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Brendan Keenan: To be or not to be in the eurozone?

PLUCKY little Estonia. Having escaped the Soviet Union, and faced the wrath of the Russian bear on several occasions since, this tiny country of 1.3 million people has now joined the euro. These people are brave, but are they right in the head?

Actually, the entry of Estonia is a timely reminder of what the euro is supposed to be, and what it is not. It is timely because, in Ireland, these arguments were forgotten the minute those strange new notes appeared in the ATM machines.

We are paying a terrible price for that amnesia and are having trouble engaging with the kind of rational analysis which preceded entry -- even though almost everyone was in favour of membership.

There are those who say we should leave the single currency, but you will search hard for detail on how such an event could be organised, and what would happen afterwards.

Those in charge of affairs say we must never contemplate any such thing. But you will search even harder for any detailed analysis from our leaders as to the consequences of continued membership, and what will happen to us if we do.

Estonia also offers some hard lessons for those who hanker for life without the constraints of the euro. It, too, had a borrowing splurge and horrible crash. The 14 per cent fall in output was almost on an Irish scale -- and this is the poorest country in the EU. Even though it was not a member, the very existence of the euro exerted a baleful influence.

One does not have to be in the euro in order to borrow in euro. So poor little Estonia, like Ireland, had access to all the credit it wanted via the Germanic pool of euro savings, provided by foreign banks -- mainly Swedish. And Sweden is not in the euro either.

Having almost bankrupted themselves in the Nineties, and been rescued successfully, the Swedish banks got into all kinds of trouble again, this time in the Baltic states. To coin a phrase, you can keep a country out of the euro, but you cannot keep the euro out of the country.

Estonians, like other eastern Europeans, were able to get cheap mortgages by borrowing in euro. But they ran the risk that their national currencies would fall and the cost of the loans would rise. This is precisely what happened in some cases, especially Hungary -- as many Irish property investors are all too well aware.

These people are brave, but are they right in the head?

Estonian debt will still be foreign debt, but it is now in their own currency. Having seen the calamities of the past year, they will not be celebrating entry like earlier members. But the prospect of keeping your loans in the currency in which they were borrowed is a powerful incentive to join.

Any country leaving the euro under pressure would find itself up to the ears in foreign currency debt. Those with long memories will know that excessive foreign debt is an even more severe constraint than government deficits.

As for those, after a crash austerity programme, Estonia's public finances are well within the rules for euro membership. Which illustrates one of the fundamental flaws in the rules -- that they do not count private debt.

It would have been much better if they had done when the euro was formed. Better still if governments had monitored private debt more closely. Having had the euro bubble before it had the euro, the newest member will begin by having to reduce its total debt.

However, the strength of the Estonian public finances will help. Unlike the past decade, lenders are assessing the solvency of governments country by country. Ireland is still gripped by the pincers of high government borrowing and large private debt. Painful as such a squeeze may be, it reflects reality better than giving German rates to all, as happened for the first 10 years of the single currency.

But Estonia's case also brings to mind the fundamental questions facing Ireland in 1999. There is, first the political one. The Baltic states have the theoretical defence of the Nato military machine against the giant neighbour who in the past absorbed them. But many there think the "soft power" of EU and euro membership may actually be a better protection. It often seems that Moscow feels the same.

Ireland's strategic choices are less stark, but they are real. So long as there is a European currency, what would be the position of an Ireland which did not belong to it?

Would it be a smart Atlantic Hong Kong or Singapore, which could nimbly use its monetary independence to best advantage; or an impotent, unsuccessful outsider -- probably an unofficial member of the sterling zone, by decree of the markets? Opinions may vary, but the choice is as fundamental as ever it was.

Sunday Indo Business