Latvia: The country that fell for the euro

The single currency is supposedly doomed, weighed down by the parlous state of the Greek economy and infighting between member states. So why on Earth would a Baltic state with a strong economy want to board this stricken ship?

The Latvian government has been accused of dragging the Baltic nation into the eurozone “by force” this week, as it became the 18th member of the single currency.

“Latvians have been forced to adopt the euro and haven’t been allowed their say,” said Andris Orols, the chairman of the Anti-Globalist Association. “The majority of the population is opposed to the move”. An opinion poll conducted last month showed 50 per cent of Latvians were against joining, with only a fifth in favour of their country swapping the old currency – the lat – for the euro.

There is also widespread concerns that retailers will use the currency transition as an excuse to push up prices. In the same poll 83 per cent expressed concerns that the euro would trigger unwarranted price increases.

However, earlier this week the Prime Minister, Valdis Dombrovskis, insisted that, despite the eurozone’s turmoil of recent years, accession to the currency union was unequivocally the right economic course for Latvia. “It’s a big opportunity for Latvia’s economic development” Mr Dombrovskis said, speaking at a ceremony on New Year’s eve in Riga, at which he symbolically pulled a euro note out of a cash machine.

Mr Dombrovskis added a note of caution, warning Latvians that euro membership was “not an excuse not to pursue a responsible fiscal and macroeconomic policy”. That warning was very much in keeping with the country’s austere economic policy of recent years.

Latvia suffered the most extreme economic bust of any country in the world during the global financial crisis of five years ago. In 2008 and 2009 it lost a full quarter of its economic output – a shock equivalent to America’s Great Depression.

A decade-long boom fuelled by a vast surge of capital inflows from abroad (which accelerated when the former Soviet state entered the European Union in 2003) ended in a banking crash in 2008 and Latvia’s application for a €7.5bn bailout from the International Monetary Fund and the European Union.

Many countries experiencing a crash on that scale devalue their currencies in order to boost exports and maintain unemployment – and indeed that was what the IMF recommended. But the administration of Mr Dombrovskis refused to sacrifice the country’s long-standing currency peg with the euro. Instead, it opted to regain its international competitiveness and restore balance to the country’s books by imposing massive fiscal austerity. In 2010 the government pushed through a staggeringly large consolidation, equivalent to 4 per cent of GDP.

This ascetic policy approach thrust Latvia into the international limelight. The European Commission sang its praises for embracing austerity and eschewing devaluation – a policy combination it was demanding of the likes of Greece and Portugal. 

Attention intensified when the medicine seemed to work. The Latvian economy bounced back quicker than anyone expected, growing by about 5.5 per cent in both 2011 and 2012. The country is projected by the IMF to have expanded by a further 4 per cent last year, faster than any other country in the European Union and taking Latvia back to its 2007 GDP peak. The current account swung from a 22 per cent deficit to virtual balance. The unemployment rate, having hit 19 per cent in 2010, has since receded to 11.7 per cent, below the eurozone’s 12.2 per cent average and well below the excruciating 27 per cent rates in Greece and Spain.

However, some say the story of Latvia as a poster child for the merits of austerity is overblown. They claim that its impressive return to growth (despite its severe fiscal squeeze) is more attributable to its latent catch-up potential and developmental momentum rather than the benefits of massive state budget cuts. They reject comparisons with Greece, Spain, Portugal or Italy, pointing out that the Baltic state has a considerably lower income per head and a much larger export sector relative to GDP.

Critics also point out that an exodus of many young Latvians to find work abroad has flattered the unemployment figure. Between 2008 and last year the total population is estimated to have fallen by about 8.5 per cent.

The IMF’s chief economist, Olivier Blanchard, says he has been pleasantly surprised by Latvia’s performance, but maintains that he is not convinced the government’s front-loaded fiscal squeeze was either necessary or helpful to the economy.

Nevertheless, it is striking that Latvia’s growth rate in 2014 is forecast to be four times higher than of the rest of the eurozone which it joins this week. Latvia’s accession has shown that one of Europe’s most dynamic economies still regards the eurozone as a club worth joining.

