Single currency union marks 15th anniversary by expanding – 18 months after crisis in Greece threatened breakup
The eurozone will gain an extra member at midnight on Tuesday as Latvia becomes the 18th country to join the single currency union, despite little obvious public enthusiasm for the move.
Latvia's arrival gives eurocrats in Brussels an extra reason to toast in the new year. Eighteen months after the threat of Greece quitting the euro gripped financial markets, the eurozone is marking its 15th anniversary by expanding, not fracturing.
With final preparations completed, outgoing prime minister Valdis Dombrovskis will ceremonially withdraw the first euro note from an ATM shortly after midnight.
European commission president José Manuel Barroso offered his congratulations to Latvia on Tuesday as households and businesses prepared to wave goodbye to their currency, the lats.
"This is a major event, not only for Latvia, but for the euro area itself, which remains stable, attractive and open to new members," Barroso said. "For Latvia, it is the result of impressive efforts and the unwavering determination of the authorities and the Latvian people. Thanks to these efforts, undertaken in the aftermath of a deep economic crisis, Latvia will enter the euro area stronger than ever, sending an encouraging message to other countries undergoing a difficult economic adjustment."
City analysts were less effusive. ING pointed out that the eurozone was still trying hard to repair the constructional mistakes of the past, and that the former Soviet state could bring its own problems. "While some look forward to welcome another stability-oriented government, others fear that Latvia could become the next Cyprus," ING said.
Mark Galeotti, a professor at New York University, has also predicted that suspect funds could flow westward into Latvian banks. "Immediately after Latvia joins the eurozone I imagine we're going to see an actual spike in dubious money flowing in," Galeotti, who researches organised crime in the former Soviet Union, told AP.
Within Latvia the eurozone crisis has left some people edgy about the move. Recent opinion polls have shown that a majority of Latvians oppose the move, with just a fifth strongly in favour.
Andris Liepins, 51, a shop owner in the capital Riga, told Bloomberg he was "convinced" prices will rise under the new currency, and also fears paying for future eurozone bailouts.
"Why does a country have to pay other countries' debts?" Liepins added.
And in a village north-east of Riga, Leonara Timofejeva, who tends graves to earn the minimum wage of 200 lats (€284) per month, also predicts inflation. "Everyone expects prices will go up in January," she told AFP.
Raoul Ruparel, head of economic research at Open Europe, said Latvia would be an "interesting test case" as to whether a small country could join the euro region and thrive. He said Brussels would be monitoring the country closely for signs of instability, as "they don't want a repeat of what happened before".
Latvia has already had a taste of eurozone-style austerity. Wages were slashed and unemployment soared after the 2008 financial crisis struck. After a long credit-fuelled boom, Latvia slumped into a deep recession.
The economy is now growing again – more rapidly than any fellow EU state.
"While Latvia's switch to the euro comes just five years after an international rescue package, which saw its economy shrink by more than a fifth in 2008-2009, it appears to be on the fast track to recovery as their economy is growing at the fastest pace in the European Union this year," said analysts at City firm Clear Currency.
The Latvian finance minister, Andris Vilks, has argued that Ukraine's recent tug-of-war between the EU and Russia shows the wisdom of making closer ties with Europe.
Vilks said: "Russia isn't going to change. We know our neighbour. There were before, and there will be, a lot of unpredictable conditions. It is very important for the countries to stick together, and with the EU."
Latvia's own political future is unclear at present. Valdis Dombrovskis resigned as prime minister after 54 people were killed in a supermarket collapse in Riga last month, the country's worst disaster since winning independence in 1991. A new prime minister has not yet been appointed.
Eurozone faces more challenges in 2014Although the threat of eurozone breakup has receded, many experts warn that next year will be challenging. Open Europe's Ruparel says the European Central Bank's asset quality review – stress-testing the region's banks – will dominate 2014. It will put the spotlight on banks in France and Italy in particular, he predicts.
Europe's economy remains weak, having struggled out of recession this summer, and the jobless rates are at record levels.
Kit Juckes of Société Générale said: "The nagging, never-ending fear is that policymakers like to tell us the crisis is over, but we still have falling bank lending, and we still have levels of unemployment, especially youth unemployment, that would in most countries and at most points in history, have caused a massive political backlash."
In Latvia, the youth unemployment rate is almost 25%, slightly higher than the eurozone average. In Spain and Greece, the figure is over 50%.
Latvia for beginnersHere are a few key numbers and facts about Latvia and its adoption of the euro.
Latvia has a coastline along the Baltic Sea and borders with Estonia, Russia, Belarus and Lithuania. The capital is Riga, where more than a third of the population lives. Some 44% of the country is forest.
Latvia has a population of 2,041,763 and after it joins the eurozone 333 million Europeans will share the same currency
Latvia's old currency, the lats (LVL), can be exchanged as of 1 January at an official conversion rate of 1 euro = 0.702804 LVL. Prices must be displayed both in lats and euros until 30 June 2014.
GDP growth in third quarter: 1.2% on the quarter (eurozone: 0.1%, EU: 0.2%, UK:0.8%)
GDP per capita, expressed in purchasing power standards is 36% below the EU average, putting Latvia ahead of Croatia, Romania and Bulgaria but below the rest of the EU.
Unemployment rate: 11.9% in October (eurozone: 12.1%, EU: 10.9%, UK: 7.4%)
Annual consumer price inflation: -0.3% (eurozone: 0.9%)
Main exports: Wood and metal products, machinery, electrical equipment and mineral products
Latvia joined the European Union on 1 May 2004
Compiled by Katie Allen. Sources: European Commission, Bank of Latvia, The Latvian Institute
EuroLatviaEurozone crisisEuropean monetary unionEconomicsEuropeGraeme Weardentheguardian.com © 2013 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds |
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