It’s official! In January 2014, Latvia is set to become the 18th member of the European Monetary Union. That’s right, it will say goodbye to Lats, its current domestic currency, and say hello to the euro!
It’s not hard to see why many investors are scratching their heads wondering why the heck a country would want to associate itself with the euro these days. After all, a country would be better equipped in solving its economic problems if its central bank had more control over its monetary policies.
Take Greece and Portugal for instance. Both countries are having a difficult time getting out of recession and returning to growth because the ECB’s policies and the euro’s relatively strong levels make it hard for their exports to be competitive in the global markets.
It also doesn’t help that it takes time for European leaders to agree to a consensus when it comes to major changes. This could delay the immediate reforms needed by smaller, more financially troubled euro zone economies.
Why join the euro zone?
First and foremost, Latvia’s admission to the euro zone will symbolize freedom and independence. It will reinforce Latvia’s individuality, as full integration with Western Europe is a clear sign that the country has finally liberated itself from Russia, its historical oppressor.
Second, joining the euro zone will allow Latvia access to lower interest rates for public lending, and therefore, the economy as a whole. S&P, a major credit rating agency, raised its credit rating on Latvia on Monday to BBB+ from BBB. Lower rates will help facilitate economic development further, which will support Latvia’s growth.
Third, Latvia’s economy might be small, but it is extremely open. It does three-fourths of its external trade in euros, so removing the currency conversion costs will reduce the country’s economic burden greatly.
And last, being part of the euro zone will stimulate foreign investment, similar to what happened in Estonia after they joined the euro zone in 2011. Within one year after joining, Estonia’s non-financial sector doubled in size. We can reasonably expect something similar to happen in Latvia.
The euro isn’t the problem
When it comes down to it, there are plenty of reasons for Latvia to join the euro zone and very few drawbacks.
Yes, it is true that there a few problematic euro zone members, but it doesn’t necessarily mean that the euro is the root of the problem. After all, the shared currency has been relatively stable.
Also, keep in mind that the lat has been pegged to the euro since 2005, so pretty much everything that the euro has gone through, the lat has experienced as well.
But then again, those are just my two cents on the matter. How do you feel about Latvia joining the euro zone? Do you think it’s the right decision?