An Austerity Success Story? Latvia to Join Eurozone

Photo: alf.melin for flickr

Photo: alf.melin for flickr

Speaking at a press conference last Wednesday in Brussels, the European Union’s Economic Affairs Commissioner Olli Rehn announced that the European Commission has approved Latvia’s application to become the 18th member of the eurozone. Latvia’s desire to join the zone comes at an critical moment for the other 17 members, many of which continue to struggle through sluggish economic conditions.

The eurozone’s current economic prognosis is less than favorable for growth, and Commissioner Rehn reiterated that “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.”

Indeed, the eurozone continues to endure a particularly deep recession, characterized by high governmental debt across much of the continent and a 12.2% unemployment rate in EU member states. The Latvian economy appears in healthier shape than those of the most troubled member states, Greece, Portugal, and Italy.

In order to join the eurozone, potential members need to pass a number of requirements outlined in EU treaties and agreements. Included are demands that the country can show ability to control inflation, deficits, and government debt, and keep its currency in a narrow exchange rate range with the euro. Latvia committed to join the European Union in 2004, and has by now properly readied itself to switch to the euro. In general, it takes most countries several years to accomplish this. The only opt-outs granted in EU history have been to the U.K. and Denmark.

After digging its way out of a recession in 2008-2009, Latvia now has the highest GDP growth rate and the second-highest export rate in the EU. The country managed to bring its 8.1% of GDP deficit in 2010 down to 1.2% in 2012, which is well below the 3% mandated target. In 2013, France is still struggling to bring its deficit below 3% of GDP, and last month the EU granted the country an extra two years to meet that target.

Latvia’s economic success has not come without a price. The nation had gone through several years of austerity, which in his statement on Wednesday Olli Rehn was quick to praise, saying, “Latvia’s experience shows that a country can successfully overcome macroeconomic imbalances, however severe, and emerge stronger.” Although French President François Hollande warmly received Latvian Prime Minister Dombrovskis last April and commended him for his nation’s economic growth, French popular opinion may not be as amicable.

An article published in Le Monde last week called Latvia’s austerity policies “draconian.” These policies, championed by the European Union and the International Monetary Fund (IMF), brought Latvia drastically reduced civil service salaries and pensions, poverty, and unemployment (currently at 14%). Since the 2008 financial crisis, Latvia has lost over 10% of its population. Such high levels of emigration has partially masked the severity of the already high unemployment rate.

Past voting results in Latvia reveal that only about a third of the population supports the forthcoming membership in the eurozone. Last week’s local elections ushered in anti-euro parties, who took over half the vote. Indeed, one party specifically calls itself “Latvia for the lat” (Latvia’s national currency). In November of last year, the European Central Bank refused Latvia’s request to issue the euro under the name “airo,” a name that the Latvian government chose after widespread national debate.

Those in Latvia who are against the euro claim their country stands to lose a large measure of its sovereignty, as it will be restrained from raising or lowering interest rates to deal with fluctuating economic conditions. All eurozone members have a set interest rate benchmark that is determined by the European Central Bank. For some, benefits outweigh the costs; no need to exchange currency, wider access to credit, a more stable currency, and greater investment potential are all advantages that Prime Minister Dombrovskis continues to reiterate.

While the EU Commission has granted Latvia entry, the final decision will be made July 9 by eurozone finance ministers. By January 1, 2014, the lat should be replaced by the euro. Some reservations still remain, as a high percentage of Latvian banks’ deposits come from non-residents, overwhelmingly Russian citizens. The European Central Bank noted that outside deposits total slightly less than seven billion euros, which is about a third of Latvia’s GDP.

European officials see this as something that could undermine the Latvian banking system, as deposits from non-domestic depositors are considered less stable. Nevertheless, Dombrovskis and some economists hold that Latvia’s situation is no comparison to that of Cyprus, who recently needed a bailout from the EU as a result of similar problems.


  1. […] European Union’s Economic Affairs Commissioner Olli Rehn announced that the European Commission has approved Latvia’s application to become the 18th member of the Eurozon…. After digging its way out of a recession in 2008-2009, Latvia now has the highest GDP growth rate […]

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