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Valdis Dombrovskis on Latvia's fearless path to euro

Valdis Dombrovskis on Latvia's fearless path to euro
By Euronews
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With Latvia set to join the euro single currency soon, euronews went to talk to the Baltic country’s Prime Minister Valdis Dombrovskis, in Riga. He has been leading the euro application process.

Seventeen countries are in the euro group today, including Latvia’s regional neighbour Estonia, since 2011.

Latvia’s target date to abandon its national currency, the lats (plural lati), is next January, in 2014. A final decision by the EU on Riga’s eurozone membership request is expected this summer.

Hans von der Brelie, euronews: “Prime Minister, the European Single Currency is in a deep crisis. So why does Latvia want to join the euro right now?”

Latvian Prime Minister Valdis Dombrovskis: “We set this target of 1st January 2014 several years ago. Since we fulfil all the Maastricht criteria we are now moving forward. I would not say that this [current crisis] is a euro-crisis; it is not a crisis of the euro as a currency. If you look at the euro as a currency, it is stable, like the US dollar or the Japanese yen or other global currencies. The share [of the euro] as a global reserve currency is also stable: some one quarter of global reserves is held in euros. [In reality, this crisis] is a financial and economical crisis in certain eurozone countries.”

euronews: “Between 2008 and 2010 Latvia lost one fifth of its economic wealth. There could have been the possibility of devaluation in order to reboost [your] economy but you chose austerity. Isn’t this a price too high to pay for most people?”

Dombrovskis: “First of all, we do not see devaluation as much of an answer to our economic problems, because we are a very small and very open economy, which means that if we were to devalue then imported energy prices would increase immediately, imported component prices would increase immediately and any gains in competitiveness we would get [through devaluation] we would lose very quickly through inflation. And if you think about this, devaluation per se does not help with the budget deficit. So we would have to do austerity anyway, because, for example, in 2009 we had a budget deficit of almost 10 percent of GDP and this was after having taken austerity measures. Now our budget deficit is down to 1.4 percent of GDP, which is a reasonable level. But it had to be brought to this reasonable level.”

euronews: “Most people here in Latvia are against the euro. Why you are deciding to introduce the euro against the [will of the] majority of the people?”

Dombrovskis: “First: it will help us to attract foreign investment, because it will reduce some currency exchange rate risks that there might be, and which still has to be somehow calculated in. For the very same reason we think it will help to lower interest rates, both for public debt as for the economy as a whole, and we would reduce currency conversion costs for the economy, because we are spending hundreds of millions of euros just for converting from lats to euros and from euros to lats, because our economy is already quite “euro-ised”. Eighty percent of our loans are in euros. Almost half of deposits are in euros. And our currency, the lats, is pegged to the euro anyway. So, whatever happens to the euro will happen to the lats.”

euronews: “Being a member of the eurozone implies solidarity among the members of this eurozone. Are you ready to pay for crisis countries such as Greece?”

Dombrovskis: “Yes. First of all, we understand that becoming a member of the eurozone means sharing solidarity, means contributing to the European stability mechanism, and we are ready to give our contribution. Even if you could calculate that contribution as an ‘expense’, we consider it more like an ‘insurance mechanism’ which might be helpful for us as well. But even if we calculate it just as an expense, we see that the benefits are much bigger than the potential costs. “

euronews: “Once you are a member of the eurozone, your voice – Latvia’s voice – will be heard among your colleagues of the eurozone. What lessons could be learnt from Latvia?”

Dombrovskis: “Well, there needs to be a balanced approach. In the case of Latvia, there were three main directions how we overcame our crisis: fiscal adjustment, which was needed to stabilise finances; measures to stimulate the economy – we mainly did it through the absorption of EU funds which are available to us – and also cutting the administrative burden. We also set up additional social safety networks to deal with the social consequences of the crisis. I think this is also the direction in which the European debate is going. Yes, we need financial adjustment, we need financial stability. But at the same time we need economic growth, so we have to look at how to stimulate growth. And we need to deal with the social problems, and despite being the country that has applied the most austerity of all the 27 EU members, we are now also the country which has the fastest growing economy in the EU-27.”

euronews: “Having a look around Europe, we see political crises in Bulgaria, in Italy, in other countries – due to austerity. You are opting for austerity. Aren’t you afraid about your political future?”

Dombrovskis: “In fact, in Latvia we are not practising austerity politics any more. The 2013 budget was, in fact, the first budget where we started to increase expenditures to allocate some extra funds for priorities. I have already been through two parliamentary elections in my four years in office, and have managed to stay in spite of the austerity measures we have taken. We also clearly saw some kind of austerity fatigue. You really cannot drag it on for many years.”

euronews: “What is your strongest argument to convince someone who is against the euro? What is your most important, strongest argument?”

Dombrovskis: “Well, the euro will serve as a positive signal about financial and economical stability in Latvia, and it will facilitate economic growth.”

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