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%.
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.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Get 6 issues free
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
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.
‘Inheritance tax insurance’ enquiries are soaring – but is it worth it?
MPs warn over Lifetime ISAs which could leave savers out of pocket
