Bloomberg News

Latvia Becomes 18th Euro-Area Member as Animosity Lingers

January 01, 2014

New Latvian Euro

A "Folk Maiden" illustration sits on the face of a new Latvian euro coin during a media presentation in this arranged photograph at the Latvian central bank, also known as Latvijas Banka, in Riga, Latvia. Photographer: Jason Alden/Bloomberg

Latvia became the 18th member of the euro area today, with half the former Soviet republic’s citizens opposing the currency switch and expectations of rising prices at a seven-year high.

Finance Minister Andris Vilks, who helped make euro adoption one of the country’s key goals as Latvians endured the world’s deepest recession in 2008-2009, withdrew euro notes from a cash machine in front of TV cameras after midnight.

“Today is a very important day for Latvia, difficult to imagine three or four years ago, Vilks said at a news conference. ‘‘Everything is just beginning for Latvia.’’

Euro adoption will cap a journey of more than two decades for Latvia, which will become the fourth former communist country in the currency area after Slovakia, Slovenia and neighboring Estonia. Opponents of the switch outnumber proponents two-to-one in the country of 2 million, according to opinion polls. The resentment is stoked by concern that prices will rise and the country will be forced to take on new responsibilities in the currency union.

‘‘I’m convinced’’ prices will rise with the euro, said Andris Liepins, 51, a shop owner in Riga, the capital. ‘‘It’s a fact’’ that Latvia will have to help pay for other countries’ debt after adopting the euro. ‘‘Why does a country have to pay other countries’ debts?”

Austerity Drive

Prime Minister Valdis Dombrovskis pushed through austerity measures equivalent to 16 percent of gross domestic product as part of a bailout program that shored up finances and kept the currency pegged to the euro. The economy, which shrank by more than a fifth in 2008-2009, grew 4.5 percent in the third quarter from a year earlier, the fastest pace in the European Union.

The yield on Latvia’s dollar bonds maturing in 2020 rose 1 basis points or 0.01 percent to 3.71 percent yesterday, according to data compiled by Bloomberg. Standard & Poor’s raised its outlook to positive on Dec. 13 on Latvia’s BBB+ rating, the third-lowest investment grade.

Dombrovskis’s government resigned Nov. 27 following a supermarket collapse that killed 54 people. He will remain as a caretaker prime minister until a new one is nominated by the president and confirmed by parliament. Political parties haven’t yet agreed on a candidate whom the president is willing to nominate as leader until elections in October.

Inflation Concern

Concern that inflation will accelerate is rising even after consumer prices fell 0.4 percent in November from a year earlier, the sixth month this year without an increase. The Finance Ministry estimates prices will rise 2.3 percent next year as the economy expands 4.2 percent.

About 83 percent of people say they fear the euro will trigger unwarranted price increases, the European Commission said in a report Dec. 3.

The government is focusing on the potential benefits. Adopting the euro will attract more investment and promote export growth, which will allow the economy to expand more quickly and “raise welfare,” Vilks said in a statement Dec. 27.

Half the country remains unconvinced. Opposition to euro adoption is 50 percent, according to a Dec. 27 report by the polling company SKDS, compared with 58 percent in October. Sixty-seven percent of respondents said last month that they expected prices to rise, the most since at least December 2006, according to a separate poll by SKDS. Each poll has a margin of error of 3.1 percentage points.

‘Elite Project’

The euro “has always been an elite project anyway -- some grand vision for a unified Europe at its core,” said Tim Ash, chief economist for emerging markets at Standard Bank (SBK) Group Ltd. in London.

Lithuania is determined to qualify to adopt the euro a year from now, convinced that joining Latvia and Estonia in the currency area will bolster economic growth, investor confidence and regional trade ties, Bank of Lithuania Governor Vitas Vasiliauskas said today in an e-mailed statement in Vilnius.

’’Acceptance into the euro club confirms that a country is able to implement responsible economic policy,’’ Vasiliauskas said. ’’Lithuania is also following that path.’’

For the euro area, Latvia will mean the addition of another country that favors austerity and has won accolades from German politicians including Chancellor Angela Merkel for its commitment to budget cuts.

‘Paid Off’

“Joining the euro marks the completion of Latvia’s journey back to the political and economic heart of our continent, and that is something for all of us to celebrate,” EU Economic and Monetary Affairs Commissioner Olli Rehn said in a statement yesterday. “Your efforts have paid off, and your country’s strong economic recovery offers a clear message of encouragement to other European countries undergoing a difficult economic adjustment.”

Latvians, whether they like the concept or not, will need to get used to their fourth currency in 22 years. The country introduced the Latvian ruble to replace the Soviet one in 1992, then resurrected the pre-World War II lats a year later.

“I personally won’t like giving up the familiar lats and start using the euro, but it’s an entirely irrational sentiment,” Alf Vanags, director of the Baltic International Centre for Economic Policy Studies, said by phone. “On balance, euro adoption is good for Latvia,” since it provides a mutual insurance policy that countries can draw on when they get into trouble.

To contact the reporter on this story: Aaron Eglitis in Riga at aeglitis@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net


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