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.