Adding Latvia will make the Eurozone bigger, but doesn’t solve the problems in Europe
A few days ago, European Commissioner Olli Rehn announced the entry of Latvia into the Eurozone, as of 1 January 2014. In response to criticism about potential financial risks for the current countries in the Eurozone, Rehn stated that the Latvian banking sector is much smaller than the one in Cyprus and that the economic criteria are all in line with the demands of the European Commission. It is however not the size that matters, but the quality that causes problems. The banking sector in Latvia is still greater than its GDP and about 50 percent of the deposits come from abroad, mainly Russia. Furthermore, all the countries that are now in trouble were financially sound when they got on board.
It is also good to remember that Latvia was actually the country that was hardest hit by the financial crisis, whereby it lost 25 percent of its GDP between 2008 and 2010. Today, the economy is still smaller than it was before the crisis hit. Unemployment is high at 12 percent and overall living conditions have hardly improved. The country has liberalized and the markets love Latvian economic policies. Unfortunately, many Latvians do not. In the past few years more than 10 percent of the population has left the country to find a better life elsewhere, which means that Latvia also suffered a demographic crisis on top of the economic crisis.
Nonetheless, the European Commission decided to accept Latvia into the Eurozone because it fulfills the criteria set by the European Union. Rehn stated that Latvia “achieved a high degree of sustainable economic convergence with the euro area.” The question is whether this convergence is a good thing or if it just means that Latvia is in as bad a shape as the rest of the Eurozone area. Most of the Eurozone countries are again in a recession and have not truly recovered from the crisis that started in 2008. Adding another country will make the Eurozone bigger, but also more unstable and doesn’t solve the structural problems in Europe, which is that the economies are too different to be part of one stable currency.
The European Union is like a company that tries to take over smaller companies in order to grow, but does so to hide its own deficiencies. Solving problems by ignoring them and to add potential risks is not the best strategy if you are looking for a durable and prosperous Union. In the end the main question is not if Latvia has its books in order, but whether ‘Europe’ has its economic and political system in order.