Very recently, all 27 member nations of the European Union (EU) approved the entry of Estonia into the eurozone, meaning that Estonia would adopt the euro as its primary form of currency. At first glance, it seems that tying itself to a widely-used, strongly-supported currency would be a no-brainer for Estonia. However, with Europe’s recent economic woes, the situation becomes a bit more complicated.

Most notably, Steve Hanke, the architect of the currency regimes of the three current “Baltic Tiger” states, (Estonia, Latvia, Bulgaria) believes that the three nations, Estonia especially, would be better off focusing on improving competitiveness rather than moving to adopt the euro. He was asked, in light of the recent speculation that Estonia would soon be admitted to the eurozone, about what benefits such a move might have: “The narrow technical benefits they receive will be very small, if any at all, and those can be accommodated by just making the currency boards even more orthodox and tighter than they already are.”

A currency board is a monetary authority which is required to maintain a fixed exchange rate with a foreign currency. Under currency boards, nations back money in circulation with foreign reserves at a fixed exchange rate to another currency, in Estonia’s case, the euro. In essence, the Estonian kroon is simply a euro clone. However, if the euro were to collapse, or take a serious dive in value, Estonia would have the freedom to re-anchor their kroon to another currency, such as the German mark or the U.S. dollar. This wouldn’t be the case if they adopt the euro. The argument is that by tightening up their currency boards, Estonia could receive all the benefits of the euro currency while not being completely tied down to it.

On the flip side, there lies the risk that the EU will halt expansion into the eurozone, or that changes in the Estonian political climate will opt against entry into the eurozone. As of now, with the unanimous approval that took place June 8th, it appears that Estonia will indeed enter the eurozone on January 1st, 2011. However, they might want to take another look at their currency board system before permanently adopting the euro.

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