By Dean Carroll
As the eurozone swells to 18 member states on its 15th anniversary and Latvia joins the single currency, the European Commission has proclaimed the project to be a huge success despite the economic crisis that has rocked the European Union to its very foundations. Brussels insisted the latest accession – meaning 333 million citizens shared the currency – was a “major achievement”.
European Commission President José Manuel Barroso maintained that the eurozone remained “stable, attractive and open to new members”, adding: “For Latvia, it is the result of impressive efforts and the unwavering determination of the authorities and the Latvian people. Thanks to these efforts, undertaken in the aftermath of a deep economic crisis, Latvia will enter the euro area stronger than ever, sending an encouraging message to other countries undergoing a difficult economic adjustment.”
Commission vie-president Olli Rehn added: “I want to very warmly welcome Latvia to the euro. Your efforts have paid off and your country’s strong economic recovery offers a clear message of encouragement to other European countries undergoing a difficult economic adjustment. Joining the euro marks the completion of Latvia’s journey back to the political and economic heart of our continent, and that is something for all of us to celebrate.”
However, the majority of the country’s population of two million are against the adoption of the euro – according to some polls – due to the loss of national sovereignty and the removal of the independence that being able to devalue your own currency brings. Many citizens in the former Soviet republic were said to resent the EU’s interference in the nation’s affairs with eurozone membership dangled as a carrot while the country endured its deepest ever recession until 2011 – and the accompanying structural reforms. According to a survey of 1,000 people by pollster SKDS, some 58 per cent of Latvians opposed the currency switch with only 20 per cent in favour.
Latvians also retained some scepticism about the positive benefits of membership when the economy was already growing at almost 5 per cent a year. It was reported that the public in the country believed prices would rise significantly as the euro is adopted. In addition, there was concern that Latvia could be forced to bridge the budget deficits of other less wealthy single currency members under further EU debt mutualisation programmes.
Joining Slovakia, Slovenia and Estonia – Latvia is only the fourth ex-communist country to join the eurozone just as Ukraine is entangled in a strategic tug-of-war between Russia and Europe. Although the country’s economy is now growing fast, then Prime Minister Valdis Dombrovskis’s government had pursued brutal austerity measures said to be equivalent to 16 per cent of gross domestic product in order to qualify for a €7.5bn EU-International Monetary Fund bail-out. The loan was designed to stabilise the economy and keep eurozone membership in sight.
Economists have predicted that single currency membership will indeed prove beneficial for Latvia, attracting additional investment and boosting exports despite the public distaste for the European project. Ratings agencies were also expected to upgrade the country’s credit score as a result of accession to the eurozone, meaning it would be able to borrow money at a more favourable rate on the international markets. The euro will be the fourth Latvian currency in just 22 years. Previously, the state introduced the Latvian ruble to replace the Soviet currency in 1992. And then in 1993, politicians resurrected the lats – money last used before the Second World War.
Asked about the eurozone’s financial woes earlier this year, Dombrovskis had said before his resignation over the fatality-causing collapsed supermarket roof in November: “This crisis is not a currency crisis. If you look at the euro as a currency it’s doing just fine. What we are really seeing is a financial and economic crisis in certain eurozone countries. But we also see that this problem is being addressed through strengthened fiscal discipline and stricter economic governance.”
The country now has to form a new governing coalition. Forecasting only slight political upheaval, Latvia’s Finance Minister Andris Vilks said: “No-one is going to change because society and business want to see stability and predictability of conditions. No one is going to change that.” Latvia joined the EU back in 2004. Under supranational law, all new member states are committed to joining the euro at some point. Latvia’s neighbour Estonia joined the euro in 2011 and has enjoyed strong growth since. And Eurostat has predicted that Latvia’s economy will continue to grow by approximately 4 per cent this year.
Addressing the situation in Ukraine and the shadow of Russia, Vilks explained why Latvia had turned towards the EU: “Russia isn’t going to change. We know our neighbour. There was before, and there will be, a lot of unpredictable conditions. It is very important for countries to stick together and with the EU. We will be more integrated and protected in case of troubles, and we can see what is happening in Ukraine today. Russia is nervous about losing partners and influence. That is one reason why the Baltics and Finland were so eager to go to all institutions including the North Atlantic Treaty Organisation. It’s not so easy for small countries to deal with these issues; we need help.”
Dean Carroll is editor of Policy Review. Follow him on Twitter @poljourno