vahur kraft : the euro in estonia - the agenda and practical aspects speech by mr vahur kraft, governor of the bank of estonia ( eesti pank ), at the international conference “ euro currency - french - german experience and estonia future ”, tallinn, 30 september 2003. * i. * * introduction based on the requests addressed to eesti pank information service we can say that there is a most encouraging - if somewhat surprising interest in estonian national euro - coins among the general public - although these coins do not exist as yet. some people are convinced that we have the euro coins already ; the others would like to register in order to be the first to receive the new coins. but every coin has two sides - and in this case it means that a very significant percentage of the estonian population are not at all eager to take leave of the estonian kroon and replace it with the euro. they would like the central bank to proceed slowly. that puts the central bank into the unusual position of arguing for speed and decisive action instead of a conservative approach while the public is still somewhat confused by the recent results of the swedish euro referendum. the swedes would have liked, perhaps, to be a bit more papal than the pope - and they certainly have achievements to be proud of. but for estonia - and with a long - term view in mind - proceeding rapidly and adopting the euro as soon as feasible would be the best. there are some very good arguments for that. ii. economy the best argument lies in the estonian economy. regardless of the lingering global uncertainties, economic growth in estonia has been strong - 5. 8 % in 2002. that means a growth figure approximately 4 % higher than that of the euro area. it could even be said that during the last two years estonian economy has had to face something akin to a positive external shock as the eu membership became more and more of a certainty and the risk margins correspondingly lower. and there was also a parallel negative economic shock - the continuing weakness of external markets. all that has meant certain advantages - for instance, lower interest rates and significant inflows of foreign direct investment, but there are also certain risks involved. estonia's high economic growth of the last year and a half is mainly based on high domestic demand. high domestic demand, a continuously strong inflow of foreign investments and a lower than expected export growth have resulted in a significantly high current account deficit - an estimated 14 % or more of the gdp by end

integration through a higher correlation in economic cycles - as well as lower transaction costs and lower risk premiums. it is also clear that emu participation reduces monetary uncertainty. for instance, had it not been for the emu, european financial markets could probably have been much more turbulent during the asian and russian crises and the recent slowdown of the global economy. for an accession country, a rapid erm - emu accession could mean a further rise in its international credibility - take, for example, the developments in greece who clearly benefited from erm2 credibility in 1999, after the asian crisis. in case of estonia, our earlier policy choices have resulted in an environment characterized by the openness of the economy - export and import reaching 179 - 180 % of the gdp, by a stable fixedexchange - rate, by a long tradition of balanced fiscal stance and rapid integration with the european markets - all of them features favourable to a relatively rapid real convergence. we could even say that the convergence that presently takes place in our real economy takes place in a de facto emu environment. according to an analysis recently conducted by the ecb, the correlation of manufacturing industries'business cycles between estonia and the five larger emu member countries is even higher than that for some of the present member countries, the correlation of overall economic cycles is slightly lower but that is due to the more rapid economic growth in estonia compared to the euro area. but there is one more important aspect i would like to stress in this context - and that is the crucial role of the financial system in real convergence under a currency board based fixed exchange rate regime. it is fair to say that estonian banking system is presently strong, well capitalized and liquid. the banks'forced reliance on their own capital and liquidity has had a direct impact on the market structure. strategic foreign ownership - mostly by scandinavian financial groups - has provided estonian banks with both strong capitalization and transfer of international best practices. at the present time estonian banking sector is responsible for a significant share of the profits of their owners. profitability means effectiveness at least comparable to the financial sectors of our neighbouring eu member countries and a somewhat greater flexibility of production factors, especially the flexibility of labour markets. profitability also means a relatively rapid adoption of new technologies. for example, the number of card payments per capita in estonia should be roughly equal to the respective german figures while the share of internet banking customers is somewhat higher ( and the list of internet - based bank services somewhat more