Economist of the Bank of Latvia, Martins Bitans had this to say in relation to the question: «Of course it can. It is also still possible to ride from Riga to Daugavpils on nothing more than a cart. And the risk of ending up in a ditch is much lower than when driving a car. However, the possibility of arriving to your destination in comfort is a good enough reason for most people to stop using carts.»
«It goes similarly with Euro. It gives us the opportunity to reach Latvia’s goal faster – the increase of welfare. One of the main political goals that lie before us now is the increase of the level of welfare to that of European countries as soon as possible, as well as achieving the return of those residents that left Latvia. Therefore, we must use every possible instrument to reach this goal. Euro is one of them,»- says the economist.
«Of course, improper steering could result in us falling into a ditch a lot faster with Euro. Some Eurozone countries have already done that. We can avoid the ditch by staying on the road without steering from one side to another; respectively, by consequently realizing an appropriate budget policy (saving money during growth years, so that we have reserves to spend during economic downslide years), as well as by limiting an unjustified rapid crediting development and the forming of credit bubbles. We can look at other Eurozone countries and learn what we shouldn’t do. We can also reflect on our own mistakes. I see no reason for us to fear Euro; unless we want to admit that we are incompetent and that we can assess neither our own or someone else’s experience,»- says the expert.
According to him, it is naive to believe that the situation in the Eurozone is becoming worse every day and that Latvia can stay on the side lines with its own currency and watch peacefully how the situation unravels without affecting us. According to estimates of the Bank of Latvia, Latvia (even formally staying out of the Eurozone) should take into account the drop in economic activity in a long-term projection, as well as an increase of unemployment in the country, which could reach even 25% in worst case scenario. With or without Euro, events within the united monetary region will continue to affect Latvia directly and seriously.
«Even if we assume for a moment that the Eurozone cannot continue to exist in its current state in the near future, this includes the reduction of the number of member states, either way this changes nothing. Even now it is clear that Europe’s most prominent economies (Germany, France, Benelux countries) are too closely linked together in trading and other financial relations for them to rely on their national currencies in the future. Even if the economic and monetary situation in Europe changes, it will still be replaced by another system. Given this theoretical scenario, it is in Latvia’s economic interests to be part of the potentially possible monetary system. By joining Eurozone, Latvia will ensure that our country’s economic development will be closely linked to the future of large European national economies,»- Bitans notes.
Also, the latest analysis of the Bank of Latvia states that it is worth joining Eurozone as soon as possible. The adoption of Euro will ensure lower interest rates for all economy participants, which will allow a cheaper refinancing of debts in both the private and State sector. Lower debt servicing expenses mean more available money to be used in the funding of other needs. According to the bank’s estimates, the reduction of just the State budget’s interest rates in the next ten years would give a total saving of nearly 900 million EUR.
Lower interest rates in the private sector will attract new investments, ensure a larger export increase and create additional jobs. All this would create a larger economic volume – from 2014 to 2020, the adoption of Euro would give a nearly eight billion Euro large GDP, which would ensure additional revenue for the budget. This, in turn, is a condition for higher benefits, pensions, salary increase for employees of the State sector, as well as larger State investments.
The adoption of Euro will also give Latvian residents and companies an opportunity to save money on currency conversion expenses. Adding up all Euro transactions that are made in Latvia in a year, the total amount of money that can be saved forms nearly 50 million LVL. In ten years, it will give nearly half a billion LVL. This will mean a loss of this amount for the bank sector, but others will have additional money to use for different expenses, such as – development and ensuring future economic growth.
One of the most persistent myths about Euro adoption is that the conversion of old price tags to new ones with Euro will end up with prices being rounded «up». However, according to Eurostat data, the average inflation increase after Euro adoption in Eurozone, compared to the period before Euro, was within the 0.2% border. This kind of price fluctuations is not something unusual, Latvia goes through such and larger fluctuations every month.
The second reason for concern is that Latvia’s budget more or less planned to be used to save problematic Eurozone countries that are unable to save themselves. «Fortunately, the situation is not as bad as it looks. Firstly, Latvia’s payments to the European Stability mechanism will for a capital of nearly 40 million EUR in the first five years after joining the union. In the next seven years, Latvia’s payments will need to be added, and will reach 324 million EUR. This is a large enough amount, but it is not something Latvia’s budget can handle. Also, this amount if equal to the amount of money Latvian tax payers – individuals and companies – save on currency conversion expenses every year,”- says the economist.