Despite the turmoil in the eurozone, several states are still keen to join. The EU has just approved entry for Latvia, which will become the 18th euro member in January. For Latvia, entry is partly a political imperative, as Ian Traynor points out in The Guardian. It will reinforce the ex-Soviet republic’s integration with the West and is a”big step in liberating itself from its historical tormentor, Russia”.
Economically, entry marks a seal of approval, and a boost, for Latvia’s economy. For starters, it easily meets the official criteria. Public debt is just 40% of GDP, compared to the eurozone ceiling of 60%; the budget deficit is 1.2%, compared to the limit of 3%; and inflation is just 1.2%.
States keen to join the euro are also expected to peg their currency to it in the run-up to entry. Latvia has stuck rigidly to its peg and refused to devalue the lat, even when hit by a bursting housing and credit bubble in 2009. Without the safety valve of a cheaper currency, Latvia went through gruelling austerity to adjust to its burst bubble. The economy shrank by 25% and unemployment quadrupled. But after hard and fast cuts, the recovery has also been quick: growth hit 5% last year.
In short, it has been a model austerity pupil before it has even entered the euro, notes The Economist. And now, it will benefit from a seat at the table and lower interest rates, and should also attract more foreign investment. With only the peg, Latvia had the disadvantages of euro entry without the advantages.
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