Latvia’s Euro Test

Latvia is a member of the Eurozone, a move strongly supported by its governing and financial classes and increasingly opposed by everyone else. The former believe that the move will ease Latvia’s continued economic growth by reducing the monetary friction caused by its former euro peg; the latter believe that Latvia is surrendering sovereignty and a national symbol in return for higher prices.

They’re both right.

Arguably the most foolish of Latvia’s moves following the financial crisis — which Latvia suffered worse than any other European nation — was the decision to keep the lat pegged to the euro. While this made trade with the rest of the European Union easier and signaled Riga’s determination to join the eurozone, it had other, less salutary qualities. Devaluation became impossible, and so Latvia was forced to suffer the loss of critical export facilities without the customary ability to devaluate its way to competitiveness. The friction caused by moving between the lat and the euro caused a real drag on Latvia’s banking sector and slowed Latvia’s economic recovery even more.

Alleviating this series of self-imposed headaches is the disease for which euro accession is the cure. With Latvia’s economy outgrowing the rest of Europe’s, returning to its 2007 peak, the Baltic country is prepared to enjoy the benefits of the euro currently not really enjoyed by the European south. The end of the currency friction will unchain Latvia’s economy almost as much as simplifying its Byzantine regulatory and financial systems would.

This isn’t to deny the costs of the move. The same lack of currency flexibility currently consistently dooming Greece and so much of Europe’s underbelly is being thrust on Latvia, whose economy can be summarized as “exports, shady financial transactions, uncertain services, and a moribund state sector.” Of these, only the finance sector’s clean parts will benefit; everything else will lose a certain amount of necessary flexibility in the event of another recession.

There is also the matter of the currency change and the almost inevitable price increase every retailer will pass along. This is considered a normal and usually unremarked-on aspect of euro accession, so it’s probably best to resign oneself to it.

Yet this is only the beginning of the euro experiment for this former Soviet nation. The test truly begins at the next crisis — when Latvia suffers again in the same way for the same profoundly undemocratic choice it’s making today.