Latvia is on course to join the euro. After the European Union approved Riga for membership, Fitch upgraded the country’s debt to investment-grade. If the zone doesn’t implode from recurring economic crises, Latvia believes it will have joined the economic big leagues.
Latvia, which pegged its currency to the Euro when it entered the European Union in 2004, easily met the entrance criteria. Riga’s budget deficit is just 1.2 percent of GDP, compared to the three percent ceiling. Public debt is 41 percent, two-thirds of the allowable 60 percent. (Greece was above 140 percent when other euro members noticed, setting off the euro crisis.)
The investment agency raised Latvia from BBB to BBB-plus. Standard & Poor’s already placed Latvia at that level. Moody’s rates Riga at Baa2.
Fitch explained the increase: “Euro adoption will enhance economic policy coherence and credibility compared with the current exchange rate peg to the Euro.” Estonia’s Finance Minister, Juergen Ligi, made much the same argument: “Being accepted to join the monetary union is a sign of trust.”
In fact, Riga demonstrated that it was a credible and trustworthy economic partner with its tough austerity program in 2008 and 2009, which brought the country out of a serious economic crash. The reforms resulted in significant pain for the population, but generated little of the political histrionics evident in Greece and other nations which imagine that problems created by improvident borrowing and spending can be solved by more borrowing and spending.
Latvia will be the 18th country to join the Eurozone. The next obvious candidate is Lithuania, which recently assumed the EU presidency. Vilnius, too, surmounted rough times with a tough economic reform plan. Its objectives for Europe are “to stimulate growth, create jobs and boost EU competitiveness.”
Estonia’s Ligi hopes for Lithuania’s acceptance of the common currency: “Based on Latvia’s experience, I would say it is highly likely for Lithuania to join the euro zone in 2015.” Whether Ligi’s primary objective is to strengthen the country or the continent isn’t clear. He observed: “For the currency, getting a new member is a sign that the euro is a vigorous and attractive currency, and that the euro zone is reliable.”
Actually, that reliability has been under great strain. Latvian Prime Minister Valdis Dombrovskis argued that his nation’s accession was “good news not only for Latvia but also for Europe and the Euro zone.”
Indeed, Latvia will offer a good example to the Euro zone’s economic ne’re-do-wells. German MEP Burkhard Balz, who helped move build support for Riga’s application, observed: “Latvia is that example of how to successfully emerge from a deep crisis with stringent austerity measures.” No doubt Germany would like to have more members which also believe in the traditional virtues of fiscal prudence and probity, in such short supply elsewhere in the Euro zone. Hence the obvious appeal of a Lithuanian candidacy as well.
Despite the international goodwill, Riga is acting against domestic public opinion. Latvian Finance Minister Andris Vilks hoped that support would hit 50 percent by year end. But then, one might not want to bet on that. He admitted: “People are quite afraid about different potential shocks. The best for us is less-concerning news from the euro zone.” Good luck.
In the short-term, at least, the euro may be gaining more than Latvia from Riga’s decision. Even Vilks acknowledged that “The hard times will last for several years.” But he hopes for better times: “we see a lot of benefits in the long-term, in spite of today’s environment.” His and his government’s political future may hinge on winning that bet.