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06/06/2013

Austerity policies boost Latvia as nation joins single Euro currency

Latvia-cold
A man walks along a country road in eastern Latvia, near the Russian border, in January. (Tanya Talaga/Toronto Star)

Membership has its privileges.

After years of harsh austerity policies, Latvia has emerged triumphant and will be accepted as the 18th member of the single Euro currency club.

Olli Rehn, the European Commission's top economic chief, announced Wednesday in Brussels that the Baltic nation of nearly 2 million should join the euro on Jan. 1, 2014.

Latvia’s economy fell to pieces in 2008 after the global markets collapsed and one of the country’s main banks, Parex, failed. The government rescued the bank and nearly went broke as a result. Latvia turned to the International Monetary Fund for a €7-billion loan - they were among the first EU nations to request a bailout.

With an empty treasury, Latvia's only way out was to cut government programs, departments and paycheques, economics minister Daniels Pavluts told the Star in January.  One-third of the civil service was fired. Those who remained — bureaucrats, teachers, even the soldiers — took 30-per-cent pay cuts.

The lean times were tremendously hard on the people of Latvia, forcing some to soup kitchens and many youth left the nation to seek work elsewhere.

However, of all the European nations, Latvia has emerged to be one of Europe’s shining economic lights, noted Rehn at a press conference.

“Latvia is now forecast to be the fastest growing economy in the European Union this year,” Rehn said.

Latvia’s willingness to adopt the Euro is a sign of confidence in the common currency, said Rehn, clearly taking a poke at the euro-skeptics who fear the coming collapse of the euro, especially after the banking crisis in Cyprus last March and massive monetary problems in Greece.

Those who predicted a “disintegration” of the euro were indeed behind the curve and “simply wrong,” Rehn added.

Also on Wednesday the commission released a convergence report on Latvia, making the case that there are “strong conditions” in place for the economy to continue to grow.

In fact, Latvia’s interest and inflation rates sank below the EU average, and the deficit-to-GDP ratio fell from 8.1% in 2010 to 1.2% in 2012, said the BBC. 

But the convergence report warned Latvia must stay the course.

“However, significant challenges remain, and policy discipline – which has increased during and after the crisis but has not always been strong in the past – will need to be maintained in a determined manner to fully exploit the benefits of participation in the euro area and minimize risks to the convergence path going forward.”

READ MORE: In Latvia, a tough-love economy leaves losers behind

Tanya Talaga is the Star's global economics reporter. She was in Latvia in January. Follow her on Twitter @tanyatalaga

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