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.

Arts and Entertainment
Gregg Wallace in Summer's Supermarket Secrets
tv All of this year's 15 contestants have now been named
Arts and Entertainment
Inside the gallery at Frederick Bremer School in Walthamstow
tvSimon Usborne goes behind-the-scenes to watch the latest series
Life and Style
A picture taken on January 12, 2011 shows sex shops at the Paris district of Pigalle.
newsThe industry's trade body issued the moratorium on Friday
Winchester College Football (universally known as Winkies) is designed to make athletic skill all but irrelevant
Life...arcane public school games explained
ebooksAn evocation of the conflict through the eyes of those who lived through it
Arts and Entertainment
Could we see Iain back in the Bake Off tent next week?
tv Contestant teased Newsnight viewers on potential reappearance
Life and Style
Silvia says of her famous creation: 'I never stopped wearing it. Because I like to wear things when they are off the radar'
fashionThe fashion house celebrated fifteen years of the punchy pouch with a weighty tome
i100(and it's got nothing to do with the Great British Bake Off)
Angelina Jolie with her father Jon Voight
peopleAsked whether he was upset not to be invited, he responded by saying he was busy with the Emmy Awards
Bill Kerr has died aged 92
peopleBill Kerr appeared in Hancock’s Half Hour and later worked alongside Spike Milligan and Peter Sellers
news It's not just the world that's a mess at the moment...
footballPremiership preview: All the talking points ahead of this weekend's matches
Keira Knightley poses topless for a special September The Photographer's issue of Interview Magazine, out now
The Ukip leader has consistently refused to be drawn on where he would mount an attempt to secure a parliamentary seat
voicesNigel Farage: Those who predicted we would lose momentum heading into the 2015 election are going to have to think again
Arts and Entertainment
Cara Delevingne made her acting debut in Anna Karenina in 2012
film Cara Delevingne 'in talks' to star in Zoolander sequel
Mario Balotelli pictured in his Liverpool shirt for the first time
Life and Style
Travel Shop
the manor
Up to 70% off luxury travel
on city breaks Find out more
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
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

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

iJobs Job Widget
iJobs General

C# Algo-Developer (BDD/TDD, ASP.NET, JavaScript, RX)

£45000 - £69999 per annum + Benefits + Bonus: Harrington Starr: C# Algo-Develo...

Senior Data Scientist (Data Mining, Apache Mahout, Python,R,AI)

£60000 - £70000 per annum + Benefits + Bonus: Harrington Starr: Senior Data Sc...

Data Scientist (SQL,Data mining, data modelling, PHD, AI)

£50000 - £80000 per annum + benefits+bonus+package: Harrington Starr: Data Sci...

Java Developer - 1 year contract

£350 - £400 Per Day: Clearwater People Solutions Ltd: Our client based in Cent...

Day In a Page

Ukraine crisis: The phoney war is over as Russian troops and armour pour across the border

The phoney war is over

Russian troops and armour pour into Ukraine
Potatoes could be off the menu as crop pests threaten UK

Potatoes could be off the menu as crop pests threaten UK

The world’s entire food system is under attack - and Britain is most at risk, according to a new study
Gangnam smile: why the Chinese are flocking to South Korea to buy a new face

Gangnam smile: why the Chinese are flocking to South Korea to buy a new face

Seoul's plastic surgery industry is booming thanks to the popularity of the K-Pop look
From Mozart to Orson Welles: Creative geniuses who peaked too soon

Creative geniuses who peaked too soon

After the death of Sandy Wilson, 90, who wrote his only hit musical in his twenties, John Walsh wonders what it's like to peak too soon and go on to live a life more ordinary
Caught in the crossfire of a cyber Cold War

Caught in the crossfire of a cyber Cold War

Fears are mounting that Vladimir Putin has instructed hackers to target banks like JP Morgan
Salomé's feminine wiles have inspired writers, painters and musicians for 2,000 years

Salomé: A head for seduction

Salomé's feminine wiles have inspired writers, painters and musicians for 2,000 years. Now audiences can meet the Biblical femme fatale in two new stage and screen projects
From Bram Stoker to Stanley Kubrick, the British Library's latest exhibition celebrates all things Gothic

British Library celebrates all things Gothic

Forthcoming exhibition Terror and Wonder: The Gothic Imagination will be the UK's largest ever celebration of Gothic literature
The Hard Rock Café's owners are embroiled in a bitter legal dispute - but is the restaurant chain worth fighting for?

Is the Hard Rock Café worth fighting for?

The restaurant chain's owners are currently embroiled in a bitter legal dispute
Caribbean cuisine is becoming increasingly popular in the UK ... and there's more to it than jerk chicken at carnival

In search of Caribbean soul food

Caribbean cuisine is becoming increasingly popular in the UK ... and there's more to it than jerk chicken at carnival
11 best face powders

11 best face powders

Sweep away shiny skin with our pick of the best pressed and loose powder bases
England vs Norway: Roy Hodgson's hands tied by exploding top flight

Roy Hodgson's hands tied by exploding top flight

Lack of Englishmen at leading Premier League clubs leaves manager hamstrung
Angel Di Maria and Cristiano Ronaldo: A tale of two Manchester United No 7s

Di Maria and Ronaldo: A tale of two Manchester United No 7s

They both inherited the iconic shirt at Old Trafford, but the £59.7m new boy is joining a club in a very different state
Israel-Gaza conflict: No victory for Israel despite weeks of death and devastation

Robert Fisk: No victory for Israel despite weeks of devastation

Palestinians have won: they are still in Gaza, and Hamas is still there
Mary Beard writes character reference for Twitter troll who called her a 'slut'

Unlikely friends: Mary Beard and the troll who called her a ‘filthy old slut’

The Cambridge University classicist even wrote the student a character reference
America’s new apartheid: Prosperous white districts are choosing to break away from black cities and go it alone

America’s new apartheid

Prosperous white districts are choosing to break away from black cities and go it alone