Latvia plans to join euro zone, saying currency is attractive despite Europe’s financial crisis


Latvian Prime Minister Valdis Dombrovskis speaks on the adoption of the euro by Latvia on July 9 in Brussels. (GEORGES GOBET/AFP/GETTY IMAGES)

During the Cold War, many Latvians viewed themselves as Europeans trapped at the edge of the Soviet Union, not part of it. Now, the Baltic nation’s leaders are seeking to bind themselves ever more strongly to Western Europe by adopting the euro.

Other countries in the European Union are relieved not to be part of the troubled currency club. But Latvian leaders have pressed for membership, convinced that giving up their currency, the lats, in favor of the euro will be a ticket to prosperity and protection. On Tuesday, E.U. finance ministers approved Latvia as the 18th member of the euro zone, a formality that puts the country on course to begin using the currency Jan. 1.

Nearly four years into an economic crisis in the 17-nation euro zone, many Europeans miss the powers they had over long-gone pesetas, drachmas and lire. But Latvia’s aims suggest that for some countries, older ideals of European unity still hold sway.

The E.U. was forged from the ashes of World War II with an aim to build peace, and the euro was intended as its crowning achievement, sweeping away boundaries among a patchwork of small countries in the name of building a more powerful whole. For Latvia, which shares a 181-mile border with Russia, the lure of the euro is about economics and security.

Now, Latvian leaders say, with new divisions opening in Europe, they want to make sure they are firmly ensconced in the heart of the E.U. “It becomes ever more clear that two-speed Europe is emerging,” Prime Minister Valdis Dombrovskis said. “Do we want to belong to core Europe?”

When Latvia joined the E.U. and NATO in 2004, many here said it was reclaiming a European past that had been interrupted when Soviet tanks rolled through the capital, Riga, during World War II and had returned only fitfully since the country declared independence from the Soviet Union in 1990.

E.U. membership sparked a credit boom that funded a cleanup of Riga’s medieval old city and sent Bentleys clacking down its cobblestone streets. But the global financial crisis in 2008 dried up funds overnight. Leaders, faced with a choice between printing more money or a crash course of austerity, chose to slim their budget, forcing them to chop public-sector wages by more than half.

The results made Latvia, which is about as large as West Virginia, a poster child for austerity enthusiasts, even as they created enduring economic pain at home. Citizens suffered through the E.U.’s deepest recession, with the economy shrinking 17.7 percent in 2009. Tens of thousands of people emigrated, a harsh impact on a nation of 2.2 million.

But by late 2010, the economy was growing again. In 2012, it expanded 5.6 percent, the fastest of any country in the E.U., although it has not reached ­pre-crisis heights and poverty still plagues many people. “In some ways, the formula has worked,” said Morten Hansen, the head of the economics department of the Stockholm School of Economics in Riga.

Many Latvian advocates of the euro model themselves after far richer Northern European countries such as Germany, a former imperial power in Latvia. Analysts say Latvia is likely to be a reliable advocate of austerity during thorny talks about the future of struggling economies in Greece, Spain and elsewhere.

‘Better the euro than the ruble’

Although many Latvians think of themselves as austere northerners, some foreign investors remain cautious about pouring money into a country where there is a chance of devaluation, however small. Euro advocates say taking on the currency would sweep away lingering doubts about the stability of investing in Latvia, giving it an economic boost. Latvia conducts about 70 percent of its foreign trade with euro-zone countries, and most large loans are denominated in euros, limiting the flexibility of an independent currency. “We are already using the euro, but it’s not the real euro,” Finance Minister Andris Vilks said.

The Tuesday decision had immediate economic consequences for Latvia, with the Fitch ratings agency raising the country’s long-term credit rating by one notch, making it cheaper for the government to borrow money.

And with Russian President Vladimir Putin reviving Soviet-era awards and praising Stalin’s legacy, some Latvians see further reason to be as European as possible. “Better the euro than the ruble,” said Inguna Svagere, 40, a costume-maker who was taking a break in the shadow of Riga’s grand, neoclassical opera building one recent morning.

Many Latvians say the best way small countries can project power is to join economic and political alliances such as the euro and the E.U. Other countries are still interested in E.U. membership; Croatia became the 28th nation July 1. Serbia is set to begin membership talks before the end of the year.

“Smaller countries can sit at the high table of world economies through projects like the euro,” said Latvian Foreign Ministry State Secretary Andrejs Pildegovics. Unlike countries that can afford to spurn the euro and additional integration, he said, Latvia cannot easily stand alone if it wishes to have influence in the world. “This is the best option,” he said. “We’re not in the position of Great Britain. We don’t have nuclear submarines.”

The last nation to join the euro was Estonia, Latvia’s northern neighbor, which gave up its kroons Jan. 1, 2011, after the euro crisis had started but before it reached its depths. Lithuania, Latvia’s southern neighbor, hopes to join in 2015.

Opposition to the currency union

Latvia’s political leadership has dedicated itself to the euro project, but many Latvians fear that membership would mean contributing to bailouts of euro-zone countries whose citizens are far richer than they. Inside the E.U., only Bulgaria, Croatia and Hungary are poorer than Latvia. Greece, for all its economic troubles, was still more than 11 / 2 times as rich as Latvia per capita last year.

An April survey by the TNS polling firm found that 62 percent of Latvians were against using the euro, although opposition has been waning. Some opposition groups tried to force a referendum on the issue but failed to get enough signatures.

“We will pay for richer Spain’s debt. Our doctors, our pensioners, our police officers will pay,” said Iveta Grigule, an opposition member of Parliament who has campaigned against joining the euro.

And in a society proud of national symbols that were repressed or eliminated during Soviet rule, having a national currency is a reason to rejoice. The one-lats coin has a salmon on it. The earth-tone-hued bank notes bear folk symbols that date back thousands of years.

Some opponents question the value of losing hard-won independence. “We stayed 50 years in one interesting union. We were very happy to be free of it,” said Ilze Geincmane, 55, a hotel worker who was visiting Riga recently but said she had been forced to emigrate five years ago when she lost her job and her apartment.

But for proponents of Latvia’s currency switch, the decision is a sign that the ideals of the European Union remain attractive despite the bloc’s troubles.

“Croatia and Latvia are keeping the European dream alive,” said Andris Spruds, director of the Latvian Institute of International Affairs.

Michael Birnbaum is The Post’s Moscow bureau chief. He previously served as the Berlin correspondent and an education reporter.
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