A rejection of Estonia’s bid to adopt the euro in January for political reasons would pose “enormous political and economic” consequences for central and eastern Europe, Nordea AB said, reported Bloomberg.

The Baltic nation’s effort to be the third former communist country to join the euro zone may be threatened as budget problems among existing euro users and the debate over an emergency aid package for Greece may hamper agreement on Estonia’s entry, analysts Anders Svendsen and Annika Lindblad said in a note today.

Estonia is seeking to join Slovenia and Slovakia in the euro zone by capping inflation and debt and narrowing the budget deficit according to the Maastricht Treaty, while Standard & Poor’s Ratings and Fitch Ratings raised their Estonian outlooks to stable from negative last month. Still, investors must weigh the risk of rejection on the region as some euro-region members may balk at further expansion.

“We have on several occasions been met with doubt regarding the current euro-area members’ ability to politically accept enlargement even if all Maastricht criteria are met,” Svendsen and Lindblad said. “While we find the risk of a political ‘no’ low, the potential consequences for central and eastern Europe would be enormous politically, economically and in terms of the financial market reaction.”

Prime Minister Andrus Ansip cut the government budget deficit by 9 percent of output last year to meet budget terms for euro entry and help the economy to exit its worst recession since independence in 1991 more than any fiscal stimulus measures.

Adopting the common currency would boost investment and trade by reducing currency risks, and help lower record-high unemployment, the government and central bank say.

Spreads between Estonian and euro money market rates have declined to 17-month lows, showing investors expect the European Union authorities to approve Estonia’s entry in May-June.

by Toomas Hõbemägi

Source: BBN