Latvia latest to embrace euro despite opposition

Despite a devastating recession and the travails of the euro, Latvia becomes the 19th member of the euro club today.

The reasons are partly to do with their future, and partly with their past.

Their foreign minister, Edgars Rinkevics, says they see it as another anchor in Europe, another step towards deeper integration — and another step further from the hostile embrace of Russia.

This year they celebrate the tenth anniversary of EU and Nato membership — a guarantee of continuing independence from their neighbour to the east who they continue to see as apotential threat.

For similar reasons the public are loathe to give up their beloved Lat, the currency that marked their independence from the Russian empire.

But despite up to 80% resistance from the citizens, the politicians are firm in their resolve to changeover to the euro.

Minister Rinkevics said he understands people’s emotional attachment and that they see the Lat as a form of stability, “but it’s the country’s financial policies that matter, that make things happen”, he says.

This country of just over 2m, one of the poorest countries in the EU, the second of the three Baltic countries in size, has just come through Europe’s deepest depressions that saw its housing and credit boom collapse from the dizzy heights brought about by EU membership in 2004.

Overnight, property prices that rivalled many of western Europe’s capitals collapsed, the sale of new cars fell by 90%, unemployment ballooned and they lost around 30,000 mostly young well educated people a year to emigration.

National banks collapsed with the state not having sufficient funds to bail them out, and as a result nearly 70% of the banks in the country are subsidiaries and branches of larger banks, mainly from Sweden and Denmark.

They received a bailout from the EU and are the fastest growing economy in the EU at 5.6% of GDP in 2012. They expect that 2013 growth will moderate a little to around 4%, and is forecast to average 4.4% over the next three years.

They suffered deflation that has now turned to modest inflation and expect that the changeover to the euro will bring the inevitable increase in prices as business take advantage of the confusion.

But the resurgence of growth does not mean that the economies underlying problems have been solved. The shadow economy is large — some 35% according to economist Morten Hansen who heads up the economics department in the Stockholm School of Economics in Riga.

Income levels remain low compared to other EU countries with GDP per capita at around €11,000 a year and the average monthly wage as low as €500.

Mr Rinkevics said that the massive cuts in spending by the government left serious marks on society. “The main task now is to get developing in ways that people start to feel — we have specifically targeted some social groups in the latest budget, specifically parents… but change is not going to happen over one or two years”.

Their health and education systems need much additional investment, and they may also consider changing their tax system.

In the meantime they continue to pay off their bailout at the rate of around 4% of GDP a year and have reduced the government deficit to around 1.3% of GDP, down from 10% in 2009 with general government debt close to 30% of GDP and declining.

For business the euro is a natural choice. Managing director of the SPI Group distillery in Riga, Guntis Aboltins-Abolins, says: “The only thing we can get is the advantages, and for us those are quite clear. We will save a lot on the conversion of our currency, most of our materials are imported in euro and we export to euro countries, so this will simplify the process and cut costs”.