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28th Aug 2016

Interview

Latvia on track to join euro in 2014, PM says

  • Dombrovskis (l) is a strong believer in fiscal discipline and austerity measures (Photo: consilium.europa.eu)

The first EU country to get a bailout and to implement harsh austerity measures, Latvia is now the bloc's fastest-growing economy and is poised to join the eurozone in 2014 - proof that spending cuts work, its Prime Minister, Valdis Dombrovskis, told this website.

"We still plan to join the eurozone on 1 January 2014. According to the Bank of Latvia already since September we meet almost all criteria," Dombrovskis said in an interview last Thursday (19 October) during the European People's Party congress in Bucharest.

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Despite popular opposition to the move, Latvia is obliged to join the euro when it meets all criteria, as are all EU countries except Britain and Denmark.

Its deficit and debt levels are in line with EU demands, with only inflation above the threshold, at 2.9 percent.

Dombrovskis believes adopting the euro will help the country attract foreign investors, ease transaction taxes on businesses and create price transparency, as in neighbouring Estonia, which joined the common currency in 2011.

He said the euro crisis is not a currency crisis per se: "The exchange rate to the dollar is stable, the euro share in global reserves is also stable at 25 percent."

"There are euro countries where markets are paying them to park money - Germany, Netherlands, Finland. It is not a euro problem, it is economic mismanagement in certain euro countries and that is an entirely different problem."

The 41-year old politician has no sympathy for southern demands to ease austerity.

He said it is "somewhat misleading" to believe that growth can come without the kind of painful structural reforms that Latvia had to endure: "We were badly hit by the crisis, implemented harsh austerity and now we are the fastest growing economy among the 27 members of the EU - last year by 5.5 percent, this year by 5.9."

"When a country loses control over its budget and the trust of financial markets, there is no other way. You first see what you need to do to restore financial stability, because it is a precondition for economic growth," he added.

Dombrovskis said the growth rates in his country are not based on credit or consumption, but mainly driven by an increase in exports.

"The structure of our economy is different now and we are working on it to make it more sustainable than before the crisis," he said.

According to European Commission data, fast growth rates are helping the country to catch up, but its GDP is still below pre-crisis times.

Meanwhile, unemployment is above 15 percent, lower than during the crisis (20%) but still much higher than in 2008 (6%). But these indicators are not euro-membership criteria.

Fiscal hawk

Were the tiny nation to join the eurozone as planned, it would boost the ranks of the Nordic group of fiscal hawks over the 'friends of solidarity' - mostly eastern and southern member states.

"What we need I think is smart solidarity, not throwing money unconditionally at bad balance sheets of banks or governments," Dombrovskis said.

He was also ambivalent on the demand made by euro "outs" to have equal rights when it comes to banking supervision by the European Central Bank (ECB).

"If you submit part of your sovereignty in a sense to the ECB, then of course you should be able to participate for decisions in that part," he said, while adding that by the time the new supervisory body comes into force, Latvia may already be a euro member with full voting rights in the ECB board.

Dombrovskis' name has been floated as a possible option for the centre-right European People's Party to put forward in 2014 for the post of EU commission chief.

His Polish counterpart Donald Tusk is also a possibility, as well as Luxembourg's commissioner Viviane Reding.

But the Latvian politician, up for re-election in 2014, said it is "premature" to talk about the nominations.

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