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Monday 19.02.2018 | Name days: Zane, Zuzanna
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BL: Euro adoption to abolish the “devaluation phantom”

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Once Latvia joins Eurozone, residents will eventually forget about the “devaluation phantom”, which makes otherwise reasonable citizens believe in rumours, notes Banks of Latvia economist Lyudmila Nola.

“The devaluation rumour may be the reason why we hear concerns that employers could act unfair during the Euro adoption period and merely have current salaries in Lats be the same in Euro. This is actually the expression of hidden devaluation fears, which could eventually disappear after Latvia adopts Euro, prices and salaries be converted following the official rate (0.702804 LVL per EUR),” – explains the bank’s expert.

“Everything is not ambiguous not just with the current workforce trends, because Iceland is also going through migration and negative events in employment. Even though Iceland’s GDP decreased less than that in Latvia during the crisis, it was not due to the devaluation of the currency there. The country’s policy during pre-crisis years, as well as the realization of a number of large investment projects just before the crisis, which allowed the country to hold export growth during the crisis,” – said the economist.

According to her, the difference between Latvia and Iceland is seen in investment dynamics, which largely reflects the future development opportunities of the two countries. During the crisis, investment collapse was enormous in both countries, but Latvia has been far more successful in recovering investments. Latvia has recovered more than 60% of its pre-crisis investment volume, while Iceland’s recovered investment amount is smaller than 35%.

“Words have power in economics – it is said that “a newspaper can kill a bank.” Just recently, people were exchanging Lats for Euro after hearing “true” rumours about the expected devaluation of Lat. According to the Bank of Latvia, during the period from 2007 to 2011, more than half of 600 million EUR large Lat/Euro conversion expenses were related to devaluation fears, not regular economic activity,” – she says.

She adds that there are, of course, those who benefit. Devaluation benefits those who previously made savings in foreign currency. It can make a man rich in an instant.

However, there are many more people that do not benefit from devaluation in any way. Life become s more complicated for people that have credits abroad, and income in a devalued currency. Even though devaluation is performed to support domestic enterprises, it often creates problems in funding attraction for business development.

Devaluation scares off foreign investors as well. Funding flows from the country.

“Nothing will change in the residents’ everyday lives after we join Eurozone, because the currency exchange rate will not be fixed towards a single world currency. Entrepreneurs that work with partners in Eurozone will benefit the most,” – says Nola.

Ref: 102.109.109.5928


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