Estonia's rapid transition to a market economy and integration into the world economy have intensified its economic and political ties with Western Europe. It now faces the challenge of meeting the remaining requirements for EU membership and eventual participation in EMU.
Estonia attaches a high priority to joining the European Union (EU) and participating in European Economic and Monetary Union (EMU). It has therefore moved ahead vigorously with deregulation, price liberalization, enterprise restructuring, and privatization. A large part of its legal framework is already aligned with the frameworks of EU members, and it has undertaken much of the structural adjustment necessary for EU accession.
Estonia's economic integration with the European Union and other European countries is already well advanced. A comprehensive Association Agreement ("Europe Agreement") has been in force since early 1998, and Estonia and the European Union are engaged in a dialogue through an "Accession Partnership." The EU Commission also reports regularly on the progress Estonia and the other accession candidates have made toward meeting the conditions for EU membership set forth in the Copenhagen criteria (see box).
At its summit in Copenhagen in 1993, the European Council reached an understanding that all Central and Eastern European countries would be admitted to the European Union once they had fulfilled certain conditions, including adhering to the aims of economic and monetary union. The council established several benchmarks, known as the Copenhagen criteria, for assessing countries' progress toward economic and political compatibility with the European Union: (1) the existence of stable institutions ensuring democratic government, the rule of law, human rights, and the protection of minorities; (2) the existence of a functioning market economy and the capacity to cope with competitive pressures and market forces within the European Union; and (3) the ability to take on the obligations of membership, including adherence to the aims of political, economic, and monetary union.
Countries seeking to join the European Union should find that the long-term gains from membership outweigh the costs. This was certainly the case for Portugal, Spain, and, especially, Ireland, which all experienced rapid growth after becoming EU members. Model-based simulations for EU membership candidates from Central and Eastern Europe indicate that accession will have a similarly positive impact on them. However, one of the challenges faced by accession candidates is that greater integration with the European Union will restrict their scope for autonomous policy choices, given the need for "policy convergence." Estonia's ability to pursue an independent monetary policy is already constrained by its currency board arrangement, which pegs the kroon to the deutsche mark (and thus the euro).
Another challenge is the discipline imposed by the EU benchmarks: before accession, the Copenhagen criteria; after accession, the Maastricht criteria and the Stability and Growth Pact. Compliance with EU regulations and standards entails sizable budgetary outlays and large public sector investments in infrastructure, the environment, and other sectors, and therefore has implications for fiscal policy. For Estonia, which until...