“It is better for us to be part of the eurozone during the crisis”

TALLINN. Mari Pärnamäe (27) is an economist from the Bank of Estonia. She explains the current economic situation in the country in an interview.

By Enora Regnier

Mari Pärnamäe. Photo: Bank of Estonia

Q: Estonia adopted the euro in January 2011. One year after, what are the consequences on the economy of the country? How did it affect the prices in the shops? Can the inflation be slowed in the country?

A: It is difficult to know the exact impact of the euro on our economy for now.

Inflation expectations were heightened before accession to euro area, but they proved to be in vain. Eurostat as well as Eesti Pank’s specialists calculated the direct impact to annual inflation in Estonia to range about 0,2-0,3 percentage points.

Currency changeover can influence inflation in different ways. Prices may rise because of consumers’ lower price sensitivity or due to direct costs (e.g. changing menus in restaurants). Rounding prices may have effects both ways. All in all, higher inflation is not entailed when changing currency.

As we can’t produce everything in our small country, we have to import a lot and we are dependent on food prices on the international market. Last year, the prices increased but it was the case for all countries who need to import a lot, not only Estonia.

If prices have increased in the country, it’s not really because of the euro but because of the international market.

 

Q: So far, a lot of Estonians feel that the only things that didn’t increase in the country are the wages. What is the current salary situation?

A: We suffered a lot in 2008 during the recession and the wages have been severely cut by the government. But the salaries are increasing in the country, even if it’s slowly. Nominal wages have been growing year-on-year since 2010 and real wages since 2011.

The wages have to be related to the productivity in the country. The only way to increase the wages is to grow the productivity, which can prove to be difficult for a small country.

Strong wage growth is not favorable for Estonian economy, since it drives up production costs. Estonia is largely dependent on exports and our trade partners, especially the Nordic countries like Sweden and Finland, who represent half of our trades. Thereby having higher production costs lowers our competitiveness.

Estonia has adopted the euro in the middle of an economic crisis. Why the rush? Do you think that the country choose the best moment to adopt the common currency?

The timing was not important for us because we knew for a long time that we would have the euro anyway. It was a natural step for our economy because our exchange rate was already the same as the euro. We were ready to adopt it, it was planned and there was no reason for us to wait longer because of the crisis.

We would have felt the effects of eurocrisis even if we weren’t been part of the eurozone. We have been affected by the crisis before. But it is better for us to be part of the eurozone during the crisis because it makes it safer for us.

Having a small and independent currency, like in Latvia, means that the prices and the cost of production and trades can increase suddenly and it is a risk for international companies who want to trade with them. Being part of the eurozone is a security for them, and it’s the same for us.

The economy of the country is growing faster than in other eurozone countries. Though, the inhabitants don’t seem to feel the positive effects of it, and are complaining about the high prices in the shops. Some of them think that the government betrayed them. Do you think the money is properly distributed? Who is the real winner with the euro, the government or the people?

I don’t think the government promised anything about the wages. I think it is a psychological reaction from the workers, because we all knew the inflation would increase.

People compare their current situation to 2006 and 2007 , when the economy was booming beyond its capacity. For local corporations last years have signified “coming out of the recession” time. Companies did report high growth rates in their revenues last year, which they could use for labour costs and/or investments. All processes take time and restructuring an economy from real-estate-oriented boom-period to a sustainable growth path is difficult.

The goal in introducing euro as a local currency was to encourage long-term economic growth in Estonia.

It’s maybe hard for everybody to see it because they feel like they have to pay more, but the country wins a lot by being in the eurozone and our economy as a whole is much better. And I don’t see money left over somewhere, the profit made by the companies doesn’t disappear.

People have to keep in mind that the inflation is true for everybody and that companies have to invest more because of it.

The good thing now is that the inflation is expected to slow down and the energy prices are already stabilized.

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