Listen to this article
A vote of confidence in the euro: Latvia on Monday formally decided to join the troubled common currency, with the prime minister, finance minister and central bank governor jointly signing the application.
It might not make headlines in the ECB’s headquarters in Frankfurt. But for Riga this is big news – its most important economic decision since it joined the European Union in 2004.
Latvia’s cabinet on Monday took the critical decision to invite the European Commission and European Central Bank to assess its readiness to join the eurozone.
“This is a day that will enter Latvia’s history,” Finance Minister Andris Vilks told reporters during a special ceremony when he, Prime Minister Valdis Dombrovskis and central bank chief Ilmars Rimsevics signed the application, according to Reuters.
If it passes the EU’s economic tests, Latvia would become the 18th eurozone member and the fourth from the former Communist states of eastern Europe, after Slovenia, Slovakia and Estonia [corrected]. Lithuania has said it could apply to join in 2015 or 2016, and Poland has recently seen a revival in domestic debate about future entry.
Unlike older EU members such as the UK, the countries that joined the EU in 2004 are formally committed to entering the common currency when they are ready and can meet the economic entry criteria. However, in practice many delayed their informal entry timetables, even before the post-2007 global crisis put huge pressure on the EU economy.
Latvia saw the biggest drop in GDP of any EU members in 2008-10, when output fell by a cumulative total of 20 per cent as a fast-growth credit-fuelled surge collapsed, property prices plunged and some banks ran into trouble. After an EU/International Monetary Fund rescue and a draconian austerity package, the economy has recovered, recording growth of 5.5 per cent in 2011 and 5.3 per cent last year, with 3.5 per cent forecast for 2013. Last year, Riga paid off its IMF loans, three years early.
All this shows that 1) Latvia is right to seek the shelter of a bigger common currency and 2) its leaders have shown that they will do whatever it takes to get their economy in order. Even though Latvia remains a poor country by EU standards, it won’t be another Greece.
In defence of Latvia, Alphaville
Poland relaunches drive to join euro, FT
Newest EU members go cooler on euro, FT
Estonia: path to growth via austerity defies eurozone doubters, and Krugman, beyondbrics