Removing Moral Hazard

The entry of Estonia into the Euro after a year of massive turbulence in the Euro framework and the European Union (EU) in general shows either great foresight-or a complete lack of it. Personally I am pleased that at a time of continuing concerns surrounding the Euro Estonia has chosen to join-for all the right reasons.

Since winning independence from the Soviet Union in 1991, Estonia’s tight control on spending has given it the lowest level of government debt in the 27-member European Union and the second-smallest budget deficit in the euro zone.

This is not a country looking to join the club so it can ride on its coattails.
Andres Lipstok, Estonia’s central bank governor became a voting member of the ECB council when the Baltic nation joined Europe’s currency bloc on January 1.

Under his guidance, despite the fact that the Estonian economy shrank 13.9% in 2009Estonia raised sales, alcohol and fuel taxes, froze payments into workers’ pension funds and cut salaries. The measures helped reduce the budget deficit to 1.7 percent of gross domestic product.

Ireland and Greece in contrast had deficits of more than 14 percent of GDP, in spite of the fact that under the Maastrict Treaty the EU imposed a 3 percent limit.

Mr Lipstok will throw his weight into the "German" camp of fiscal rectitude and austerity. In so doing Estonia will be aligning itself with Germany, Austria, Finland and some other smaller EU members.

He will be joining a group led by Bundesbank President Axel Weber and ECB Chief Economist Juergen Stark. This group of policy makers led by Mr Weber are demanding politicians take greater responsibility for their own profligacy. Last month Stark said that every euro-area country must be responsible for its own debt.

It would seem that the goal of ending moral hazard and perhaps pushing the responsibility and some of the losses back to those who created the mess in the first place has taken another baby step.