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Originally published Wednesday, January 1, 2014 at 6:00 PM

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The euro adds Latvia, but further growth is uncertain

On Wednesday Latvia became the 18th country to join the euro, a move that roughly half of Latvians opposed, but leaders tout it as a long-term path to continued expansion.


The New York Times

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PARIS — Utinane Dace, a doctor at a private health center, frowned during a stroll this week through Riga, the capital of Latvia, as she contemplated her country’s move to become the newest member of Europe’s currency union.

“I don’t like it — the euro is not my money,” said Dace, arching an eyebrow. “This has been dictated by people from above. But we’re too small to do something about it and protest against it.”

In the halls of power, European leaders are taking a starkly different view. On Wednesday, as Latvia became the 18th country to join the euro, they promoted it as a sign that the currency union — even with wrenching growing pains and recent threats of a breakup — is on a long-term path to achieving its founders’ vision of continued expansion.

“Despite the negative headline of the crisis, the basic promise of peace, prosperity and freedom to travel and work still have their appeal,” said Holger Schmieding, chief economist at Berenberg Bank in London. “So the process of euro enlargement has not come to an end.”

How quickly it will grow is another question. While most of the European Union’s 28 member countries are obliged eventually to ditch their national money for Europe’s single currency, skepticism among European citizens about the euro union is still alive in many corners over a project some see as run by European elites.

Lithuania is on track to be next in adopting the currency, in 2015. Like Latvia, its neighbor and fellow former Soviet republic, it is eager to link itself to the West, an imperative that has grown starker as Russia seeks to keep a grasp on Ukraine despite recent pro-Western protests there.

After 2015, however, eurozone enlargement is set to slow. In Eastern Europe, several countries have not even taken the first step required for euro membership by entering the exchange-rate mechanism, a sort of waiting room. The Czech Republic, Hungary and Poland have all pushed back their target dates for eurozone membership until near the end of the decade in the face of low public support.

Smaller nations, including Romania and Croatia, which joined the European Union last year, have said they are unlikely to adopt the euro until around 2020, partly because their economies cannot quickly meet the criteria. Those include achieving a deficit of 3 percent of gross domestic product and keeping debt to 60 percent of the annual gross domestic product.

Around half of Latvians opposed joining the euro, although support rose toward the end of the year. The reluctance was palpable on New Year’s Eve in Riga, where the fireworks and celebrations that illuminated other countries at the moment of euro membership were starkly absent. The only sign that a new currency was coming was in stores, which had begun to post prices in euros alongside lats, the old money.

Part of the reluctance among euroskeptics, economists say, is the fear of losing a degree of sovereignty and of being liable for supporting other countries should any new crisis break out. Few have forgotten how Estonia, which joined the euro in 2011, was soon called upon to help bail out Cyprus when a banking crisis hit.

The euro’s economic troubles have also damaged the currency bloc’s image and highlighted structural flaws in its foundation that have still not been fully addressed.

In Britain, which has no intention of adopting the euro, Prime Minister David Cameron has distanced his government even more from the European Union recently, and has repeatedly pointed to the crisis and the haphazard response of eurozone leaders as proof that the currency bloc is a flawed and cumbersome project. He promised a national vote on exiting the European Union should he win the next election.

Some resistance may start to melt once the eurozone starts showing tangible signs of recovery after a five-year malaise. Growth is already starting to rebound in some crisis-hit economies. Ireland recently exited an international bailout and Spain now no longer needs eurozone support for its banks.

One of the lessons learned from the crisis is that countries need to get their economic houses in order before joining, to avoid the type of disasters that happened in countries like Greece and Spain, said Jacob Funk Kirkegaard, a research fellow at the Peterson Institute for International Economics in Washington.

Latvia achieved that, largely by adopting a wrenching austerity program that shrank its economy at one point by 20 percent from its peak. Since then, the economy has rebounded, growing 4.5 percent through the third quarter of 2013, while unemployment fell to 11.3 percent — still high, though down from 20 percent in 2010.

Despite negative opinion in the polls, a number of citizens see wider economic benefits of Latvia’s joining the euro club. Unlike Britain, which has a powerful economy, smaller countries can see a lift from euro membership as businesses profit from executing transactions in a single currency. In particular, Latvian businesses expect borrowing costs to fall and investment to go up.

“It’s absolutely positive,” said Normunds Bremers, the director of Wenden, a furniture-production company based in Jaunpiebalga. “It will be easier for the exporting business, and easier for those companies that focus on the market of the European Union.

“People are quite often against the euro, but they don’t understand the reasoning that it can, in fact, benefit them.”



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