PROMOTED VIDEO
News
ebookA unique anthology of reporting and analysis of a crucial period of history
Arts and Entertainment
Neil Young performs on stage at Hyde Park
musicAnd his Hyde Park set has rhyme and reason, writes Nick Hasted
News
Women have been desperate to possess dimples like Cheryl Cole's
people Cole has secretly married French boyfriend Jean-Bernard Fernandez-Versini after just three months.
Arts and Entertainment
AKB48 perform during one of their daily concerts at Tokyo’s Akihabara theatre
musicJapan's AKB48 are one of the world’s most-successful pop acts
News
Ian Thorpe has thanked his supporters after the athlete said in an interview that he is gay
people
News
The headstone of jazz great Miles Davis at Woodlawn Cemetery in New York
news
Arts and Entertainment
Brendan O'Carroll has brought out his female alter-ego Agnes Brown for Mrs Brown's Boys D'Movie
filmComedy holds its place at top of the UK box office
News
newsBear sweltering in zoo that reaches temperatures of 40 degrees
Arts and Entertainment
Professor Kathy Willis will showcase plants from the Royal Botanic Gardens at Kew
radioPlants: From Roots to Riches has been two years in the making
Extras
indybestThe tastiest creations for children’s parties this summer
Arts and Entertainment
TV The follow-up documentary that has got locals worried
Arts and Entertainment
Paolo Nutini performs at T in the Park
music
Independent
Travel Shop
the manor
Up to 70% off luxury travel
on city breaks Find out more
santorini
Up to 70% off luxury travel
on chic beach resorts Find out more
sardina foodie
Up to 70% off luxury travel
on country retreats Find out more
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs General

Software Engineer - C++

£35000 - £45000 per annum + competitive: Progressive Recruitment: Software En...

Software Team Leader - C++

£40000 - £45000 per annum + competitive: Progressive Recruitment: Software Tea...

Sales Executive - Central London /Home working - £20K-£40K

£20000 - £40000 per annum: Deerfoot IT Resources Limited: Sales Executive - Ce...

Graduate Java / C++ Developer

£40000 - £50000 per annum: Deerfoot IT Resources Limited: Graduate Java / C++ ...

Day In a Page

Super Mario crushes the Messi dream as Germany win the 2014 World Cup in Brazil

Super Mario crushes the Messi dream

Germany win the 2014 World Cup in Brazil
Saharan remains may be evidence of the first race war, 13,000 years ago

The first race war, 13,000 years ago?

Saharan remains may be evidence of oldest large-scale armed conflict
Scientists find early warning system for Alzheimer’s

Scientists find early warning system for Alzheimer’s

Researchers hope eye tests can spot ‘biomarkers’ of the disease
Sex, controversy and schoolgirl schtick

Meet Japan's AKB48

Pop, sex and schoolgirl schtick make for controversial success
In pictures: Breathtaking results of this weekend's 'supermoon'

Weekend's 'supermoon' in pictures

The moon appeared bigger and brighter at the weekend
Iraq crisis: How Saudi Arabia helped Isis take over the north of the country

How Saudi Arabia helped Isis take over northern Iraq

A speech by an ex-MI6 boss hints at a plan going back over a decade. In some areas, being Shia is akin to being a Jew in Nazi Germany, says Patrick Cockburn
The evolution of Andy Serkis: First Gollum, then King Kong - now the actor is swinging through the trees in Dawn of the Planet of the Apes

The evolution of Andy Serkis

First Gollum, then King Kong - now the actor is swinging through the trees in Dawn of the Planet of the Apes
You thought 'Benefits Street' was controversial: Follow-up documentary 'Immigrant Street' has got locals worried

You thought 'Benefits Street' was controversial...

Follow-up documentary 'Immigrant Street' has got locals worried
Refugee children from Central America let down by Washington's high ideals

Refugee children let down by Washington's high ideals

Democrats and Republicans refuse to set aside their differences to cope with the influx of desperate Central Americas, says Rupert Cornwell
Children's books are too white, says Laureate

Children's books are too white, says Laureate

Malorie Blackman appeals for a better ethnic mix of authors and characters and the illustrator Quentin Blake comes to the rescue
Blackest is the new black: Scientists have developed a material so dark that you can't see it...

Blackest is the new black

Scientists have developed a material so dark that you can't see it...
Matthew Barzun: America's diplomatic dude

Matthew Barzun: America's diplomatic dude

The US Ambassador to London holds 'jeans and beer' gigs at his official residence – it's all part of the job, he tells Chris Green
Meet the Quantified Selfers: From heart rates to happiness, there is little this fast-growing, self-tracking community won't monitor

Meet the 'Quantified Selfers'

From heart rates to happiness, there is little this fast-growing, self-tracking community won't monitor
Madani Younis: Five-star reviews are just the opening act for British theatre's first non-white artistic director

Five-star reviews are just the opening act for British theatre's first non-white artistic director

Madani Younis wants the neighbourhood to follow his work as closely as his audiences do
Mrs Brown and her boys: are they having a laugh?

Mrs Brown and her boys: are they having a laugh?

When it comes to national stereotyping, the Irish – among others – know it can pay to play up to outsiders' expectations, says DJ Taylor