RIGA - The use of the euro currency removes uncertainty about a country's future monetary policy, strengthens external credit ratings, reduces the cost of public and private financing, and all this helps to boost foreign and domestic investment, contributing to faster economic growth, the European Commission's Executive Vice President Valdis Dombrovskis (New Unity) said at the international conference "Ten Years with the Euro" organized by the European Commission and the Bank of Latvia on Friday.
At the time when Latvia was debating joining the euro, the country was just emerging from the global economic and financial crisis, and there were a lot of skeptics, Dombrovskis said, noting that some of them warned that Latvia was "buying the last ticket to the Titanic".
However, Latvia's commitment to the euro provided a stable policy anchor at a time of great economic distress, as Latvia had entered the crisis as one of the world's most overheated economies with weak fiscal policy and unconstrained bank lending, Dombrovskis explained.
He recalled that preparing for euro adoption helped Latvia to set a major reform agenda, which was much needed at the time.
In his speech, Dombrovskis said that according to Eurostat data, Latvia's gross domestic product (GDP) per capita increased by 10 percentage points between 2013 and 2022, to around 73 percent of the European Union (EU) average. Labor productivity has increased by 12 percentage points to 75 percent of the EU average, the EU commissioner said.
He also underlined that the use of the euro removes uncertainty about the country's future monetary policy, strengthens external credit ratings and reduces the cost of public and private financing. All this in turn helps to boost foreign and domestic investment, leading to faster economic growth and more jobs.
Membership of the euro area also brings a number of benefits that may not be so obvious, Dombrovskis said, adding that it submits a country to specific EU regulation in areas such as banking and fiscal policy.
Tighter fiscal policy coordination in the euro area helps ensure sound fiscal policy and reserve building to deal with future shocks, Dombrovskis said. "The euro area is equipped with a huge firewall - the European Stability Mechanism - which can provide financial support if something goes wrong. This contributes to financial stability and fiscal discipline in the country concerned, benefits the EU as a whole and increases overall competitiveness," he said.
Dombrovskis also stressed that the adoption of the euro was the right and correct decision for the Baltic states, and that the Baltic states had a strong political motivation to integrate more closely into the EU.
The euro is a symbol of European strength, unity and solidarity, Dombrovskis said.
At the same time, however, Dombrovskis also pointed out that peace was currently threatened by Russia's brutal aggression against Ukraine, and it was clear that Latvia did the right thing when it decided to join the EU, the euro area and NATO. Given the Baltic region's location on Russia's border, the shared recent history, the Baltic countries saw the euro as part of a protective barrier that is vital for economic stability.
Euro membership is also important as a way to maintain stability and protect against the risk or speculative attacks, Dombrovskis said. This is especially true for small open economies that are geopolitically more exposed to shocks, such as the Baltic states.
Membership of the euro area has helped the Baltc countries weather a series of shocks and remain strong in an increasingly unstable, hostile and fragmented world, Dombrovskis said, noting that euro membership brings greater credibility, which in turn reduces borrowing costs and brings more stability to the economy.
Among other things, Dombrovskis noted that throughout the Covid-19 pandemic, three-month interest rates in the euro area remained relatively low compared to non-euro area countries such as Hungary and Poland. But the gap widened significantly after February 2022, when Russia launched its military offensive against Ukraine - interest rates in non-euro area countries rose faster than in the euro area.
Dombrovskis explained that interest rates had risen to counter high inflation, which meant that European Central Bank's (ECB) policy had been successful. Inflation is falling across the euro area - including in Latvia, where the shock was particularly strong given the country's high exposure to rising energy prices.
The interaction between monetary and fiscal policy has allowed inflation to fall without causing a major economic slowdown, Dombrovskis said, adding that in this context the euro area economy has shown considerable resilience, in particular thanks to a good policy mix, but this cannot be said so surely for some non-euro area member states where economic risks are higher and long-term interest rates are significantly higher than in the euro area.
Dombrovskis pointed out that when the euro was born after the Cold War, the world was a relatively calm and stable place, whereas today's world is characterized by great power rivalries. Patterns of influence are shifting between regions and continents, and protectionism is on the rise around the world. In these turbulent and changeable times, the EU can achieve much more if its member states act together and remain united to protect each other, and the euro is a key element underpinning Europe's unity and strength.
The euro also acts as a safety net and an anchor of stability, the EU commissioner said. Given that the euro is widely used in global trade and financial markets, euro membership limits the risks of sudden capital flight in the event of a crisis. In such cases, banks operating in the euro area can count on the ECB's support. This means they can continue to lend to people and businesses in need. This was evident during the pandemic.
"In the rapidly changing and fragmented world, a strong euro reduces dependence on the decisions of other countries and allows the EU to better defend its interests and values at the international level," Dombrovskis stressed.
He said that the euro also needs to evolve along with the times and the digital age. While we can be proud of what we have achieved so far, we need to adapt and innovate. As we move towards a digital economy, the digital euro is the logical next step, given the decline in the use of cash for payments in many parts of the world, including Europe.
Dombrovskis said that the digital euro would complement cash, but not replace it. The possible introduction of a digital euro is a task for the ECB, which will have the final decision on whether and when to introduce it.