Global Economics

Joining Euro Would Help Baltics


If Estonia, Latvia, and Lithuania entered the euro zone, their balance-of-payments and credit woes would recede, reports S&P

If the Baltic nations rapidly entered the eurozone, their current balance of payments crisis would end and credit ratings would go up, US-based rating agency Standard and Poor's said on Thursday (5 March).

"It's pretty clear that, with current debt burdens, if any of the three Baltics were in the euro, their ratings would be at least one notch higher," analyst Frank Gill said, according to Agence France Presse.

"If there were any indication from the European Commission or the European Central Bank of greater appetite for an acceleration of EMU [European Monetary Union] membership that would clearly have a positive impact on the sovereign ratings."

Last week, Standard and Poor's downgraded Latvia's credit rating to junk status and said that the two other Baltic nations, Estonia and Lithuania, were also in danger of heading south in the coming months.

Latvia's economy has degenerated at an alarming rate, moving from Europe's highest growth rate in 2007 to contracting by 10 percent year-on-year in the fourth quarter of 2008, with experts predicting a contraction of 12 percent in 2009. Unemployment has climbed sharply, up to 8.3 percent in January.

European Central Bank president Jean-Claude Trichet on Thursday ruled out any change to the rules to allow fast-track entry for eastern EU member states, however.

"I would say that at this stage our position is that it is extremely important that we don't change any framework," he said after a two-day meeting of the bank's governing council, where a cut in interest rates to 1.5 percent was announced.

"Sticking to the rules is very important for the stability of the European Union."

Heading into an emergency European summit in Brussels last Sunday, Luxembourg Prime Minister Jean-Claude Juncker—also chair of the eurozone group of states—said: "I don't think that we can change the accession criteria overnight. This is not feasible."

Dutch Prime Minister Jan Peter Balkenende also said at the he was against any "softening" of the entry requirements.

But EU powerhouses Germany and France seemed to open the door to the idea at the same summit.

German Chancellor Angela Merkel told reporters in the European capital that the EU "could consider" a speeding up of the entry process. French President Nicolas Sarkozy echoed Ms Merkel's comments, saying: "The debate is open."

At the moment, the rules require that countries remain in the euro waiting room for two years after meeting strict deficit and exchange rate criteria.

A number of eastern states, notably Hungary and Poland, have requested that the rules be adapted to allow a quicker entry to the safe haven of the single currency.

With weaker export markets than western member states, joining the euro would do little harm to overseas sales, but would protect their economies from currency fluctuations.

The three Baltic states, along with Bulgaria, are scrambling to maintain their currency pegs to the euro. The peg has protected them in the same way that joining the euro would, but it is expensive, as they must hold on to sufficient foreign currency reserves to ensure that all holders of its notes and coins can convert them into euros.

This in turn has stoked unrest, particularly in Latvia, as austerity measures, including sharp wage cuts, are imposed in order to maintain the peg measure.

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