Latvia's ready, steady, euro!

By bne IntelliNews June 11, 2013

Mike Collier in Riga -

Valdis Dombrovskis looks tired. It's hardly surprising, as the Latvian prime minister has had a busy week. On May 30, his country was officially invited to start preparing for membership of the Organization for Economic Cooperation and Development (OECD), after more than a year of relentless tub-thumping to win the invitation. Taking the edge off his mood two days later, his Vienotiba ("Unity") political party got a thumping of a different sort in local elections, slipping into a distant third place in Riga behind the pro-Russia Harmony Centre and the right-wing National Alliance. But that didn't seem so important come June 5, when Dombrovskis secured what he, at least, regards as the biggest prize of all - backing from the European Central Bank (ECB) and European Commission for Latvia's adoption of the euro as its currency on January 1, 2014.

No sooner was the news confirmed than Dombrovskis embarked on a relentless series of media interviews to explain why he is so keen on getting into the crisis-wracked Eurozone, so when bne sat down with him in his office a couple of hours after the decision was announced in Brussels and Frankfurt, the first call was for a cup of strong coffee.

"I would say we should spare the celebration until July 9 [when EU finance ministers will vote on the matter] - even though we no longer have any technical obstacles in our way now that the Commission and ECB have said Latvia fulfils all the Maastricht criteria and is ready for euro adoption," says Dombrovskis who is now his country's longest-serving prime minister since the restoration of independence in 1991.

"We're working intensively with the Eurozone countries to ensure there is political support for Eurozone accession and so far things seem to be on track. We expect positive Ecofin [Economic and Financial Affairs Council] and European Council decisions, but those decisions still remain to be taken," he says.

Dombrovskis' work in turning Latvia's economy from a berserk basket case in 2009 into one that has the unique distinction of simultaneously recording the EU's highest growth rate (more than 5% in both 2011 and 2012 with 4% expected this year) and the lowest inflation (-0.4% in April) is certainly remarkable. So if things are all going so well, the obvious question is why risk entering the Eurozone maelstrom?

"We believe it will facilitate economic development in Latvia for several reasons," Dombrovskis says. "First, we will get lower interest rates for public lending and for the economy as a whole, and several ratings agencies have already said publicly that they will raise Latvia's credit ratings once we join the Eurozone. Second, we are a small and open economy and we do around 70% of our foreign trade in euros, so we would remove those currency conversion costs we are spending now. That burden on the economy would disappear."

"And we expect it to stimulate foreign investment - something we saw in Estonia where after they joined the Eurozone in 2011, non-financial sector investment doubled. We would expect to see something similar."

Indeed, in Dombrovskis' judgment there isn't a euro crisis at all: just crises in some of the Eurozone member states. "The euro is not the problem here. If you look at the euro as a currency, it's stable and closer to historical maximums than minimums. Our currency, the lat, has been pegged to the euro since 2005, so what happens to the euro happens to the lat anyway. So really, there aren't many reasons for us not to join."

Many Latvians remain to be convinced. A June 6 survey by the Factum pollster for the finance ministry said that only 38% of Latvians support euro adoption. Other polls in recent months suggested similarly lukewarm levels of support, and in the local elections it was Harmony Centre - who are not strictly anti-euro but don't regard euro adoption as a priority - that racked up an astounding 58% of the vote in Riga.

Preparing for the euro

Once Ecofin gives its assent on July 9, the preparations for euro adoption can begin in earnest. Advertising campaigns will bombard Latvians with information and the expectation is that pro-euro sentiment will gradually rise as fears are allayed.

According to Dombrovskis, it is practical issues that people fear rather than being against the euro on principle. "People have been hearing about a Eurozone crisis for the last three years, so it's understandable that they have reservations. It's not a trivial matter," he admits. "There are basically two parts to this: why we are joining and how we are joining. The 'why' concerns the economy, foreign investment and so on. The second part is the practicalities - what will happen with the lats in their pocket, their bank accounts, prices and so on. These are the practical worries that need to be addressed."

On an early-morning commuter train to Riga from the northern city of Valga, which straddles the Latvian-Estonian border with its twin town Valka, opinion on the euro is divided. Despite actually living on the Estonian side of the border in Valka, electrician Normunds Zvaigzne, 41, says he regrets the imminent demise of the lat. "My Estonian colleagues all say they miss the Estonian kroon. It was an important symbol of their nation, just as the lat is important to us - and they tell me that prices definitely did rise when they got the euro, so we expect the same thing," Zvaigzne tells bne.

Inga Svagrova, 32, from Sigulda, regional director of an international fashion house, proves that even with the government saying more education is needed to make public sentiment more positive, many Latvians are already well informed.

"My personal feeling, on a purely emotional level, is that I am against joining the euro at the present moment. It seems strange to do so when there is still so much trouble and uncertainty," she says. "However, I also appreciate that we are members of the EU and need to continue on that course. It is the same with ordinary people too - I understand that for business, and exporters in particular, the sentiment is positive, whereas pensioners are justifiably scared about price rises."

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