Eurozone means all or nothing at all in Latvia

By bne IntelliNews February 4, 2013

Mike Collier in Riga -

When Estonia joined the Eurozone in 2011, anti-euro campaigners famously compared the move to buying the last ticket aboard the Titanic. The European single currency has been shipping plenty of water since then, though it has yet to hit its fatal iceberg.

In neighbouring Latvia, eurosceptics have been using the same analogy, though the parliament's narrow January 31 vote in favour of euro adoption could be better described as missing the boat, cobbling together a raft of austerity measures, paddling like stink to catch up and climbing aboard with arms aloft in true Leonardo di Caprio style.

Speaking exclusively to bne minutes after he won the vote rubber-stamping Latvia's euro changeover plan by 52 votes to 40, Prime Minister Valdis Dombrovskis was in triumphant mood. "A year ago Latvia was the only country saying, 'We will stick with the target and we are willing to join'. Other countries were hesitating. Now the situation is changing - Lithuania has set a target date of 2015, the Poles are thinking seriously about 2017 and so on," Dombrovskis says.

Asked if there is any basis on which Brussels and the European Central Bank could refuse Latvia's application to start using the euro next year or suggest a delay while they consult their charts, he was unequvocal: "I wouldn't think so... we fulfill the [Maastricht] criteria and we approach the application with confidence."

"There is no indication that the European Commission would say, 'why hurry?' Indeed this euro adoption date of January 1, 2014 was agreed with the Commission when we had our [€7.5bn] international loan programme. This target date was part of Latvia' exit strategy form the crisis. From this point of view the Euro Commission has no issues with the target date," Dombrovskis maintains.

High stakes

For government at least, the stakes are high. Having made euro adoption the major justification for swingeing austerity measures over the last three years, being holed by Brussels would have huge ramifications, as Dombrovskis himself admits. "If we don't reach this result [of euro adoption] it would have far reaching consequences not only for the government but for the country as a whole, for the economy, for interest rates, for financial stability, so I think it's in out best interests to join the Eurozone."

Political analyst Ivars Ijabs of the University of Latvia is more specific.

"[A refusal] would seriously undermine the credibility of Dombrovskis and would probably lead to serious losses in the parliamentary representation of [his party] Vienotība in 2014 elections. Most probably a new populist party would emerge, which would get their support from the failure of Dombrovskis."

Ijabs also identifies an important fact that tends to get overlooked in an international media that assumes everyone in the country must be passionate about the pros and cons of euro membership. Polls show that support for Eurozone entry is at best lukewarm. A December 3 poll by DNB bank showed just 8% of people were in favour of joining the euro as soon as possible, 42% said Latvia should wait, and 41% were opposed to joining. 9% had no opinion either way. But the truth is that with most mortgages and other consumer loans already denominated in euros and dual-currency bank accounts the norm, euro adoption is no big deal. "One shouldn't over-exaggerate the role of public opinion in this -

unless we are going to have a referendum, which we probably won't. Despite the rising anti-euro rhetoric of opposition politicians, most Latvians are used to be passive in these issues... the majority simply do not care much about it," says Ijabs.

On the streets of Valmiera, an industrial town 110 kilometres north of Riga, the question of Latvia's Eurozone bid is of minimal interest. "I don't think about it," says Anete Kurpniece, manager of Dodam, a small office providing everything from translation services to souvenirs. "It will change nothing whether we join the Eurozone or not. In effect we already use the euro anyway - the exchange rate is fixed and we take euro payments from foreign clients."

On the other side of Valmiera's 13th century castle ruins at the cosy Liepziedi un Rozmarins trattoria, co-owner Atis Zentins expresses similar sentiments. "We let foreigners pay in euros if they don't have any lats," he says, speculating that the only impact on his business might be to make payments to Italian suppliers slightly faster. "It's more of a political game than anything else, but it would be a big change and it's important to be positive whenever you make a change."

The mood is more positive at the town's major employer, the Valmieras Stikls glass fibre factory, a major exporter. "I think our business will benefit from Eurozone membership," chief financial officer Dainis Senbergs tells bne. "For customers in the USA and Asia, it is still not easy to understand what this place is called Latvia. It is different with the Eurozone, as that is strongly associated with Europe and it's much better known abroad," Senbergs says.

"Saying no to the Eurozone would damage the perception of Latvia among foreign investors," he adds.

The general assumption is that the country will indeed be admitted to the euro club. "Our base scenario assumes that Latvia will join the euro area in 2014, which will support confidence and thus promote growth somewhat," says a January 16 assessment by the country's largest bank, Swedbank.

Opposition parties have repeatedly bluffed that they might call a referendum on euro adoption, but only Iveta Grigule of the oligarch-controlled Greens and Farmers' Union seems serious about it.

Despite peddling a populist line based on fears that the central bank governor is about to drive Latvia's gold reserves to Frankfurt, Grigule should not be underestimated. The assent of President Andris Berzins is needed to put the final seal on Latvia's euro bid. When the virtually unknown septugenarian was manoeuvred into the top job in a secret parliamentary vote in 2011 that caused outrage among the electorate, his delighted sponsor was... Iveta Grigule.

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