Latvia joins the eurozone

By Alex  Lehmann

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Latvia is joining the eurozone on 1 January 2014. The admission follows thorough examination of the country’s compliance with all relevant macroeconomic criteria. This represents an impressive achievement, which appears even more remarkable considering how hard the country was hit in 2009 by the global financial crisis.

Latvia’s recovery illustrated several important points. It demonstrates what can be achieved with strong and determined political leadership. It is testimony to the remarkable resilience of the population which suffered severe decreases in income and living standards. But the major lesson, we believe, has been how consistent structural reform that improves the working of product and labour markets can enhance an economy’s ability to respond to adversity.

When the crisis hit the Baltics, the countries – after years of rapid growth – were already on course towards joining the euro. Despite the hardship involved, they stayed the course and opted for "internal devaluation" by bringing down cost levels and regaining competitiveness. This also involved repairing the banking system which after years of rapid capital inflows was hit hard by the global crisis. The EBRD played a part in support to one key local bank and in recent years has witnessed the determination of policy makers at first hand.

This course has been rewarded. Today Latvia is the fastest growing economy in the European Union and also for 2014 the EBRD forecasts stronger than average growth with a more than 3 per cent increase of economic output. Joining the euro will benefit the country by taking European integration a decisive step further and boosting investors’ confidence.

As a country which was able to implement painful but unavoidable reforms under very challenging circumstances, Latvia has won international recognition. How was the country able to do it?

A major reason was that Latvia, like the other Baltic states, has consistently reformed its institutions after deep dysfunction in the 1990s. The latest EBRD Transition Report shows a clear correlation between economic growth and the quality of institutions. Economic integration is the key to bolstering reform and supporting improvements in institutions and human capital.

The Transition Report also confirmed the complementarity of economic reform on the one hand and targeted political and governance reforms on the other. The latter includes, in particular, the quest for transparency and accountability.

These are challenging tasks and, as the Transition Reports also shows, work on structural reform is never really over. Transition is a process, not a result. Membership in the eurozone will mark an important milestone. Latvia will have a formal role in the decision-making process of the common currency and its banks will have access to European Central Bank liquidity.

The recent progress on the establishment of a European Banking Union in a nutshell demonstrates the advantages of being on the inside. As a eurozone member Latvia has a voice in its own destiny. On that note: Welcome to the club!

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