Latvia – eurozone

Small Baltic state –  Latvia decided to apply to join euro zone in 2014Latvia pegged its currency to the euro after joining the European Union in 2004. Small and limber economy – Latvia should slide more easily into the currency bloc than larger states like Poland and the Czech Republic and have remained keener on joining throughout the banking and debt crises.

Many Latvians’ mortgage loans are in euros  – meaning a switch would decrease currency risk and most see the currency as a lesser long-term risk than the lat. They are also keen to entrench their links with western Europe to keep former imperial master Russia at arms length.

But while the country’s leadership is keen on the project, polls show much of the population are worried that a currency switch will drive prices higher and take control of the economy out of Latvian hands.

To join the euro zone, Latvia needed to ask for an assessment by the European Commission and European Central Bank of its readiness to switch currency. At the moment of writing Latvia fulfills all five Maastricht criteria and should thus be set for adopting the euro on 1 January 2014. True, besides the five quantitative criteria (on inflation, exchange rate, long-term interest rates, budget deficit and government debt) a country is also supposed to be evaluated on the basis of ‘sustainability’ of e.g. low inflation but that never seems to have played a major role. (Estonia was invited to join at a time of negative inflation, which is hardly sustainable). For all the recent newcomers, Slovenia, Malta, Cyprus, Slovakia and Estonia, it seems to have been the case that fulfilling the five means you’re in and I do not envisage this to be different in the case of Latvia.

“This is a day that will enter Latvia’s history,” Finance Minister Andris Vilks told reporters when he, Prime Minister Valdis Dombrovskis and central bank chief Ilmars Rimsevics signed the application.

eurozone

The application will be handed over in Brussels. A report on Latvia’s euro hopes will be prepared by the European Commission and the European Central Bank. Finance ministers are expected to take a final decision in July.

Latvia says it meets all the economic criteria needed to be accepted into the euro zone. The criteria relate to levels of debt, deficit, inflation, long-term interest rates and having a stable peg to the euro.

Dombrovskis said after the signing that the euro would benefit Latvia in terms of increased investment, lower currency.

The Eurozone may bring many benefits to the Latvian economy but economic development still rests with the Latvians and economic convergence is not automatically guaranteed by the euro. Thus the hard work does not end on 31 December 2013 – it begins on 1 January 2014.

Enthusiasm for the euro waned across much of eastern Europe after Greece’s problems emerged in 2009 and drove the currency bloc into a series of sovereign bailouts which has split its members economically and raised questions of its broader viability.

Much of those nerves have eased for now on the back of strong action by the European Central Bank last summer and membership has inched back onto the agenda in the region’s biggest economy, Poland.

The Czechs and Hungary remain far more skeptical while Romania and Bulgaria are still far from fulfilling the Maastricht criteria for joining. Latvia kept its peg to the euro even when some economists said a devaluation would have helped ease its downturn in 2009 and the government had to slash public sector wages and hike taxes instead.

Despite its current relatively high growth rates, at 5.1 percent year-on-year and 1.3 percent quarter-on-quarter in the last three months of 2012, the country remains one of the poorest countries in the EU along with Bulgaria and Romania. Latvia will become the 18th country to join the euro area, and the second Baltic state to do so.

But the main question is – how the currency change will affect employment  and population number in general and is it really the best way to defeat economic crisis ?

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/By Andrea Blažević, Antea Božić, Kristina Piene and Agita Sarkane/

Sources:

http://www.ir.lv/2013/4/29/latvia-in-the-eurozone-lots-of-work-ahead accessed on 28.04.2013

http://www.euronews.com/2013/03/05/latvia-applies-to-join-the-eurozone/ accessed on 28.04.2013

http://www.reuters.com/article/2013/03/04/us-latvia-euro-idUSBRE9230EK20130304 accessed on 28.04.2013

6 thoughts on “Latvia – eurozone

  1. I think that currency change will not affect employment neither the population number, at least not directly. It will change some things on better long term, like cheaper loans and bigger security, but on short term people are only gonna notice a rise of the prices. This I think it happened in every country that started using Euro. We should look this more further ahead and there we will se positive oucomes from Euro. European Union should connect now more than ever, because every time in history of EU, where there was cricis, EU made a step forward and till now it has always shown as a right thing to do.

    Reply
  2. I’m from Czech Republic and I am glad that the Czech Republic does not have the euro. Euro as the single currency is good for the financial markets and in trading, but for the very economy of the state is not good. The future of eurozone is uncertain. Many economists predict that the eurozone will be abolished in the future. Slovakia adopted the euro, and I know that they wanted to go back to their currency.
    Our ex president was very skeptical of the eurozone. Now we have a new president who is open to the eurozone and plans to adopt the euro. I have a little concern about its adoption. I think our country is not ready to adopt the euro.

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  3. Actually I agree with you. I come from Latvia and I am 100 % sure that accepting the euro will not bring many benefits for the economy. For example prices for goods and services will increase but wages are expected to be the same. Of course for trading and comparing prices with other EU countries is very easy but I am still not sure if it will bring any benefit for poor and media – level citizens.

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  4. EU is not a charity. It is a politics and economical organization. Therefore, EU must not a salvation for poor countries because it has a hierarchy in itself and the countries that located at the summit hierarchy, such as Germany and France, exploit poor countries in the EU like Greece. After Greece joined the Euro area, country’s economy went bankrupt quickly. Now Greece government thinks that selling even its islands. Germany applies pressure to get back debt. Actually now Greece government is managed by developed countries in EU. The interes of Greek people are not protected by Greece government because big companies want to plunder greece market. This example is dramatic for poor countries in the EU. Most poor countries people think that if they join the Euro area, they will be a rich person. But this thinking is incorrect.

    Reply
  5. I can agree with most of the previous comments in terms of wages not changing significantly and prices going up. We’ve seen this happen many times in the previous years. And having seen and heard all the speculations about Euro as a “cursed” currency and Greece as the primary example of “zone red”, no wonder people don’t know what to think – they are torn.

    But what would be interesting to see is what will the government do if the country does convert to €. How will they react to this new situation on a bigger market, make their local market look as appealing as possible to the major investing economies and make way for the foreign capital.

    Reply
  6. I believe changing their currency will benefit Latvia in the long run such as promoting foreign direct investment, as more countries are changing to the Euro. This means that trading will be less complex. However it will not bring instant benefits as wages will probably stay the same.

    Reply

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