We, 31.05.2023
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Euro didn't raise the prices after all

Tõnis Oja
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Photo: Pm

Five years ago, soon after the retailers said euro would not raise the prices, the statement turned into a joke among the people. Just before the switch, chamber of commerce and industry initiated a campaign aimed at avoiding unsubstantiated rise of prices of goods and services while the euro was being adopted in 2011.

Indeed, as observed by many among us, in Finland the prices did go up after it entered euro on January 1st 2002 and so we were convinced a price rally was in store here too.

In the beginning this proved true. Beginning November 2010 the consumer price index rose by over five percent a year and such rapid price rise lasted till September next year. Still, it was not as much because of the euro (though its adoption gave a decent boost to economic growth), but our fast and successful exit of the great economic crisis, as well as the fast rise of commodity prices globally.

Thereafter, the price rise slowed down, and from mid-2013 the prices begun to slowly drop and thus till today.

Thus the almost only fear in Estonians as related to euro – rampant price rise – failed to materialise. In five years, the consumer price index has risen by a total of 8.1 percent which equals an average of below two percent a year. Meanwhile, average pay has risen by a whopping 32 percent.

Researcher TNS Emor data says during the time the main foods basket price has basically stayed the same and for several staples as milk, butter and meat it has actually dropped.

«Adoption of euro as such did not bring the feared large price rise,» admitted by Swedbank chief economist Tõnu Mertsina. «The one-off impact during and right after the switch stayed within 0.2–0.3 percent. True, with certain goods and services the price rise was significantly higher,» he said.

In the place of the unrealised fear of inflation, however, what we faced was the European debt crisis. Unexpectedly, it turned out that instead of joining a stable reserve currency, we had entered a bloc in deep crisis which entire existence came under question.  

They managed to keep the eurozone in one piece, however, and the major crisis is behind us perhaps. Still, the insecurity looms large and the eurozone economy is a far cry from what we were hoping for.

Curiously, we for whom assuming governmental debt was as good as taboo were forced to place millions of taxpayer euros into saving Greece and other southern members.

Were we in too much of a hurry in joining the zone? Then, perhaps, we might have had better things to do with the money spent on Greece? And, on top of that, these last years the membership has had no positive impulse on our economic growth.

Still, the specialists say for a small nation like Estonia euro has only good in store. «Here the main keyword is trustworthiness,» said  SEB economist Mihkel Nestor.

«Though Estonian public finances are way ahead of most in eurozone with its conservative budget policy and super low debt level, a small nation cannot take the knowledge of this to the global public,» he said.

«Therefore, for us the single European currency remains the option most prudent. A good example regarding the lack of trust toward a small currency was the last economic crisis where foreign media readily speculated about the potential devaluation of the kroon, thou this would have been extremely complicated legally and economically not too expedient.»

Tõnu Mertsina said that the euro did away with conversion costs and the conversion risk of the currency.

«In Estonia, impact of foreign trade on economy and its percentage of GDP is high. Already, eurozone nations make for over a half of our foreign trade and over 60 percent of foreign trade transactions are in euros. Therefore, the single currency which did away with conversion costs and conversion risk and made price comparison easier and trading more convenient was very needful for our foreign trade,» emphasised Mr Mertsina.

«The disappearance of conversion costs and price comparability also favour travelling and boost our tourism. Meanwhile, the forex companies saw their revenues cut,» said Mr Mertsina.

Perhaps most importantly, for the over 160,000 home loan owners the euro was relief from the kroon’s devaluation fear. Though technically complicated – not to say impossible – the fear was always there. The more so that the topic was occasionally tabled by certain media and politicians.

DNB bank senior economist Priit Roosimägi said theoretically the euro has deprived Estonia of the option to pursue its own monetary policy and thus the chance to soften blows from potential economic shocks.

«As I said, this is theoretical,» stressed Mr Roosimägi. «In practice, considering the comparative smallness of Estonia’s economy including the limited domestic demand, with its own currency Estonia would still have a hard time effectively and positively affecting overall economic trends with active monetary policy,» he said.

«Rather, attempts by a small open economy to intervene with the purchasing power of its currency may result in increased insecurity in foreign partners. That in turn may further deepen economic shocks through decreased external demand,» he added.

Food cheapened

Foodstuff price change September 2011 – August 2015

Milk –19 percent

Butter –10 percent

Cheese +7 percent

Pork –13 percent

Sugar –40 percent

Source: TNS Emor

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