more businesses and people are involved.
An interesting fact: The Estonian parliament and France’s highest court have declared internet connection is a basic human right.
The Economic Lesson
The Organization for Economic Cooperation and Development (OECD) estimated the direct and indirect impact of the 5-day internet shutdown in Egypt. Directly, they estimate $18 million a day in lost revenue. Also though, the financial implications for tourism, inoperative call centers, and multinationals’ worries about future reliability are incalculable.
Having just entered the euro zone, the Estonian kroon will be replaced by 194 million euro coins and 45 million bank notes. The process will take 2 weeks as the new currency replaces the old. Here are some pictures of Estonian euro coins and a picture and history of euro banknotes.
To be accepted, Estonia had to pass the “euro” test. Composed of five categories, the test focuses on euro zone targets for 1) inflation, 2) the deficit, 3) debt, 4) long-term interest rates and 5) exchange rate stability requirements. Estonia gets high marks for her debt (8% of GDP) and deficit (1% of GDP) but a lower grade for inflation (10.8% during 2008).
Fully aware of euro zone problems, Estonia says it wants to join as nation #17 because alone, it is too small to have its own monetary policy. As its finance minister said, “It is a small step for the euro zone and a big step for Estonia.” (A slightly familiar quote)
The Economic Lesson
This interactive map of the euro zone illustrates its history.
Posted by: adminEcon
Tags: Estonia, euro zone, kroon