Latvia’s Euro Entreaty Reveals Euro Shortcomings

Latvia recently made news in its bid to adopt the euro as its currency, seeking to join fellow Baltic state Estonia as part of the common currency. While commendable in many ways, this move to join the currency union also strikes at many of the contradictions of modern European integration policy.

It is first worth noting that Latvia is likely to succeed in its bid, thereby becoming far and away the poorest member of the eurozone. It has hit most of the benchmarks needed for formal entry, and Germany — the power behind the euro throne these days — will back Riga’s play.

Yet Latvia’s success flies in the face of almost every possible indicator — and it again comes back to Berlin.

There is first the obvious. The very last thing the eurozone needs right now is another poor country signing onto the common currency as a leverage to enhance its export position. Although the lat has been pegged to the euro for some time — nominally to ease the transition and to show fiscal responsibility — transitioning the remaining roughly half of the country’s debt not currently euro-denominated into the euro will provide an immediate balance sheet improvement for Riga, if not on the same scale as the ones Rome, Athens, and Madrid enjoyed years ago.

Latvia’s economy is also unready for the euro. Although it is impolite for some reason to say this about European countries, the Baltic state is caught in the middle income trap. Its economy is export-dependent, and domestic demand has fallen below pre-crisis levels, with no sign of a full recovery anywhere in sight.

Public opinion is also opposed to the switch. The Baltics fought Soviet occupation, and Latvia was no exception; for its troubles, tens if not hundreds of thousands were conscripted as cannon fodder against the Nazis, and Latvian nationalists and farmers executed and imprisoned in similar numbers. The Singing Revolution and the establishment of the lat remain signs not only of national pride, but of independence from a multinational bureaucracy that wipes out local control.

Most Latvians are still hesitant about completely joining another of those.

Finally, decades of Soviet rule destroyed Latvia’s civil society. The Lutheranism that tided over centuries of Latvians is gutted. Catholicism has fared better, but only slightly. A quarter of the country professes no faith and professes no civic organization membership. The fertility rate of 1.17 is one of the lowest in Europe. The Soviets harvested the best and brightest for their inhuman machine, and what was left fled not long after the Singing Revolution. Tertiary education, once the pride of Latvia, is now a shell.

Yet Latvia has one feature, one single attribute, that all but assures its entry into the eurozone: successful austerity.

Angela Merkel has staked her Government and Germany’s leadership of the eurozone on the principle that if those lazy Southern Europeans would simply tighten their belts and get to work, they would enjoy the benefits of healthy, flourishing economies; they can then afford all the work stoppages and strikes they like. Her primary example for the success of this model is Germany itself, which put itself through wrenching reforms to integrate East Germany and to remake its welfare and government programs into a sustainable model for a country which does not have enough babies.

No one else has yet succeeded on the German model — except Latvia. The country’s forced austerity pulled it through the financial crisis (with the help of a significant IMF bailout in 2008) and it is now poised for upward growth. Government deficit spending is now less than two percent of GDP, the debt is at forty percent of GDP (by a law passed during the austerity reforms, it is capped at 60 percent), and the private sector is successfully struggling out of the wreckage of the crisis.

Latvia’s entry into the euro is therefore predicated not on what it is, but what it symbolizes. For Germany, the pain of adding yet another low-performing, undereducated, impoverished nation to the eurozone is outweighed by the ability to gain more leverage over the future of Southern Europe, and the South is in no position to argue.

The question of course is whether the country’s economy will become a greater drag on the eurozone in the long run — but for now, Riga and Berlin are only concerned with the present.