Krugman Wrong to Argue Euro Is a Trap, Baltic Ministers Say

The benefits of joining the euro outweigh any costs for rescuing members in crisis, finance ministers of the three Baltic nations said, rejecting economist Paul Krugman’s view that Europe’s common currency is a “trap.”

“Being members of the euro zone is not only a necessity for us, it’s a privilege,” Lithuanian Finance Minister Rimantas Sadzius told a news conference in the capital, Vilnius, with his Latvian and Estonian counterparts. “This organism is alive, with good prospects that have only improved as it has dealt with troubles” in countries like Cyprus.

Krugman, a Nobel laureate, criticized Poland’s euro ambitions in a New York Times article this week, saying joining the common currency “is at best a gamble, with a potentially terrible downside.” Latvia, which wants to join the euro region in 2014, and Lithuania, which seeks membership in 2015, only stand to gain, Estonian Finance Minister Juergen Ligi said. Estonia made the switch in 2011.

Austerity plans that Krugman opposed helped the Baltic nations recover from debt crises that the European Union has battled since 2008 to become the 27-nation bloc’s fastest growing region, Latvian Finance Minister Andris Vilks said.

All three should now be in “core Europe, where many decisions are made,” Vilks said, referring to the 17 nations that share the euro and have a voice in EU monetary policy.

Switching Costs

Euro-area authorities, which this week approved a 10 billion-euro ($13 billion) rescue package for Cyprus, are now working on turning the European Central Bank into a supervisor for banks and standardizing procedures for insuring deposits and shutting down banks.

The logistical costs of changing to the euro, payments to the European Stability Mechanism and guarantees of loans for resolving future crises in euro members are an investment in future growth, according to Sadzius. Lithuania’s initial contribution to the ESM would be 800 million euros, he said.

With per-capita income that’s just two-thirds of the European Union average, Lithuania stands to benefit from faster convergence with other EU economies no matter how they’re performing, according to Sadzius.

“Our booms don’t reach the level of their busts,” the Lithuanian minister said. “Getting the euro, if we can qualify, would give our economy a nice push.”

Inflation Hurdle

Lithuania’s main hurdle to adopting the euro at the start of 2015 is slowing inflation to below an EU limit. Latvia meets economic criteria for euro adoption and is awaiting political approval to make the switch next January, according to Vilks.

The exchange rates of the Latvian lats and the Lithuanian litas are both pegged to the euro.

Introducing the euro in more countries will increase those nations’ visibility and trust among investors, and will reduce the complexity of the EU economy, Estonia’s Ligi said.

“There are almost only pros, positive things,” Ligi said. “Negative aspects are almost entirely emotional.”

Poland last month delayed setting a date for euro adoption until after a general election in 2015, when Prime Minister Donald Tusk says all requirements to switch currencies will have been met. Recent opinion polls have shown most Poles are against the change. Poland scrapped plans to adopt the euro in 2012 after Europe’s sovereign debt crisis erupted more than three years ago.

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