Latvia's fanfare for the common currency

By bne IntelliNews September 18, 2012

Mike Collier in Riga -

Anyone who wants to take a trip down memory lane and listen to the sort of giddy pro-euro rhetoric last heard in the run-up to the launch of the single currency should book a trip to Riga - preferably before the end of the year, to be on the safe side.

While the euro may be unloved by many of the people using it at the moment, euro-enthusiasm remains undimmed in the Baltic states - in official circles, at least. The opening session of a Nato conference held in Riga on September 14-15 was a virtual fanfare for the euro, with leaders from Latvia, Lithuania and Estonia all predicting a great future for the coinage, Greece notwithstanding. "We don't really have a euro crisis... what we have is a debt crisis and an economic crisis in certain European countries," said Latvian Prime Minister Valdis Dombrovskis in what appeared suspiciously like an attempt at a soundbite.

The exchange rate of the euro as a currency has remained relatively stable throughout the crisis period, Dombrovskis pointed out, claiming that the main problem of Europe was that it was not compulsory to follow Eurozone rules. The euro, he said, is currently "at a turning point" with things set to improve after a "bumpy six months" while the Greek crisis is handled.

His grand plan is to meet all the Maastricht criteria governing euro adoption by the end of this year in order to qualify for swapping the lat for the euro in January 2014. If he succeeds, it would put the cherry on top of the cake for Latvia's dramatic turnaround from economic basket case in 2008 - when it was forced into a €7.5bn euro bailout from the International Monetary Fund (IMF) and EU - to the pin-up of proponents of front-loaded austerity programmes instead of gentler alternatives such as fiscal stimulus or quantitative easing.

Certainly, any failure on Latvia's part to meet all the Maastricht criteria won't be for want of trying - in July a percentage point was even lopped off Latvian VAT, which fell from 22% to 21% as the Finance Ministry tries every trick in the book to satisfy the criteria with room to spare.

But even if Latvia meets all the criteria so routinely flouted by most existing members of the Eurozone, there is still no guarantee it will be accepted into the club, as the European Commission and European Central Bank must both give their assent. The fact that neighbouring Estonia was admitted to the zone in 2011 under similar circumstances would make any refusal highly controversial, but an argument that Latvia's see-saw economy needs to prove its sustainability for a bit longer could easily be forthcoming from either if, as seems likely, the euro crisis will still be dragging on at year's end.

Yet the possibility of being kept in the Eurozone waiting room is not one that Dombrovskis is even willing to consider. At a special briefing on the second day of the Nato conference, bne asked which countries had already said they would definitely back Latvia's candidacy and how he would react to a "non" from Brussels. The first part of the question was neatly ignored, while the second gained an admission that there is no plan B. "There should be no artificial obstacles. After all, it's the Commission itself which signed the memorandums of understanding during Latvia's bailout programme which forsees euro adoption on January 1, 2014, so in a sense the Commission has already signed up to this," Dombrovskis replied.

Central support

If anything, euro-enthusiasm is even stronger at the Latvian central bank than it is in government. On September 5, the Bank of Latvia hosted a discussion of the subject that emphasised the expected benefits of Eurozone accession with little time given over to possible risks.

According to the bank's predictions, euro adoption as planned would boost real GDP by 7.4%, investment by 15.9%, exports by 5% and would lower long-term interest rates by 0.5 percentage point (all by 2020). "We are now placed quite comfortably in terms of meeting the Maastricht criteria," Uldis Rutkaste, the bank's head of monetary policy, told bne on the sidelines of the event.

But Rutkaste admitted public opinion remains equivocal at best. "Every day, we get mostly negative news from Europe. Many people don't follow it that closely and don't understand all the issues but they see that something negative is coming from Europe and that affects their attitude towards the euro as well," he said.

An August survey of more than 1,000 Latvians by the Latvijas Fakti pollster showed that just 35% supported euro adoption with 59% declaring themselves against and 6% undecided. A September poll was even more damning, estimating that just 14% of Latvia's 2m population was europhile.

However, most analysts agree that what looks like a high degree of euro-scepticism may not be as strong as it first seems.

According to Ivars Ijabs, a political expert at the University of Latvia, the question of euro adoption in Latvia is not one that gets people particularly excited. "According to opinion polls, we are rather euro-sceptic, but there has been no call for a referendum [on euro adoption] and even if there was, there would be a large campaign stressing security issues. Most probably, Latvia will enter the Eurozone as it entered the EU - without much debate, as it is more or less self-evident that Latvia has to be there," Ijabs says.

Similar pragmatism comes from the business sector. Dainis Senbergs of the Valmieras Stikls fibreglass manufacturer, a major employer, says joining the Eurozone will place exporting companies such as his in a more efficient environment. "It will be easier to manage risks and will help in negotiations with other countries such as India and America who understand the euro, instead of having to explain about the lat," he says.

"The euro question is really not so critical to ordinary people," Senbergs argues. "They don't like the idea of having to bail out people who are richer than them, and that will have to be answered, but it basically comes down to which side of the world we want to orientate ourselves - is it Europe or some other part?"

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