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23rd Jul 2021

Latvia heralds 'big opportunity' as it joins eurozone

  • Swapping the Lat for the euro is unpopular with Latvians (Photo: PnP!)

Latvia became the 18th country to join the eurozone on Tuesday (1 January).

Joining the currency is "a big opportunity for Latvia's economic development," Prime Minister Valdis Dombrovskis said as he became the first Latvian to withdraw euro banknotes in Riga.

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The move leaves neighbouring country Lithuania as the only one of the three Baltic states not to be part of the single currency, although Vilnius hopes to join in 2015.

After enduring a severe recession in 2008, at the height of the financial crisis, which sliced 24 percent off its national economic output, Latvia abandoned plans to join the euro.

The crash, which was the sharpest contraction in the EU at the time, led the country to request a €7.5 billion bailout from the International Monetary Fund.

In the event, however, Latvia used just €4.5 billion of the rescue package and has since become one of the EU's fastest growing economies.

"Latvia's strong economic recovery offers a clear message of encouragement to other European countries undergoing a difficult economic adjustment," said EU economic affairs commissioner Olli Rehn in a statement Wednesday (1 January).

Rehn added that euro accession "marks the completion of Latvia's journey back to the political and economic heart of our continent."

The country has one of the lowest levels of government budget deficit and debt in the EU at 1.2 percent of GDP and 40.7 percent of GDP, respectively.

The figures leave Latvia as one of only a handful of EU countries to be in conformity with the bloc's Stability and Growth Pact.

Meanwhile, with a banking sector whose size relative to GDP remains under 150 percent compared to an average of over 350 percent across the eurozone, Latvia is considered to be one of the safest members of the currency bloc.

Its banks have become a popular choice for oligarchs from Russia and the Ukraine.

More than €8 billion of the cash in Latvia's bank vaults, around half its total deposits, is held by foreign savers, most of which is believed to come from Russian and Ukrainian businessmen.

In comparison, Baltic neighbours, Estonia and Lithuania, hold just €2.5 billion and €560 million of non-resident deposits, respectively.

Most Latvian's are unhappy about swapping the Lat for the euro.

A recent survey by pollster SKDS found that only two out of 10 Latvians supported euro membership, with 50 percent opposed.

Over 80 percent believe that the euro will lead to higher prices, according to a separate study by the European Commission.

Pro-Western government wins Latvia elections

Latvia’s main Russia-friendly party scored worse than in previous elections and is likely to stay out of government, amid concerns over Russia's war on Ukraine.

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