On 1 January 1999 the third phase of the European Economic
and Monetary Union will be launched. The currencies of the 11
Member States will irrevocably be fixed against each other
and the single European currency - the euro - will be
introduced. Euro banknotes and coins will be issued on 1
January 2002 and from 30 June of the same year only euro
banknotes and coins will be in circulation.
The Member States of the European Economic and Monetary
Union (EMU) have made thorough and extremely precise
preparations for introducing the single currency. Changeover
to the single currency will significantly broaden the circle
of countries in Europe that have irrevocably fixed their
currency conversion rates against each other. The convergence
of monetary systems will occur towards more stable currencies
and thus, one can suppose that in long-term perspective the
general monetary and economic stability of Estonian major
foreign economic partners will grow.
IMPACT OF EURO ON ESTONIAN MONETARY POLICY
The introduction of the euro on 1 January 1999 will
certainly have a positive effect on the whole Estonian
economy and monetary system. Increased stability in the
European money markets reinforces growth of these
economies and thus paves Estonia's way in implementing a
monetary policy aimed at stability.
Eesti Pank assures that the introduction of the euro
by the 11 Member States on 1 January 1999 will not cause
any changes in Estonian monetary policy. Estonia will not
deviate from its monetary policy based on currency board
arrangement and fixed exchange rate. That means that the
exchange rate of Estonian kroon against the German mark
will remain on the present level, i.e. 8 to 1. However,
it also means that starting from already 1 January 1999
the Estonian kroon will be fixed against the euro, in
accordance with the conversion rate of the German mark
against the euro to be determined on 31 December 1998
with the accuracy of six significant digits.
By the end of the changeover period it is necessary to
amend Estonian legislation, replacing references to the
German mark by references to the euro. However, there are
no grounds for speculations about this process being
possibly used for a direct or hidden change in the
exchange rate policy. Eesti Pank hereby states that when
the anchor currency is changed, the exchange rate will be
determined based on the fixed exchange rate of the
Estonian kroon against the German mark eight to one.
At the same time, relating to the introduction of the
single currency, certain formal and technical changes in
the operational framework of the Estonian monetary policy
will be made, for several reference rates will disappear
and amendments have to be introduced in connection with
the euro being added to the international monetary
system.
Fore example, already from 1 January 1999 the
reference rate for remunerating excess reserves held with
Eesti Pank will be replaced by the European Central Bank
deposit rate. Starting from the beginning of the next
year, there will be changes in quoting foreign exchange
rates by Eesti Pank and the euro will be included in the
list of quoted currencies. Eesti Pank will treat the euro
and the German mark on equal basis in foreign exchange
transactions with commercial banks, i.e. the purchase and
sale transactions in the euro are executed without
spread.
IMPACT OF THE EURO ON ESTONIAN ECONOMY AND FINANCIAL
SYSTEM
The introduction of the euro supports the development
of economies geographically close to Estonia. The
renewing monetary system favours structural changes in
the European economic system: the efficiency and
competition both in real and financial sector will
increase.
Taking into account the continuing integration of
Estonia into European economy, the introduction of the
euro enhances the prospects of local economy. At the same
time, Estonian businessmen have to take into
consideration the increasing competition in the European
internal market, which means that there is no hope for an
easy and guaranteed success.
To maintain a favourable economic outlook, Estonia has
to more strictly pursue the sustainable economic policy,
especially at the current time of economic adjustment.
Eesti Pank is convinced that the economic policy pursued
so far, including the surplus budget, has to be followed
also in the future.
The launch of the EMU on 1 January 1999 will have a
profound impact on the environment European banks,
including Estonian banks, operate in. The introduction of
the euro makes the financial system of EMU Member States
more open and efficient. This, in the opinion of Eesti
Pank, should essentially increase the integration of
Estonian financial sector and real economy in the
European capital markets.
Consolidation in the European financial sector arising
from the introduction of the single currency has already
become apparent in Estonia. This is evidenced by the
recent mergers of banks, strategic investments made by
foreign banks in Estonian banks and the expansion of
Estonian banks to the other Baltic countries. Estonia has
implemented the vast majority of European Union banking
regulations that makes the banking environment here
largely correspond to European requirements.
Therefore, Eesti Pank is convinced that the
introduction of the European single currency, the euro,
is a positive step for Estonia, in terms of the external
environment influencing Estonian economy. Estonia is
ready, regarding both the monetary policy and banking
system, for the single currency to be introduced by the
11 EMU Member States.
