Latvia: Weighing Prosperity and Identity

Another student guest post, this one covering Latvia’s current debate on whether to join the Eurozone.


Latvia has been committed to westernization in order to preserve the independence it gained from the Soviet Union in 1991. Domestically, westernization has been evident through the establishment of both democracy and a market economy. Other empirical evidence of Latvia’s commitment to westernization includes their accession to European political and economic frameworks as well as the transatlantic security structure. The next milestone in Latvia’s European integration is the adoption of the Euro as its national currency. This next logical step in westernization has become unfavorable in public opinion due to the threat that it poses to the Latvian identity, which has consequently threatened delegitimizing the governing coalition and further western integration in Latvia.

In efforts to achieve the Maastricht criteria, which are necessary for accession into the Eurozone, Latvia endured a deep recession due by internally devaluating as opposed to devaluing its currency during the global financial crisis. This decision was justified economically as well because 90 percent of loans and the majority of bank deposits are already in euros. Therefore, the elimination of Latvia’s peg to the euro would be followed by mass bankruptcies.

It is clear that the benefits outweigh the potential drawbacks of joining the Eurozone. Membership would grow the economy through the elimination of the foreign exchange risk in trade with other Eurozone countries. Latvia would experience an influx of bank assets, growing the banking sector. The banking sector would also become increasingly competitive due to the consolidation of banks. The biggest downfall of joining the Eurozone is that the economic policy of the European Central Bank is focused on the development of the Eurozone as a whole, not particular member states, which may potentially lead to economic instability due to asymmetric shocks. But, the severity of asymmetric shocks would be lesser than maintaining the current peg to the euro without accession into the Eurozone. The fiscal discipline demonstrated during the financial crisis is empirical evidence that Latvia is already prepared to tolerate asymmetric shock.

Despite these benefits Latvians still want to retain their currency for its intrinsic value. The reintroduction of the Latvian lat as the national currency contributed to the reestablishment of Latvian culture is considered to be a symbol of Latvian identity. The lat is perceived as a nostalgic remnant of Latvia’s brief independence in the early twentieth century. This popular perception discredits the transition to the euro by equating modern European accession to Soviet annexation.

The Latvian population’s nationalist pride for their currency perpetuates the Latvian disconnect from politicians. Opinion polls indicate that forty one percent of Latvians are opposed to and only thirty percent are in favor of the adoption of the euro. Yet, the Saeima passed the resolution to adopt the euro with a vote of 52 to 40. Opposition parties could initiate a referendum on whether Latvia should adopting the euro, but opposition leader Janis Urbanovics calls this, “an irresponsible action,” because the decision was made by an elected parliament.

Clearly the Latvian governing coalition has become disconnected with the Latvian people and their desires by pushing to adopt the euro.  Although, improving the long-term stability and prosperity of the country is worth the minor sense of anomy in the short term.

References

Bitans, Martins, and Egils Kauzens. “Impac of the Euro Adoption on the Economy of Latvia.” Latvijas Banka. N.p., 2004. Web. 3 May 2013. <http://www.macroeconomics.lv/sites/default/files/impact_of_the_euro_adoption.pdf>.

Collier, Mike. “Eurozone Means All or Nothing at All in Latvia – BUSINESS NEW EUROPE.” Business New Europe. N.p., 4 Feb. 2013. Web. 03 May 2013. <http://www.bne.eu/story4499/Eurozone_means_all_or_nothing_at_all_in_Latvia>.

Gelzis, Gederts. “Latvians Don’t Want to Let Go of Their Lats | Europe | DW.DE | 21.01.2013.” DW.DE. Ed. Gabriel Borrud. N.p., 21 Jan. 2013. Web. 01 May 2013. <http://www.dw.de/latvians-dont-want-to-let-go-of-their-lats/a-16536902>.

“Glossary:Convergence Criteria.” Statistics Explained RSS. European Commision, 3 Jan. 2013. Web. 03 May 2013. http://epp.eurostat.ec.europa.eu/statistics_explained/index.php/Glossary:Maastricht_criteria

“Latvia to Join Eurozone in 2014 – RT Business.” Latvia to Join Eurozone in 2014 – RT Business. TV-Novosti, 18 Feb. 2013. Web. 03 May 2013. <http://rt.com/business/latvia-eurozone-transition-currency-305/>.

“Relations With LatviaEuropean Commision.” Enlargement Archives. European Commission, n.d. Web. 02 May 2013. <http://ec.europa.eu/enlargement/archives/enlargement_process/past_enlargements/eu10/latvia_en.htm>.

Wheatley, Alan, and Aleks Tapinsh. “Analysis – Resilient Latvia Ready for Euro but Reforms Needed.” |Reuters. Thomson Reuters, 12 Mar. 2013. Web. 1 May 2013. <http://uk.reuters.com/article/2013/03/12/uk-eurozone-latvia-prospects-idUKBRE92B0HC20130312>.

Advertisements

Your thoughts?

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s