Latvia Set to Become 18th Member of Eurozone

Econintersect:  The European Commission has officially approved the admission of Latvia to join the Eurozone group which shares the common euro currency.   The ECB (European Central Bank) had approved the move on 05 June 2013.   The remaining steps are considered to be pro forma:  approval by EU finance ministers and the European Parliament.  These could come as early as July and membership will become official 01 January 2014.  There will be essentially no change to business for Latvia because the local currency (the lat) has been pegged to the euro for ten years.

Supporters of austerity point to Latvia as a success story for their point of view, as the country has the best GDP growth rate in Europe.  See Anders Aslund article in The National.  But the depth of damage to the country’s economy was quite severe with a drop of  more than 28% in GDP from 2009 to 2011, according to Trading Economics.  For 2012 GDP was still more than 15% below 2009.  For comparison, the U.S. suffered a much smaller GDP decline (-4.7%, 4Q 2007 to 2Q 2009) and GDP for 1Q 2013 is 3.5% higher than the 2007 peak.

In addition to the GDP penalty paid by Latvia the country has paid in other ways for the austerity imposed.  Among these:

• Unemployment climbed to 19% in 2010 and has only improved to 15.5% by the end of 2012.

• There were large population losses,  From January 2007 to January 2013 the population declined by more than 8%.  In the three years before 2007 the population had been essentially unchanged (-0.09% over three years).

Based on this record it may be no surprise that Latvians favor not joining the euro by more than a 2:1 margin.

According to an article at AdvisorOne, the other nine EU (European Union) countries not yet members of the Eurozone are not considered likely to follow Latvia.  The UK has been notably negative to the idea of giving up the pound.  Other countries mentioned by AdvisorOne with no immediate prospects for joining the euro are:

• Denmark (indefinitely postponing consideration);
• Poland (no conversion to be considered until after 2015 elections);
• Czech Republic (no likely move until 2019);
• Hungary (more than a decade before conversion).

Econintersect has not found discussion of euro prospects for the remaining EU members not mentioned above:  Bulgaria, Lithuania, Romania and Sweden.

John Lounsbury

Sources:

• Investor Alert: Latvia to Become Newest Eurozone Member (Marlene Y. Satter, AdvisorOne, 18 June 2013)

• Latvia Steps Toward a Tarnished Prize, the Euro (Jack Ewing and James Kanter, The New York Times, 05 June 2013)

• Latvia gives Greece a lesson in austerity (Anders Aslund, The National, 19 January 2013)

• Latvia GDP (Trading Economics, 18 June 2013)

• Real Gross Domestic Product, GDPC1 (St. Louis Fed Fred, 18 June 2013)

• Latvia Population (Trading Economics, 18 June 2013)

• Latvia Country Report (Global Finance, 18 June 2013)