Latvia signs up to the euro

Almost ten years after it joined the EU, Latvia has become the 18th member of the eurozone. Its accession underscores its recovery from a wrenching recession after its credit bubble burst in 2008. GDP fell by 25% and unemployment reached 20%. Now growth is rising by 4%-5% a year and joblessness is down to 11%.

What the commentators said

This isn’t just about deepening economic links with Europe, as Jurius Kaza pointed out in The Wall Street Journal. Latvia’s pursuit of close ties to the West has been a consistent foreign-policy priority since it regained independence from Soviet Russia.

Latvia has joined all the main institutions in Europe in order to escape the influence of Russia, an imperative that has grown more urgent given its massive neighbour’s increased meddling in former territories such as Ukraine. “Russia isn’t going to change,” said Latvia’s finance minister Andris Vilks.

Neither will the controversy over whether Latvia is a poster-child for austerity or not, said Ambrose Evans-Pritchard in The Daily Telegraph. European officials note that it had pegged its exchange rate to the euro in the run-up to entry. Rather than leave the peg and devalue the lat, it opted to undergo a huge squeeze in living standards to regain competitiveness after its credit-induced boom.

Nurses, teachers and police suffered pay cuts of 28%. Internal demand slumped by 42%. Now that growth has returned, the EU says Latvia should persuade the likes of Greece and Spain that austerity can work.

However, as Evans-Pritchard pointed out, it “may not be a useful model for others”. For starters, “society has been gutted” by the exodus of well-educated young people, undermining future prospects. The overall population has fallen by 7%.

Latvia’s economy is far more open than most of the rest of the periphery. Exports account for 60% of GDP, so it was easier for foreign sales to provide a boost. Its low public debt levels also reduced the burden on the economy and the danger of a debt spiral amid a shrinking economy.

What does seem pretty clear, said Richard Milne in the Financial Times, is that eurozone expansion is likely to stall after Lithuania joins next year. No other non-euro EU member has even joined the exchange rate mechanism, the first step towards euro membership. The odds are that the next non-Baltic euro member is a decade away.

• Stay up to date with MoneyWeek: Follow us on TwitterFacebook and Google+

MoneyWeek magazine

Latest issue:

Magazine cover
Faster and faster...

The frenzied pace of the high-tech revolution

The UK's best-selling financial magazine. Take a FREE trial today.
Claim 4 FREE Issues

Which investment platform?

When it comes to buying shares and funds, there are several investment platforms and brokers to choose from. They all offer various fee structures to suit individual investing habits.
Find out which one is best for you.