Latvia to become 18th Euro member amid public resentment

Latvia’s euro adoption, dangled as the ultimate reward while the country endured the world’s deepest recession, is being met with resentment.

In the country of 2 million, which will become the 18th member of the euro area tomorrow, opponents of the currency switch outnumber proponents two-to-one as public expectations for accelerating inflation mount, opinion polls show. Residents are also bracing for taking on new responsibilities in the currency union.

“I’m convinced” prices will rise with the euro, said Andris Liepins, 51, a shop owner in Riga, the capital. “It’s a fact” that Latvia will have to help pay for other countries’ debt after adopting the euro. “Why does a country have to pay other countries’ debts?”

Euro adoption will cap a journey of more than two decades for the former Soviet republic, which will become the fourth former communist country in the currency area after Slovakia, Slovenia and neighboring Estonia. The government of Valdis Dombrovskis, which is spearheading the switch, pushed through austerity measures worth 16 percent of gross domestic product as part of a bailout program that shored up finances and kept the currency pegged to the euro. The economy, which shrank by more than a fifth in 2008-2009, is growing at the fastest pace in the European Union this year.

The yield on Latvia’s dollar bonds maturing in 2020 fell 3 basis points or 0.03 percent to 3.672 percent today, according to data compiled by Bloomberg, at 11:35 a.m. Riga time. Standard & Poor’s raised its outlook to positive on Dec. 13 on Latvia’s BBB+ rating, the third-lowest investment grade.

Inflation Concern

Concern that inflation will accelerate is rising even after consumer prices fell 0.4 percent in November from a year earlier, the sixth month this year without an increase. The Finance Ministry estimates prices will rise 2.3 percent next year as the economy expands 4.2 percent.

About 83 percent of people fear the euro will trigger unwarranted price increases, the European Commission said in a report December 3.

The government is focusing on the potential benefits. Adopting the euro will attract more investment and promote export growth, which will allow the economy to grow faster and “raise welfare,” Finance Minister Andris Vilks said in a statement December 27.

Half the country remains unconvinced. Opposition to euro adoption is 50 percent, according to a December 27 report by the polling company SKDS, compared with 58 percent in October. Sixty-seven percent of respondents said last month that they expected prices to rise, the most since at least December 2006, according to a separate poll by SKDS.

‘Elite Project’

The euro “has always been an elite project anyway — some grand vision for a unified Europe at its core,” said Tim Ash, chief economist for emerging markets at Standard Bank (SBGOF) Group Ltd. in London.

For the euro area, Latvia will mean the addition of another country that favors austerity and has won accolades from German politicians including Chancellor Angela Merkel for its commitment to budget cuts.

“Joining the euro marks the completion of Latvia’s journey back to the political and economic heart of our continent, and that is something for all of us to celebrate,” EU Economic and Monetary Affairs Commissioner Olli Rehn said in a statement today. “Your efforts have paid off, and your country’s strong economic recovery offers a clear message of encouragement to other European countries undergoing a difficult economic adjustment.”

Latvians, whether they like the concept or not, will need to get used to their fourth currency in 22 years. The country introduced the Latvian ruble to replace the Soviet one in 1992, then resurrected the pre-World War II lats a year later.

“I personally won’t like giving up the familiar lats and start using the euro, but it’s an entirely irrational sentiment,” Alf Vanags, director of the Baltic International Centre for Economic Policy Studies, said by phone. “On balance, euro adoption is good for Latvia,” since it provides a mutual insurance policy that countries can draw on when they get into trouble.

Bloomberg