Latvia Tells the Eurozone’s Story in Slow-Motion

Latvia has been a poster-child for Germany’s demand for Southern (read: Greek or Former Vital German Market of the Week) austerity since the country leveraged painful government cuts and related programs to early and steady economic success. Its euro entry was a foregone conclusion on this very basis, a good thing as most of the country doesn’t want it except the banks, who are really tired of the costs associated with running a euro-denominated currency.

Latvia is however a potential problem for the EU as its tale of redemption-by-austerity is something of a fable. Latvian economic growth is in no small part based on an open invitation to the less financially forthright nations of the world to invest heavily in the country in return for visa-free travel rights of Europe’s Schengen zone. A lot of money entered Latvia that way, which helped speed its economic recovery beginning in 2010. A lot of Russians, Kazakhs, Iranians, Chinese, and others bought the privilege of visa-free travel in Europe that way, which helped cause a recent escalation in European blood pressure.

This is a source of some conflict in Latvia as well, as most Europe-related things are. The ruling coalition is considering cutting back on the program (at German insistence). The opposition is conflicted. Popular opinion is directly opposite its euro sentiment, which is to say it’s broadly in favor. The business community, which has benefited from the largesse, is wildly opposed.

The problem is simple: Latvia did not rely on sainted austerity for its recovery. Its economy is still fragile. Its banking sector is a mess waiting to happen. It cannot cut off foreign investment, and yet it must.

Welcome to the contradictions of the eurozone.

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