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The euro – preparing the way

Oct 17, 2012
By Charo Navarro Mateo

The euro – preparing the way

RIGA - The first commitment, when Latvia became one of the countries of the European Union in 2004, was the promise to join the eurozone and adopt the euro.
The fact is that Latvia has been tied to the euro since 2005, and in the same year joined the Exchange Rate Mechanism II (ERM II). The latter was an arrangement for exchange rate pegging and simultaneously a procedure for testing the maturity of the possible euro-adopting accession countries.

For seven years now, the lat has been operating at a rate of 0.702804 to the euro. In short, 1 euro is worth 70 santims. The Bank of Latvia has considered it appropriate to change over to the euro at this rate. Nevertheless, “the final decision on the changeover to the euro and the exchange rate at which it takes place in the particular EU member state is taken following the recommendation of the ECB and European Commission,” says Martins Gravitis of the Press Department of Bank of Latvia.  This will be not before July 2013.

The reasons to join the euro have been discussed over several years, but the experts agree that the euro stands for a “brand of quality,” as the euro is “a possibility for more investment and more employment,” according to Andris Vilks, Minister of Finance of Latvia, at the 18th Baltic Financial Forum held in Riga last September. According to Mortens Hansens, Head of the Economics Department at the Stockholm School of Economics in Riga, the end of the devaluation and the power of stabilization are the main reasons why Latvia must join the euro. What seems clear is that the Latvian economy needs to increase investments to make real, the necessary economic break-through, and for the experts the euro brings foreign investment in order for this to happen.

“The Euro is an opportunity after five years of going down, it means a strict discipline to ensure stability and it makes sure of employment and competitiveness for Latvia,” said Vilks.
For Juris Ulmanis, Professor at Riga Business School and an avid supporter of the introduction of the euro in Latvia, the main reasons within the business sector is the fact that within the euro area, there is no need for Latvian businesses to work in different currencies. Companies can export and import in the global economy while paying, and being paid, using the euro. “It reduces the risk of losses caused by global currency fluctuations [and also] the risk and transaction costs which will help Latvia’s current account balance,” says Ulmanis.  

For the Investment and Development Agency of Latvia (LIAA), the public organization which promotes business development and the competitiveness of Latvian entrepreneurs, the euro is also good for companies, precisely because joining the euro and having the euro currency immediately shows that Latvian companies are stable and have an opportunity to conduct business more easily abroad. “Joining the eurozone means stability, a similar work ethic as the rest of Europe, easy for doing business, and the commercial trade,” said Richard Kalnins, Senior Project Manager at LIAA.

Another positive aspect of the euro is price transparency and simplification, which means that Latvian companies will be better able to tell if a price in one country is better that the price in another, and also, the various types of payments are simplified by using the euro. “With price equalization across borders, businesses have to be more competitive. Pricing still varies, but businesses can more easily spot a good deal,” says Ulmanis.

For banking system interests, it seems that the euro is also a goal that brings benefits for the financial sector, mainly because the current European Commission proposal to create a common banking supervision mechanism gives stability in a more closely integrated union. This more effective supervision would help to identify possible risks and make the Latvian banking system more protected against any potential crisis situations. In this sense, if any Latvian bank needed an economic bail-out, this would be financed from funds generated by banks themselves and not from the tax-payer.

According to Gravitis, if Latvia had managed to introduce the euro in 2008 as previously envisaged, the government would not have needed to take over one of the largest commercial banks during the recent crisis, because short-term support by the ECB would have averted this problem. Banks’ customers also would benefit from the euro, because the brand of stability would attract cheaper resources for operations, which would enable more loans being made available to companies and other clients.

The Euro Project for Latvia, drafted by the Ministry of Finance, states that at the beginning the banking sector would lose income from currency exchange (adjustments in information technology and other systems). The cost for the public and private sector has been 600 million euros in the last five years, but the bank system is “expected to be outweighed through gains of more economic activity due to financial stability and trust,” says Gravitis.
What the euro gives to the financial system is a large boost and integration of the Latvian financial markets. “Capital can flow more easily because exchange rate risks have disappeared and because financial market rules are being progressively harmonized, allowing Latvian investors to move capital to those parts of the euro area where it can be used most effectively,” says Ulmanis.
What seems crucial for the experts is the fact that the euro provides a model of sustainable growth in the long term for Latvia.

Maastricht Criteria
But to be accepted to the Economic and Monetary Union in 2014, Latvia needs to fulfill the so called Maastricht criteria. Basically, this means that Latvia must meet the determined objectives of inflation and public deficit as defined in the Maastricht Treaty.
According to the Ministry of Finance, Latvia is ready for the euro in this regard. “The Maastricht Criterion is expected to be fully accomplished by March 2013,” says Dace Kalsone, Euro Project Manager at the Ministry of Finance. The Bank of Latvia expects to meet the Maastricht Criteria even by October of this year.
A huge discipline in fiscal and monetary stability, as requested by the European Union, is the main reason which makes Latvia stronger in order to face the current eurozone crisis.

Plan for the euro changeover
Are Latvian people ready for  the euro? It seems that there are many things planned in order for every citizen to be well informed about what the euro will mean for them.
“We have already planned the drafts for the communication campaign, aimed at entrepreneurs, inhabitants, municipalities, children and youth, and teachers, as we also have designed the content for the information seminars,” says Kalsone.

Next year, the communication campaign has been divided into three stages: for the beginning of 2013, seminars are planned for social associations (teachers, social workers, etc); then in the middle of the year there will be seminars for professionals, and the overall communication addressed to the Latvian people, including all the practical information, will take place during the second half of 2013.

“During the year, there will be public information, in all the institutions’ offices, with practical guidelines and seminars across the Latvian regions in the countryside,” says Kalsone.
What is definitely planned is that people will have time to get used to the euro properly. Dual price displays from three months before and six months after the euro is introduced, and also a parallel circulation period of lats and euro for two weeks after January 1, 2014. It will also be possible to exchange euros and lats free of charge for an unlimited time in the Bank of Latvia. According to the Euro Project all non-cash savings in lats will be automatically converted to euros on January 1, 2014.

Does the introduction of the euro only bring benefits? Are there any kinds of risks? The latest official polls conducted by the Center for Sociological Studies (SKDS) states that 59 percent of people surveyed are against the introduction of the euro.

In the next issue some of these questions will be examined, including, what kind of negative effects can affect consumers? Is the euro completely beneficial for entrepreneurs? Why are a significant number of Latvians still against the euro?

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