For the inveterate merchants of gloom Latvia’s entry yesterday into the euro is akin to rats climbing aboard a sinking ship. The euro, they will have us believe, was doomed, is doomed, a patient on life support, and Latvia, a dupe of pot-half-full euroenthusiasts. Eighteen months ago the threat of Greece quitting the euro gripped markets. Three months ago Cyprus had to be bailed out. Germany continues to drag heels on crucial debt mutualisation. Bank stress tests in coming months are also likely to raise more fears ...
Yet, on its 15th anniversary, the euro took in its 18th member, despite, admittedly, the less than warm feelings of a majority of Latvians at losing the lat. Lithuania is also to join next year, probably the last new member for several years – it took Latvia eight years from joining the exchange rate mechanism, which sets trading bands for its members’ relationship to the euro, providing the required pre-entry currency stability. Sweden, Poland, and the Czech Republic, although under treaty commitments to join, are still longfingering any decision – in Poland only a third of voters would back entry.
For Latvia, which has had a period of difficult and painful financial adjustment but which is now growing again more rapidly than any fellow EU state, the decision is only partly a vote of economic confidence in the euro. “Thanks to these efforts ... Latvia will enter the euro area stronger than ever, sending an encouraging message to other countries undergoing a difficult economic adjustment,” EU Commission President Jose Manuel Barroso said on Tuesday. But concerns remain. The European Central Bank has warned Latvia that the high level of foreign deposits, mostly from Russia, in Latvian banks, as in Cyprus, is a risk.
For Latvia and the other Baltics, however, joining up, and deeper integration into the EU, are also important political affirmations of independence and of continuing the process of distancing themselves from former masters in Russia. The latter’s bullying of the Ukraine in recent weeks has added urgency to the move.