Latvia joins the eurozone
Dec 30, 2013, Vol. 19, No. 16 • By ANDREW STUTTAFORD
There are plenty of dismal statistics to choose from, but unemployment stood at over 20 percent in early 2010 (compared with an average of 6.5 percent in 2007), and GDP shriveled by 18 percent in 2009, after a 4.2 percent decline the previous year. Despite this, Dombrovskis was able to prevail in the October 2010 general election and then weather (albeit precariously) a snap election called in slightly murky circumstances the following September. The fragmented and incomplete development of political parties in Latvia means that general elections are not the best gauge of public opinion, but Dombrovskis’s survival (he went on to become Latvia’s longest-serving democratically elected prime minister) says something. He resigned only in late November, after the deadly collapse of the roof of a Riga supermarket, a tragedy for which he took “moral and political responsibility.”
But by then the economy was well on the mend, bolstered by a revival in global demand partly stimulated, of course, by less austere policies elsewhere. Quite why Latvia was able to resume its pre-boom trajectory as quickly as it did remains the subject of lively academic debate, but a low level of public debt was one crucial advantage: Latvia could persist with its tough approach without falling into the debt-deflationary trap that is crippling recovery in Greece and other grisly corners of the eurozone’s ER.
Latvia’s GDP growth began to turn positive during 2010, coming in at a total nicely above 5 percent for both 2011 and 2012, and is on schedule to be comfortably over 4 percent in 2013, the fastest growth in the EU. The current account deficit is again at a manageable level, the unemployment rate has shrunk to a number marginally below 12 percent, inflation is running at less than 1 percent (as opposed to nearly 18 percent in May 2008), and the budget deficit has returned to respectability after coming close to 10 percent of GDP in 2009. In 2012 it was only a little above 1 percent, while government debt stood at around a modest 40 percent of GDP, easily below the Maastricht requirement of 60 percent.
It is no surprise that Latvia’s formal application to join the euro in March was approved by the relevant EU authorities within a few months. Ordinary Latvians were not given an equivalent say. Calls for a referendum were rejected, not least on the grounds that the matter had long been decided. Any country joining the EU after the Maastricht Treaty came into force in 1993 (Latvia became a member in 2004 after—it is fair to note—a referendum) is obliged to sign up for the euro as soon as it meets the Maastricht tests, a proviso that the Swedes (joined 1995)—who wisely retain their krona—have ignored. Some seats at the EU’s table are more equal than others.
In any event, Latvia will swap the lats for the euro on January 1 at the rate, to be precise about it, of 0.702804 lati per euro, although it will still be possible to pay for goods and services in lati for another two weeks thereafter. The conversion process within the public and private sector is well under way, as is an extensive program of public education (meetings, leaflets, advertising). Most visibly to the visitor, all prices now have to be given in both lati and euros, and from what I could see in Riga, that was happening everywhere. Even in the converted zeppelin hangars (history here is complicated) of the capital’s picturesque (and somewhat law-unto-itself) central market, everything was properly priced: I had been issued a nifty lenticular currency conversion card and could check that that was so. Watchdogs are in place to stop the changeover being used to hike prices (a common, if exaggerated, fear that has accompanied the introduction of the euro in other countries). To reinforce this, dual pricing will be mandatory until the end of June.
After the changeover, lati will be convertible into euros (at the fixed rate) at rural post offices for three months, at commercial banks for six months, and at the central bank in perpetuity. This matters. Ask officials why there is still so much opposition to the switch, and—perhaps a little condescendingly—they cite folk-memories of the damage caused by previous currency conversions, especially the abrupt introduction of a “new ruble” in 1961 during the Soviet era.
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