Latvia signs up to the euro

Almost a decade after it joined the EU, Latvia has become the eurozone's newest member.

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

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.

Recommended

Why there is still life in the energy bull market
Energy

Why there is still life in the energy bull market

A green power initiative on the Galapagos Islands demonstrates how the renewable energy transition will need to be supported by fossil fuels for some …
4 Nov 2022
The end of cheap money hits the markets
Stockmarkets

The end of cheap money hits the markets

Markets have swooned as central banks raise interest rates, leaving the era of cheap money behind.
28 Sep 2022
Investors are still in denial about inflation and interest rates
Global Economy

Investors are still in denial about inflation and interest rates

There are worrying signs that inflation is becoming embedded in the economy, but many investors are struggling to adjust to the new reality.
23 Sep 2022
Could gold be the basis for a new global currency?
Gold

Could gold be the basis for a new global currency?

Gold has always been the most reliable form of money. Now collaboration between China and Russia could lead to a new gold-backed means of exchange – g…
22 Sep 2022

Most Popular

Fan heater vs oil heater – which is cheaper?
Personal finance

Fan heater vs oil heater – which is cheaper?

Sales of portable heaters have soared, as households look to cut their energy costs. But which is better: a fan heater or an oil heater? We put them t…
21 Nov 2022
Wood-burning stove vs central heating ‒ which is cheapest?
Personal finance

Wood-burning stove vs central heating ‒ which is cheapest?

Demand for wood-burning stoves has surged as households try to reduce their heating costs this winter. But how does a wood burner compare with central…
29 Nov 2022
Best regular savings accounts – November 2022
Savings

Best regular savings accounts – November 2022

You can earn an attractive rate on the best regular savings accounts. We tell you the best on the market to take advantage of right now
29 Nov 2022