By Paul Taylor
PARIS, Dec 14 (Reuters) - If euro zone governments are serious about wanting to expand monetary stability and prosperity into eastern Europe, they will agree next year to admit Estonia to their single currency area in 2011.
The tiny Baltic state has fared better in the financial crisis than its two fellow former Soviet republics, Latvia and Lithuania, because it was more prudent about foreign borrowing and fiscal discipline in the boom years.
All three have pegged their currencies to the euro and endured contractions in their economies of up to 18 percent as well as deep cuts in public spending to cope with balance of payments problems made untenable by the global downturn.
Estonia is now a test case for the willingness of the euro zone, and especially of its most powerful member, Germany, to continue to expand despite worries about the economic cohesion of the existing 16 member states.
The decision, likely to be taken in June, will also send a powerful political signal about a country that used to be part of the Soviet Union at a time when many east Europeans are anxious about Russian muscle-flexing.
Privately, some west European officials and central bankers say the euro area has enough problems -- notably the huge fiscal deficits of countries such as Greece, Ireland and Spain -- without having to take in poorer new members.
"What's the hurry? Let them wait a bit longer till their economies have really converged with ours," said a senior west European central banker, speaking on condition of anonymity because of the sensitivity of the subject.
He was not referring specifically to Estonia.
RULES BENT?
Many east European governments complain that the Maastricht Treaty's economic criteria have been applied more stringently to the newcomers that joined in 2004 and 2007 than they were to the euro zone's founders.
They contend that the reference value for public debt of 60 percent of GDP was interpreted ultra-flexibly to permit Italy and Belgium, both with a national debt of more than 100 percent of GDP, to join in the first wave in 1999.
By contrast Lithuania became the only country to be rejected for membership of the single currency area when it failed to meet the inflation criterion by just 0.1 percentage points in 2007, prompting cries of discrimination.
EU officials say the fact that Lithuanian inflation increased thereafter proves that the country had not converged sustainably with the euro area and would have had greater difficulties down the road had it joined.
Estonia intends to have an impeccable case to present and has made progress on the price conditions since analysts polled by Reuters forecast the country to join in 2012 a month ago.
"It is probable that we will fulfil all the Maastricht criteria already in 2009," Estonian Finance Minister Jurgen Ligi said last week.
That means achieving a budget deficit of 3 percent of gross domestic product or close, at a time when most members of the euro zone are running shortfalls of at least twice that size.
EU Economic and Monetary Affairs Commissioner Joaquin Almunia told the Austrian magazine Profil that Estonia, which will be formally assessed by the Commission in May, was well on the way to membership.
"This country has made good progress towards fulfilling the criteria. If everything goes well, we could in June 2010 give the green light for the 17th member," he said.
CHANGE THE RULES?
While the admission of Estonia would give a morale boost to the other Baltic states, which face at least two more years of sharp austerity before they can hope to qualify, some economists believe the EU should be bolder and admit all three now.
Together they account for less than 1 percent of the euro zone's economy, so the impact of any adjustment problems on the other members would by miniscule.
"The three Baltic countries face the deepest recessions among all countries of the world and it is not just the fault of the politicians and the people of these countries that they are in this predicament," Zsolt Darvas, a fellow at the economic think-tank Bruegel, wrote.
In a paper (*) published this month, Darvas argued that the EU should re-interpret the euro criteria to admit the three Baltic states immediately with compensatory economic measures.
"The EU has mobilised resources to support crisis-hit countries in central and eastern Europe according to its rule-books, but the EU should be more than just a rule-book. When everyone is aware that a rule has deficiencies, action is needed to modify the rule," he said.
But given the determination of European authorities to avoid creating any rule-bending precedent for larger newcomers, Estonia is likely to join on its own. (* The Baltic Challenge and Euro-Area Entry; http://www.bruegel.org/uploads/tx_btbbreugel/PC_BalticsZsolt_011209_01.pdf) (editing by Patrick Graham)