Cameron Rouses Latvia Euro Foes Ignored in Currency Push

U.K. Prime Minister David Cameron’s vow to put Britain’s European Union status to a public vote is reinforcing Latvian hostility toward adopting the euro.

“That’s a serious signal for us,” said Andrejs Elksnins, a lawmaker from the opposition Harmony Center party who also cites Czech resistance to the currency. “There are too many unknowns for the government to unilaterally take a decision today about our country’s future. It’s not the right time.”

Latvian lawmakers flew in the face of public opinion yesterday by clearing a path for the Baltic nation to apply for euro-area membership starting Jan. 1, 2014. Two-thirds of the country opposes the move, according to a December poll. Parties such as Harmony may try to sink the plan with a referendum.

After years of debt-fueled turmoil, confidence toward the euro area is returning, with Latvian, Lithuanian and Polish officials all pledging last month to seek membership. Still, as the region struggles to shake off its second recession since 2009 and the bailout costs for countries such as Greece mount, the currency switch is proving a harder sell to the public.

“If the EU collapses, it will be easier to recover” without the euro, Juris Lusis, a farmer, said yesterday at a rally in the capital, Riga, to protest the planned move. Latvia “certainly shouldn’t have to” provide aid for ailing euro-area nations.

Photographer: Scott Eells/Bloomberg

Prime Minister Valdis Dombrovskis told lawmakers yesterday, “Euro adoption is the logical next step in implementing our macroeconomic policy framework.” Close

Prime Minister Valdis Dombrovskis told lawmakers yesterday, “Euro adoption is the... Read More

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Photographer: Scott Eells/Bloomberg

Prime Minister Valdis Dombrovskis told lawmakers yesterday, “Euro adoption is the logical next step in implementing our macroeconomic policy framework.”

Negative Feelings

About 66 percent of Latvians had either a very or somewhat negative attitude toward euro adoption in December, compared with 71 percent in October, pollster TNS said Jan. 7. The survey of 1,024 people gave no margin of error. People fear the currency will stoke inflation and curb incomes, TNS said.

Latvia’s lats has been fixed to the euro since 2005, maintaining the peg even as gross domestic product plunged by about a fifth in the wake of Lehman Brothers Holdings Inc.’s 2008 collapse, which prompted a bailout.

Since then, the economy has resumed growth, expanding about 5 percent last year, the EU’s fastest clip, according to Finance Minister Andris Vilks. The cost to insure its debt against default for five years has plunged to 111 basis points from 1,193 points in 2009 as austerity wrested public finances back within the 27-member bloc’s limits and the government repaid the International Monetary Fund almost three years early.

‘Logical’ Step

With the budget deficit at 1.5 percent of GDP last year and state debt at 42 percent of economic output, Prime Minister Valdis Dombrovskis says now is the right time for the currency switch his Cabinet has championed since re-election in 2011.

“Euro adoption is the logical next step in implementing our macroeconomic policy framework,” he told lawmakers yesterday. “We’re already importing euro-zone monetary policy, while not being in the euro zone and not sitting at the decision-making table, and we pay for converting the lats to euros and back.”

The euro will boost investment in a country where more than 80 percent of loans and more than 40 percent of deposits are denominated in the currency, according to the prime minister. The Cabinet will submit its euro-adoption bid to the European Commission in February or March for a decision this year, he said last week in an interview in Davos, Switzerland.

Rate ‘Formality’

After abandoning a plan to join the euro area in 2008 as inflation accelerated, Latvia is very close to meeting the entry requirements, according to Violeta Klyviene, a senior analyst at Danske Bank A/S. (DANSKE)

The nation’s price growth, debt and budget deficit already meet the membership criteria, leaving only rules on long-term interest rates that are “more a formality than a real obstacle,” she wrote Dec. 17 in a note from Vilnius, Lithuania.

The yield on state debt due 2018 plummeted to a record-low 1.7 percent in December from a high of 12 percent on March 18, 2009. It was 2.065 percent at 2:50 p.m. in Riga, compared with 2.84 percent for five-year Lithuanian debt, data compiled by Bloomberg show.

Other potential euro-region members may also run into public opposition. While Lithuania has vowed to pursue entry in 2015, a Jan. 3-11 poll by Baltijos Tyrimai for the ELTA news service showed 57 percent oppose the move while 32 percent are in favor. No margin of error was given.

‘Reputation Problem’

“The euro currently has a clear reputation problem -- not only in Latvia but also in many European countries,” Carsten Brzeski, a senior economist at ING Group in Brussels, said Jan. 14 by e-mail. “Right now, most people associate the euro with austerity and forced structural reforms and not any longer with increased prosperity due to trade, the single market and the absence of exchange risks.”

It’s up to Latvia’s authorities to to explain the economic logic of the euro switch to skeptical citizens, according to Dombrovskis, whose government has initiated a television and leaflet campaign describing potential advantages such as price transparency with the rest of Europe.

“For the last three years or so, people have heard that the euro zone is in crisis, crisis and crisis,” he said in Davos. “People are asking the question: why join?”

At about 35 percent, Latvian backing for euro adoption is the second-lowest in an EU state a year away from making the switch, according to Lars Jonung, a senior professor at Lund University in Sweden, and Felix Roth, a research fellow at the Centre for European Policy Studies in Brussels, who cite Eurobarometer data. Finland had 33 percent support in 1997, they said by e-mail.

Vote Rejection

While Latvia’s central election commission rejected yesterday an attempt to call a referendum on euro adoption, Iveta Grigule, a lawmaker from the opposition Greens and Farmers, said she’ll try together with Harmony Center, the Leta newswire reported.

With the government opposing efforts to put the currency switch to a public vote, there’s little chance of Latvia’s bid not making it to the European Commission, according to Daunis Auers, a political science lecturer at the University of Latvia.

“A referendum in Latvia is highly unlikely,” he said Jan. 21 by e-mail. “The political and economic elite is united in support of euro accession and this level of single-minded unity, as with austerity or joining the EU in 2004, should lead to Latvia joining the euro in 2014, even if public opinion is less than enthusiastic.”

To contact the reporter on this story: Aaron Eglitis in Riga at aeglitis@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net

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