Despite the European Central Bank's doubts about how long Estonia can hold down inflation, the European Union's executive arm said the former Soviet republic of 1.4 million people was ready to adopt the euro, unlike other, bigger hopefuls such as the Czech Republic, Hungary and Poland.
"Estonia has achieved a high degree of sustainable economic convergence and is ready to adopt the euro on 1 January 2011," EU Economic and Monetary Affairs Commissioner Olli Rehn said in a statement.
If, as expected, it is given the final go-ahead by EU finance ministers, the Baltic country will become the fifth state that joined the Union in 2004 to adopt the currency. Slovenia entered the euro zone in 2007, Cyprus and Malta did so in 2008, and Slovakia followed in 2009.
The Commission's decision could reassure other candidates that the euro zone remains open for expansion despite Greece's debt crisis, which has fuelled tension in the currency area and forced it to create a $1-trillion emergency aid mechanism for members facing solvency problems.
Indeed, the turmoil within the single currency area has dampened enthusiasm towards the euro among candidate members. Polish Finance Minister Jacek Rostowski said on Wednesday that Warsaw was in no hurry to join the single currency area, which he said needed time to "refurbish" itself after the Greek crisis.
A European Central Bank report said there were mixed signals on Estonia's readiness to adopt the euro due to question marks regarding the future sustainability of the country's convergence, notably concerning inflation.
Very low inflation in Estonia - which averaged -0.7% over the last 12 months, compared to the 1% benchmark -- was due to mainly temporary factors, it said.
"In sum, there are concerns regarding the sustainability of inflation convergence in Estonia," the ECB said.
Under EU law, the Commission's recommendations are binding. The ECB's are not.
Tough reforms rewarded
The Commission said that other euro candidates - Bulgaria, the Czech Republic, Estonia, Latvia, Lithuania, Hungary, Poland, Romania and Sweden - were not ready.
Either their inflation rates are too high, budget deficits too wide or most have not yet joined the ERM II currency system, a stability test for eurozone membership, it said.
"The nine member states with a so-called 'derogation' [to the euro] have made uneven progress on the road to the single currency," the Commission said.
A recent Reuters poll among economists, mirrored by a report by credit rating agency Fitch, said those countries were forecast to adopt the euro in 2014-2016 at the earliest.
The Commission's recommendation crowns reforms that have turned Estonia into one of the most open and liberal economies in the 27-nation EU and a darling of investors.
It rewards Estonia's austerity programme, which was implemented despite deep recession last year and has ensured the country's budget deficit is below 3% of gross domestic product - one criterion for joining the euro zone.
The country cut its deficit to 1.7% of GDP last year despite an economic contraction of nearly 15%. Estonia also has one of the smaller national debts in the EU - 7.2% of GDP.
The adoption of the euro is not expected to change much for Estonia's investors and its citizens, since the country has long kept its kroon currency fixed against the euro in a currency board. The exchange rate is expected to be kept during the currency changeover.
The Commission said Estonia, which accounts for a tiny fraction of the euro zone's 10-trillion-euro ($12,700-billion) economy, met all the entry criteria on inflation, interest rates, its budget deficit, public debt and currency stability.
(EurActiv with Reuters.)
