Latvia joined the euro zone yesterday (January 1), capitalizing on its experience of austerity to bring it prosperity in a monetary union where other economies have floundered. The Baltic country of 2 million people adopted the EU’s common currency on the 15th anniversary of the launch of the euro.
The Baltic country of just 2 million people became the 18th member of the bloc at midnight (2200 GMT), one step further out of the shadows of neighboring Russia a decade after joining the European Union and the NATO.
Latvian Acting Prime Minister Valdis Dombrovskis, who led his country through its worst economic crisis since leaving the former Soviet Union in the early 1990s, said the adoption of the euro was an opportunity, but not a guarantee of wealth, and that the country should not relax its fiscal policies.
“This is no excuse for not conducting a responsible fiscal and macroeconomic policy,” he said after withdrawing the first euro banknote after midnight from an ATM in Riga.
The changeover ceremony took place at the site where the Latvian crisis began – the former headquarters of the collapsed Parex bank, now the headquarters of the state bank Citatele, which emerged from the ruins of Parex .
Parex, the country’s second-largest bank in terms of assets, went bankrupt in late 2008, forcing the Baltic state to seek an international bailout to keep its currency, the lat, pegged to the euro at the same rate.
Its economy shrank by a quarter between 2008 and 2010, but then grew at the fastest pace in the EU, growing 5.6% in 2012, after the government cut spending and wages and raised taxes in one of Europe’s toughest austerity programs.
Latvia’s efforts have been praised by EU policymakers, who have repeatedly cited the Baltic state as an example that austerity can work.
“Thanks to these efforts … Latvia will enter the euro zone stronger than ever, sending an encouraging message to other countries experiencing difficult economic adjustment,” European Commission President José Manuel Barroso said on 31 December.
However, some concerns remain. The European Central Bank has warned Latvia that the high level of foreign deposits, mainly from Russia, in Latvian banks, such as in Cyprus, is a risk factor.
Latvia is also entering the eurozone without a permanent government after Dombrovskis resigned in December, taking political responsibility for the collapse of a supermarket in Riga that left 54 people dead.
Latvia enters the euro zone as the single currency bloc marks its 15th anniversary (see context), and the euro is now used by 333 million Europeans.
Despite this, neighboring Lithuania is the only EU country left to show much enthusiasm for euro admission after the temptations and tensions of sharing a currency forced Greece, Ireland. , Portugal, Spain and Cyprus to seek international bailouts for their public finances or their banks.
Estonia joined the euro area in 2011, and Lithuania intends to do so in 2015.
Among the ex-communist EU countries that have yet to adopt the euro, Croatia is stuck in recession as major economies such as Poland, the Czech Republic and Hungary have become reluctant to do so. regard to monetary union.
Latvia, which is becoming the euro area’s fourth-smallest economy after Malta, Estonia and Cyprus, expects the euro to lower its borrowing costs and encourage investors by eliminating currency risk.
Both Standard & Poor’s and Fitch raised the country’s credit ratings in anticipation of its entry into the euro.
But opinion polls show ordinary Latvians are divided on the merits of the euro, with many fearing its adoption will be an excuse to raise prices.
“In all the other countries that had switched to the euro, prices have gone up. Most likely, they will go up here too, which is bad,” said Oleg Bachurin, 62, retired.
Latvia’s central bank expects entry into the euro area to push consumer prices up 0.2 to 0.3 percentage points in 2014, raising inflation to 2%.
“I’m not worried (about adopting the euro). I think it’s progress. We don’t have to look back, we have to move forward,” said Anita Linde, 57 years old, a shopkeeper.