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Latvia prepares to join euro

By Nicholas Hirst  -  30.12.2013 / 14:13 CET
Eurozone membership on 1 January has inspired much concern and opposition
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 Union.  

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.  

Referendum  

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.  

© 2014 European Voice. All rights reserved.
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