A New EMU Member before Any Exits

There has been much talk in the markets that a country like Greece or Germany drop out of the euro zone. There were press reports that indicated that using brinkmanship tactics, French President Sarkozy threatened to leave. We have consistently argued against such ideas and in fact, sometimes have even gone one step further: that a new country will join before a country exits.

Back after 9/11, there was talk by the doom and gloom camp that globalization was going to end. Expanding the WTO to include China at the end of 2001 sent a strong message of the commitment to globalization in the face of terrorism.

Now in the face of existential questions about the euro zone, officials are moving in a similar direction. Today a European parliamentary committee approved Estonia joining EMU on 1 Jan 2011. The European parliament as a whole is expected to vote in favor next week. A few weeks ago the EC gave its approval.

The ECB, in its consultant/advisory role, expressed concerns about the sustainability of its efforts to keep inflation in check. Inflation peaked in 2008 around 11% and fell to around 2% last year, but does appear to be trending higher. In April it stood at 2.9% year-over-year. The May figures are due out on May 7th.

Ten countries joined the EU in 2004, Estonia is likely to be the fifth country to "graduate" to EMU, following Slovakia, Slovenia, Cyprus and Malta. It may not be a major development. Estonia's GDP is around $23 bln with a population of about 1.3 mln. It has little debt and a deficit of less than 2% of GDP. It runs a modest current account account surplus. It is not the same as a Sweden or Denmark joining EMU, but a new member is a new member. And on the margins supports our contention that it is too early in this great experiment to declare it a failure, despite the current crisis.