As eurozone crisis bites, newcomer Estonia urges austerity

(TALLINN) - As the eurozone struggles with a crippling debt crisis Estonia, which will adopt the currency next year, is urging the single currency bloc to heed Tallinn's example of fiscal responsibility.

With its 2009 public debt totalling just 7.2 percent of gross domestic product (GDP), the Baltic state of 1.3 million people boasts the lowest level in the entire 27-member European Union.

In stark contrast, Italy's 2009 public debt reached an EU and eurozone-record 115.8 percent of Gross Domestic Product, way above the official 60 percent limit, according to recent Bank of Italy figures.

Moreover, the centre-right government of Prime Minister Andrus Ansip claims reserves of 11.7 percent of GDP.

So Estonia is set to be the eurozone's shining example of sustainable spending when it formally adopts the currency on January 1, 2011.

"We believe in conservative fiscal policy here in Estonia," Ansip told a group of foreign journalists in Tallinn recently.

"We don't want to borrow money at our central government from our children and grandchildren -- everybody has to pay his bills himself," he said.

"People are supporting conservative fiscal policy in Estonia, even despite all those painful budgetary cuts and tax increases," Ansip added.

And he insisted that "stronger discipline inside the eurozone will be good for the entire European Union."

In the drive to tackle the economic crisis and to switch to the euro, Ansip's government slashed public spending as the global slump battered Estonia's export-driven economy.

Eurozone members are required to hold their annual public deficits -- the shortfall between revenues and spending by central and local government -- to 3.0 percent of GDP or lower.

The latest EU estimates show that this year Estonia will come in at 2.4 percent, a level most European countries can only dream of.

Last year, the public deficits of eurozone members Greece and Ireland hovered near 14 percent of GDP.

After shrinking by 14.1 percent in 2009, the Bank of Estonia and most analysts expect Estonia's economy to expand one percent in 2010.

International ratings agency Standard & Poor's recently raised Estonia's long-term sovereign credit rating to A from A-, reflecting its eurozone accession.

It praised Ansip's government for "a series of aggressive consolidation measures, both on the expenditure and revenue sides."

Estonia will be the 17th member in the 27-member European Union to use the euro and the third ex-communist state to make the switch, after Slovenia and Slovakia.

Despite the eurozone's debt woes, Estonia's leaders are betting the euro will bring both savings and fresh investment.

Currently, 70 percent of foreign direct investment (FDI) in Estonia are made in euros and 70 percent of its exports go to other EU states.

So the authorities are confident the switch to the euro will boost the sagging economy and help ease joblessness that spiked to 19.8 percent in the first quarter of 2010.

Despite feeling the pinch of austerity measures needed to meet eurozone criteria, Estonians are cautiously optimistic about having the euro in their pockets.

A recent opinion poll found 47 percent favoured the euro over 41 percent who wanted to keep the kroon.

Shopping for shoes in a swish central Tallinn mall, architecture student Maria Framann said the euro would be a boon to the economy.

But she is also sorry that the kroon -- a symbol of Estonia's post-1991 independence from the Soviet Union -- will soon be a thing of the past.

"It's uncomfortable for Estonians because we have to give up our kroons which we're quite attached to but this is nothing compared to the good the euro will bring for our economy, for trade," she said.