Latvia will become the eurozone's eighteenth member on Wednesday
(1 January 2014), although the transition to the European Union's single
currency has drummed up only meagre support among Latvians.
Research published this month by DNB, a Norwegian bank
active in Latvia, showed that 58% of Latvians are concerned about Latvia's
entry into the eurozone, while a survey conducted by local pollster SKDS in
August found that only 13% of the population actually supported the transition.
However, a majority of Latvians continue to support the overall goal of
economic and monetary union. According to data published this month by Eurostat, 53% of
Latvians agree with economic and monetary union within the EU.
One of the major concerns of the public is that the
conversion from the Latvian lat to the euro will lead to an increase in prices,
as shopkeepers and businesses ‘round-up', as was widely reported to have
happened in other eurozone countries such as France.
To forewarn price inflation, the government ordered shopkeepers
to display their prices in both Latvian lats and euros from October and to continue
do so until June at the earliest. The conversion must be done at the official
exchange rate at which Latvia enters the euro.
In addition, the government has sought to sign businesses up
to an agreement that would commit them not to increase prices following entry
into the euro.
Polls also reveal misgivings about the perceived loss of
sovereignty from giving up the Latvian lat. Such a concern resonates in a
population that only 22 years ago gained its independence from the Soviet
A long path
Latvia joined the EU in 2004, together with seven other
former Eastern-bloc states. All are committed to joining the euro at some point. Latvia's smaller but wealthier neighbour Estonia joined the euro in 2011 and has
enjoyed strong growth since.
Latvia, which has a population of just over 2 million
and a per capita income of two thirds of the EU average, has not had an easy
path into the eurozone.
The Latvian lat has been pegged to the euro since 2005, making
the recession that hit Europe in 2008 even more brutal in Latvia, whose economy
shrank by almost 18% in 2009.
Following an International Monetary Fund (IMF) and EU bailout of €7.5 billion, the Latvian
government implemented tough austerity measures, cutting welfare benefits and
raising both value-added and income taxes.
The country emerged from recession in 2011, notching up
annual growth of over 5% of gross domestic product (GDP) that year and in 2012.
Eurostat predicts that the economy will continue to grow by around 4% of GDP
through to and including 2015.
As a result Latvia has been held up as a model of how
countries can regain competitiveness without devaluing their currency –
so-called internal devaluation. Most recently, Mario Draghi described
Latvia as a “role model” for economic reform.
The Latvian population's apprehension at joining the euro
led to calls for the country to hold a referendum on membership. But efforts to force a referendum failed
to gain enough support in Parliament – needing one third of all MPs – or
sufficient signatures from the public.
Valdis Dombrovskis, Latvia's prime minister at the time, who
is now caretaker prime minister after resigning following the collapse of a
supermarket in Riga, had argued that a referendum was unnecessary since
Latvians backed membership of the EU in 2003, which included a commitment to
join the euro.
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