Welcome to the Euro Zone

Risky Accession

This week, Latvia officially requested to be admitted into the Euro Zone. According to its own accounts, the country is meeting the Maastricht criteria and seeks to introduce the Euro by January 1, 2014. The EU Commission has given the go-ahead. Major apprehensions persist, but critics are also pointing to the fact that Latvia is a "popular offshore banking center" for clients from GUS countries.[1] At the beginning of this year, more than half (51 percent) of the deposits in Latvian banks belonged to foreign customers, a percentage that is significantly higher than in Cyprus before the banks collapsed (37 percent). In addition, billions have been transferred from Cyprus to Latvia over the past few months. According to the Moody's rating agency, a high percentage of foreign deposits can lead to dangerous instability. This does, however, not obstruct Latvia's access to the Euro zone, according the EU Commission. As was declared by the EU's Monetary Affairs Commissioner, Olli Rehn, Latvia's request to join the Euro zone is a "sign of trust," given the fact that the Euro crisis has been smoldering for years.[2]

Only a Third in Favor

Objections against the Euro's introduction are not only being raised in the financial establishment, but also among the Latvian population. According to reports, only one third of the population is in favor of the Euro, one third is against and another third is still "undecided or rather negative."[3] This is attributed not only to the general situation in the crisis ridden Euro zone, but also to the austerity programs carried out by the government in preparation for joining the Euro zone. Whereas German business circles gladly point out that the Latvian economy has grown by over five percent in 2011 and 2012, respectively, critics note that this was accompanied by drastic cuts in the living standards of large segments of the population: Pensions were cut by ten percent and salaries in the public service sector by 20 percent - from an already low starting point. According to Eurostat, Latvia shared second place with Rumania in the 2011 lineup of EU countries having the highest percentage of residents "at risk of poverty and social exclusion." (Both had 40 percent.) Youth unemployment reached 28.4 percent in 2012.

Large Approval

Introduction of the Euro has been met with large approval by the approximately 400 German companies, which are profiting from their engagement in Latvia. For the period following the introduction, they expect "a reduction in their administrative efforts and an increase in price transparency," the managing directress of the German-Baltic Chamber of Commerce (AHK Baltikum) told the German press.[4] This hope is well founded: Following the Euro's introduction in Estonia in 2011, about 90 percent of the Chamber's members drew a positive résumé. The external impact of Latvia's integration into the Euro zone should not be neglected: "Being part of the Euro zone, Latvia's international image as a trustworthy partner and promising site for investments will be enhanced." For this very reason, German businesses are also promoting Lithuania's early entry into the Euro zone - the third of the Baltic countries. However, the German companies' demands are also in contradiction to the population's wishes: The majority of the Lithuanian population rejects the introduction of the Euro.

Stimulus Means Saving

Nevertheless, Lithuania's government is seeking entry into the Euro zone as soon as possible, probably in early 2015. This has been confirmed by Prime Minister Algirdas Butkevicius in an interview with a German daily. Asked whether an austerity policy or the promotion of economic development should have priority - a controversial question in the Euro zone with Germany being all but isolated with its austerity dictates - Butkevicius answered: "In my opinion economic stimulus begins with savings, there is no alternative." He does "not agree with those, who say there has been enough of saving; now it's time to spend money again." Asked directly about harsh criticism of Berlin's policy, the Lithuanian Prime Minster responded: "I fully agree with Chancellor Merkel's policy." Priority must be given to "enhancing competitiveness, then to a flexible labor market," also to a "fiscal policy," which will "create an attractive investment climate."[5]

Contribution to European Integration

Critics note that because Lithuania - like Latvia - is one of the poorest countries in Europe, its population is particularly hit by austerity programs. According to Eurostat, Lithuania ranks fourth (with 33 percent) in the list of EU members with the largest number of residents "at risk of poverty and social exclusion." Youth unemployment was at 26.4 percent in 2012. The austerity measures, carried out in Lithuania, have therefore greatly impinged on the majority of the population. In early May, Lithuanian President Dalia Grybauskaite received the "Charlemagne Award" in Aachen, because with the implementation of the rigid austerity programs and with her efforts to be admitted to the Euro zone, she had greatly contributed "to European integration." She is characterized by three attributes, "energy, effectiveness and reliability," declared European Parliament President Martin Schulz (SPD) in his eulogy: Grybauskaite acts according to the motto "One woman, one word."[6]

In the Risk Zone

Latvia and Lithuania are seeking the introduction of the Euro at a time, when crisis is threatening the Euro in its very existence. Their admission into the currency risk zone would shift the balance of power in Germany's favor - and, therefore, protect Berlin's austerity dictate against opposition from the southern Euro countries. Poland's admission to the Euro zone, being demanded by Berlin, but still rejected by Warsaw - for obvious reasons -would have the same effect. The Baltic countries' admission would also consolidate a neo-liberal block within the Euro zone, which could persist as a "northern Euro zone" in the event of a disintegration of the currency zone. This would be beneficial of the German economy, which would be able to safeguard at least one part of the Euro zone, as a zone favoring its profit. Latvia's and Lithuania's introduction of the Euro has, from the German perspective, a long term perspective.

[1] Ein zweites Zypern; www.taz.de 05.06.2013
[2] Lettland soll in Eurozone eintreten; nachrichten.rp-online.de 06.06.2013
[3], [4] Deutsche Firmen in Lettland freuen sich auf den Euro; Frankfurter Allgemeine Zeitung 06.06.2013
[5] "Wirtschaftsförderung heißt zuallererst Sparen"; Frankfurter Allgemeine Zeitung 06.06.2013
[6] Litauens Präsidentin erhält Karlspreis; www.n-tv.de 09.05.2013