Latvia’s reward for austerity? Membership of the euro in 2014

Latvia will become the 18th country to join the troubled eurozone, in a move seen by the Baltic state’s centre-right government as a guarantee of stability and a reward for the tough austerity-measures imposed to help the country recover from a harsh financial crisis.

Announcing the move, Prime Minister Valdis Dombrovskis said that the European Commission (EC) had given the go ahead for Latvia for adopt the euro from early 2014. “Joining the eurozone will foster Latvia’s economic growth for sure,” Mr Dombrovskis said.

The EC hopes that Latvia’s switch to the euro will signal to investors that the eurozone is growing, despite its debt crisis and the huge unpopularity of austerity measures in countries like Greece, Italy and Spain. “Latvia’s desire to adopt the euro is a sign of confidence in our common currency and further evidence that those who predicted the disintegration of the euro area were wrong,” Olli Rehn, the European Union’s commissioner for economic and monetary affairs, said in a statement. The EC concluded that Latvia had managed to achieve sustained low inflation, low long-term interest rates and low public debt by enforcing measures which foreshadowed those currently imposed in crisis-hit eurozone countries.

However, opinion polls have shown that most Latvians are opposed to switching currencies because they fear the move will drive-up prices. Anti-euro parties won over half the vote in elections in Riga at the weekend.

The Baltic state, which has a population of just over two million, was one of the hardest hit by the 2008-2009 financial crisis, which burst a property bubble and forced the closure of one of the country’s leading banks.

Latvia lost a fifth of its economic output and became one of the first countries to be rescued by a bailout from the European Union and International Monetary Fund. The conservative government subsequently imposed some of Europe’s harshest austerity measures and began a vigorous privatisation programme.

Unlike other EU member states, such as Greece, the government was able to impose its austerity programme of draconian wage-cuts and tax increases almost unopposed. Protests against the measures were minimal

Despite its financial recovery, economic activity in Latvia is still 12 per cent below levels experienced before the financial crisis and unemployment stands at 12.4 per cent. Emigration is also on the rise.

Q&A: Why join a crisis-ridden currency?

Q. Why would Latvia want to join the Eurozone?

Latvia, like many eastern European countries, sees joining the EU as a guarantee of economic and political stability. For Latvia’s centre-right government, joining the eurozone is the next logical step after that, and a signal to the rest of the world that it is back in business after a devastating economic crisis. Equally important is that for a majority of Latvians, EU and eurozone membership signifies a final and welcome divorce from Russia. The country was part of the Soviet Union during the Cold War.

Q. What does the eurozone have to gain from it?

The eurozone gets another trading partner. Brussels hopes that Latvia’s membership will send an important signal to investors that the eurozone is expanding rather than disintegrating despite its three-year debt crisis. Pro-austerity policymakers, such as Germany’s Chancellor Angela Merkel, can also point to Latvia and claim unpopular measures are worth it in the long run because they help to overcome economic crises.

Q. Do ordinary Latvians care?

Opinion polls show more than half of all Latvians are opposed to swapping the lat for the euro because they fear it will bring higher prices. In elections held in the Latvian capital, Riga, at the weekend, more than half of the votes went to anti-euro parties. The government refused to hold a referendum on eurozone membership, despite pressure to do so from opposition parties.

Tony Paterson