Godmanis soothes euro nonbelievers

RIGA - There are several reasons why it is important for Latvia to join the euro area, European Parliament member and former Latvian Prime Minister Ivars Godmanis said in an interview with LETA.
Due to historical economic conditions in Latvia, there are regular banking crises happening every five to seven years. If, for objective or subjective reasons, a bank’s customers start to panic, people rush to withdraw their money from the bank. When a country is a member of the eurozone, its commercial banks can use their assets as security to receive the necessary amount of euros from the European Central Bank and, therefore, stop the crisis. This is what happened in Greece, Spain, Portugal, Ireland, Italy and many other countries, proclaims Godmanis.

If Latvia remains outside the eurozone, its banks will not have such an opportunity. In this case, should another ‘Parex crisis’ occur, the country will have to turn to the International Monetary Fund and European Commission again - which again will demand budget and wage cuts. Up to 50 percent of deposits in Latvian banks belong to non-residents, and there are many reasons why they might want to withdraw their money, causing another banking crisis to begin. Latvia’s membership in the eurozone will safeguard the country against such crises, notes Godmanis.

Furthermore, once the euro is adopted in Latvia, currency exchange costs will disappear for companies and residents who deal with other eurozone economies. And the currency risk for investments in Latvia will be eliminated, because even the theoretical possibility of devaluation of the lats will become non-existent.

People in Latvia already pay for many things in the euro currency: automobiles, land, homes and apartments are bought with the euro, and 90 percent of bank loans in Latvia have been issued in the euro currency. Even a large part of deposits is in euros, not lats. The euro is already part of people’s lives in Latvia, but there still are concerns that the lat-euro exchange rate may change as a result of some internal or external shocks. These concerns will be dispelled once Latvia joins the eurozone.

Needy residents will also be better protected, because they will pay for heating and electricity in the same currency in which Latvia pays for imported energy resources.
However, switching from the lats to the euro will also have its downsides, says Godmanis. Judging from Estonia’s experience, prices do increase when the euro is adopted. Usually such a price increase is temporary and prices increase just a little, by about 0.2 percent. Nevertheless, in Slovakia and Slovenia, prices did not increase immediately after the euro was adopted, but did so some time later.

After Latvia joins the eurozone, the Bank of Latvia will not even have a theoretical opportunity to pursue an independent monetary policy. However, the lats has been pegged to the euro for seven years already; therefore, the Bank of Latvia’s policies cannot be considered fully independent today.