Re-pegging too soon could shock economy

  • 2000-10-19
  • Jorgen Johansson
RIGA - Latvia has about 30,000 European Union documents to translate and harmonize with its legislation before it even can be considered for membership. Still, the Bank of Latvia president, Einars Repse, is already making plans for the European Monetary Union.

At a press conference Oct. 10, Repse said introduction of the euro should be regarded positively, despite the recent "no" vote in Denmark on joining the currency, and that Latvia will also introduce the euro after its integration into EU is completed.

Repse pointed out that there will be no changes introduced before Latvia joins EU, so the lat will remain pegged to the International Monetary Fund-backed Special Drawing Rights (SDR) currency pool.

SDR is a mixture of U.S. dollars, euros, Japanese yen and British pounds.

Heinz Chladek, director for emerging markets in the Austrian investment company Raiffeisen Investment AG, suggests that Latvia peg its currency to the euro. But he can't see it happening until 2002.

"The euro basket is carried by the power of the European Union," Chladek said. "The euro will maintain a strong role in the coming years."

Chladek also gave a word of warning, saying that a slow reform rate could delay Latvia's EU membership until 2008.

Repse said the lat's peg to the international currency pool is balanced, favorable and has a positive influence on Latvian exports.

"I think it would be good to harmonize with the euro and peg the lat to the euro before joining, but it would have to be matched with our export trading," said Raita Karnite, president of the European Movement Latvia.

Latvia's main exports are timber and oil transport, which bring U.S. dollars in return, making retaining the SDR peg a safer bet.

"If the euro will be the leading currency in a large area, then it will have some significance to peg the lat to it, and it would not be so dangerous," Karnite said. "We cannot say that we are too sure of ourselves when it comes to EMU."

Helmuts Ancans, head of the monetary policy department at the Bank of Latvia, said the country would be in a much better situation if it had only one big trading partner and a shared currency with that partner.

"Now the situation is not so," Ancans said. "Approximately 36 percent of all Latvian export goes to EU. Still, we cannot neglect the importance of the U.S. dollar."

Repse said that Latvia's monetary policy will remain intact after its EU integration, and the key goal of the country's monetary policy will be stable prices.

Karnite agrees with Repse on Latvia's monetary policy, saying re-pegging too soon could be disastrous.

"There are countries who already have an EU membership but don't always fulfill all EMU criteria," Karnite said. "Portugal, for instance, did not have a strong economy when they joined the EMU."

Ancans said there could be a shock to the whole financial system if the lat is re-pegged too soon.

Still, none of the Baltic countries have joined EU, and will not join for a few years. There's still plenty of work to be done and many amendments to be approved by the parliaments.

Estonia, considered the leader among the Baltic countries in the march toward EU, has pegged its currency to the German mark and, therefore, to the euro.

Lithuania, meanwhile, has retained a U.S. dollar peg, which has pinched its exporters.

"All three Baltic countries want to join EU as soon as possible," Karnite said. "I know Estonia has very strong intentions of joining EMU, and I know there are voices for EMU in Lithuania."

However, with very little information leaked to people on the street, Lat-via's dream of joining EU could be crumbled by a referendum. "Society believes there will be an EU referendum, and I think the result would be a positive one," Karnite said. "I don't think there will be two referendums - one on EU and one on EMU."