ECB warns Estonia on inflation if it joins eurozone

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The European Central Bank warned Estonia Wednesday that it could struggle to keep inflation under control if it joins the 16-member eurozone as planned next year.

"There are concerns regarding the sustainability of inflation convergence in Estonia" because while it was contained at the moment, that was in large part the result of temporary factors, the ECB's Convergence Report 2010 said.

They included "the ongoing severe economic adjustment process" Tallinn has undertaken to adopt Europe's single currency in January, and which caused output to contract by a whopping 14.1 percent last year.

"Once the adjustment phase is over, maintaining low inflation rates will be very challenging given the limited room for manoeuvre for monetary policy" within the eurozone, the ECB said.

The European Commission has backed Estonia's plan to adopt the euro in 2011, the Baltic state's foreign ministry said on Wednesday ahead of a similar announcement expected from Brussels.

European Union data showed Estonia was well within the guidelines to adopt the euro.

Estonia's public deficit, debt and inflation are all well below the limits established for eurozone members at present.

The Baltic county could in fact be one of the few countries to respect terms of the European Union's Stability and Growth Pact, which theoretically limits public deficits to no more than three percent of gross domestic product (GDP).

Public debt is normally capped at 60 percent of GDP meanwhile, but poor fiscal management and the need for economic stimulus during the 2009 recession have pushed many eurozone countries above that level.

In 2009, Estonia posted a deficit of 1.7 percent however and debt of just 7.2 percent.

Inflation was also contained at 0.7 percent, below the reference value of 1.0 percent that currently serves as a benchmark for countries seeking to adopt the single currency.

© 2010 AFP

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