First Interview

I finally had my first interview. It was with the research supervisor from Eesti Pank, the central bank of Estonia. It seems his job with Eesti Pank prior to the adoption of the Euro was to watch the inflation rate with hope that it would drop to the required level to join the Euro. There are three criteria for joining the Euro (other than being in the EU), low government debt, low budget deficit, and low inflation. Estonia was doing well with debt and deficit, but because it's a quickly expanding economy, inflation has been a problem. The recession starting in 2008 brought growth to a halt, and thus inflation was low, so Estonia was able to join the Euro.

As part of the argument for allowing Estonia to adopt the Euro, they claimed that inflation would stay low as prices were already relatively high compared to income. This hasn't happened. Estonia only stayed under target inflation for about eight months and now has the highest inflation in the Eurozone. This has been somewhat problematic as one of the biggest concerns about the Euro has been that stores would rise prices to take advantage of the confusion over the change in prices. However, the recent inflation has nothing to do with internal issues related to the Euro. It's largely caused by increasing oil prices, which Estonia imports and an increase in prices in imported Russian produce. Whether or not Estonia adopted the Euro, it would have experienced inflation.

Another thing I learned is that one problem they had to deal with was that there is also a target interest rate for adopting the Euro. However, Estonia had no interest rate as it has never issued a government bond. Government debt is only 6.6% of GDP, so they've never had need to issue bonds. So instead they had to make an estimate based on the interest rate of resident financial institutions. Luxembourg actually had a similar problem just before joining the Euro, so they started issuing bonds just so they would have an interest rate.

I have another interview tomorrow with someone that works for the State Chancellery. So we'll see what I learn there.