View Full Version : Estonia may strengthen the German wing in ECB

01-07-2011, 07:39 PM
Estonia may strengthen the German wing in ECB (http://balticbusinessnews.com/article/2011/01/04/Estonia-may-strengthen-the-German-wing-in-ECB)

Estonia’s adoption of the euro may bolster a German-influenced faction on the European Central Bank’s Governing Council that’s pushing for more government austerity in member states, writes Bloomberg.

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 Jan. 1. 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.

“Estonians prefer a stability-oriented approach, as their fiscal policy shows,” said Carsten Brzeski, senior economist at ING Groep NV in Brussels and a former European Commission official. “So Lipstok most likely will strengthen the Germanic bloc, and Bundesbank President Axel Weber will enjoy a new friend.”

Weber, who has been critical of the ECB’s decision to buy government bonds in response to Europe’s debt crisis, leads a group of policy makers demanding politicians take greater responsibility for their own profligacy. Ireland in November became the second euro nation after Greece to receive an EU-led bailout, sparking concern that contagion will spread through the euro area and undermine the common currency.

‘Austere Coalition’

“Most likely we will witness the creation of an Austere Coalition, actually a modified Hanseatic League, of Germany, Austria, Finland, Estonia, and a few of the smaller countries,” said Simon Johnson, a professor at the Massachusetts Institute of Technology’s Sloan School of Management, in his blog on Dec. 2. “Ending moral hazard -- the prospect of soft bail-out money forever -- is an admirable goal.”

Lipstok said on Sept. 20 last year that Estonia had kept a tight rein on its finances to comply with EU fiscal rules and qualify for euro membership.

Even as the economy shrank 13.9 percent in 2009, Estonia 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, well below the EU’s 3 percent limit. By contrast, Ireland and Greece had deficits of more than 14 percent of GDP.

Short ECB Tenure

Lipstok’s tenure on the ECB’s council will not be a long one. His seven-year term as Estonian central bank chief expires in June 2012 and he can’t be re-elected.

In joining the ECB, Lipstok will be plunged into top-level policy making in Europe during a time of crisis. While Estonia is the euro region’s second-smallest economy after Malta, Lipstok’s vote on the ECB council carries as much weight as any of its other 22 members.

Given Estonia’s track record of fiscal rectitude, Lipstok will find himself in good company with the likes of Weber and Juergen Stark, the ECB’s chief economist, said Hardo Pajula, a Tallinn-based economist with SEB AB. Stark said last month that every euro-area country must be responsible for its own debt.

“The rhetoric of the Bank of Estonia over the last 20 years has been influenced primarily by the postulates of Washington consensus and German ‘Ordnungspolitik’,” said Pajula. “Hence, I am rather certain that Lipstok and his team will probably make natural allies of Messrs Weber and Stark.”