- What are the benefits of the transition to the euro?
The benefits for the Latvian economy will cover euro implementation costs already in the first year:
- Overall, the country will gain from the changeover, because the euro will promote economic development and there will be more money in the national budget that will help to increase prosperity.
- The main benefit for the population will be increased prosperity. It will be ensured by the opportunities of additional financing from the national budget to be diverted for social needs and economic development; long-term loans will become cheaper. The expenses and inconvenience related to currency exchange will be eliminated.
- The main benefits for entrepreneurs are associated with cheaper and safer long-term lending resources, better investment and export opportunities as well as cheaper cross-border payments and currency conversion costs reduction.
The introduction of the euro will promote Latvia’s economic development:
- Higher credit ratings will mean more attractive borrowing rates in international financial markets, which can significantly reduce the national debt servicing costs ( in 10 years, the savings might reach 900 million euro). This money could then be allocated for other purposes - social, educational, healthcare etc.
- Lower country credit risk will also mean advantages for entrepreneurs: lower funding costs will increase investment opportunities making Latvia more attractive to foreign investors.
- An overall increase in exports and foreign trade will provide better opportunities for entrepreneurs to earn more, increase salaries for their employees and create new jobs.
- As a result of rising of economic activity, gross domestic product will grow more rapidly (between 2014 and 2020, it will increase by for 8 billion euro more than without adopting the euro). In addition to lower interest rates, this is the second reason why the introduction of the euro will produce more income to the budget to be spent for the needs of the society.
- The abolishing of currency conversion costs for euro transactions will decrease the costs for entrepreneurs and the general population` by 700 million euro over the next 10 years.
- The disappearance of currency devaluation is important both for entrepreneurs and the general population, for those, for example, who have taken out loans in euro.
- Latvian financial system's resilience to panic will be significantly strengthened by financial market integration and the possibility for the banks to borrow at the ECB. This means a significantly reduced risk for the state if some credit institution should have problems and should need to be rescued by means of money from the budget.
The main benefits for the population:
- Business activity and rapid economic development will lead to a gradual salary growth and a gradual increase in jobs in the private as well as in the public sector.
- Decrease in government budget expenditures (less interest payments on the national debt), and increase in national budget revenues ( faster GDP growth), will significantly increase the amount of funds which the government may allocate to healthcare, education, pensions, and other social needs, as well as other areas funded from the budget. Lower interest rates, because the euro area provides a unified financial market for all participants - banks, investment funds, insurers, pension funds, etc. This means more opportunities for both borrowers and lenders, including increased competition for banks.
- People will have the opportunity to compare the prices for goods or services in different countries, for example, compare prices for the most important food products. Because of increased competition, the quality of the goods and services will improve and prices will drop.
- The euro changeover will also contribute the development of tourism: both Latvian tourists travelling in many European countries and tourists from euro area entering Latvia will have no need for currency conversion. The easier to compare prices will provide for intense competition in the tourism sector and tourists will have more choices when planning a trip.
- There will no longer be any currency conversion costs when purchasing goods and services in the euro area, for example, when shopping online.
- It is expected that after the euro changeover cross-border payments in euro from Latvia will cost about as much as domestic payments in lats at present.
The main benefits for enterprises:
- A lower national credit risk will also create advantages for entrepreneurs: lower funding costs will increase investment opportunities and Latvia will become more attractive to foreign investors.
- Latvia will have greater stability and international reliability, so for the exporting enterprises in Latvia, the adoption of the euro will mean more confidence of their partners and greater export opportunities.
- The euro changeover will ensure significant financial benefits for enterprises which make cross-border transactions, because of no currency conversion in euro between enterprises.
- Along with decreasing currency risk costs for cross-border payments fill also drop, and it will be easier to predict revenue and cost flows.
Guidance for more information: http://www.makroekonomika.lv/eiro-latvija-finansialie-ieguvumi-un-izmaksas
Infographics: Latvia and the euro area; Euro and the credit rating of the country; Euro and investment; Euro and devaluation fears; Euro and entrepreneurs
Articles: www.bank.lv and www.macroeconomics.lv
- What will be the cost of the euro changeover?
The costs for the Introduction of the euro will be negligible for the economy - less than 1% of gross domestic product. Benefits of the euro changeover will cover these costs in the first year.
Public sector costs: 8.6 million lats.
Costs for the private sector: approximately 115 million lats.
The Ministry of Finance has summarized the costs for the public sector as follows:
- Adaptation of Information systems - 3.5 million lats
- Cash changeover at the Latvian Post Office- 1.5 million lats
- Public information - 1.4 million lats
- Additional safety measures - 0.9 million lats
- Price monitoring and other non-financial sector measures- 0.3 million lats
- Other costs - 1 million lats
Joining the euro area, the Bank of Latvia will ensure transition to the euro as legal tender in both cash and non-cash to continue the smooth functioning of money flows in the country without disruption. The most "visible" as well as the most important in terms of cost are banknotes and coins: the minting and delivery of Latvian euro coins as well as the delivery of banknotes to the Bank of Latvia and further provision of banks with cash will amount to total costs of approx. 12 million lats.
Bank of Latvia estimates indicate that the costs of euro introduction will pay off in the very first year.
- What is the approximate cost of euro-specific signage, production of new coins, destruction of old coins and notes, change in all IT systems, euro price labelling (inc. menus), new POS terminals etc.?
Latvia has ordered a total of 400 million Latvian euro coins of all denominations for the needs of changeover and the first year of circulation (their total nominal value is 98 million euro and weight around 1600 tons). Production and delivery costs are expected to amount to 5.1 million lats.
The process of changeover to the euro means - among other things - that the lats banknotes and coins will be destroyed. Destruction of the lats banknotes does not involve large additional expenses for the central bank of Latvia – it is a gradual process where the bank's current employees utilise banknote processing machinery already at the disposal of the Bank of Latvia.
Expenses related to the destruction of lats coins are constituted by rent which will be paid for the coin-deforming machinery procured from a group of Swiss companies – around 35,000 lats. Ensuing sales of the resulting metal (~1200 tons) are expected to generate revenue of 2.8 million lats – part of this sum will be used to cover some of the production costs of Latvia's euro coins and another part - 1.8 million lats are expected to be paid into the state budget as a result of the regular process of profit redistribution.
- How much does the production of euro banknotes and coins cost?
Joining the euro area, the Bank of Latvia will ensure transition to the euro as legal tender both in cash and non-cash to continue smooth money circulation around the country without any disruptions.
The most "visible" as well as greatest part of the costs is related to the banknotes and coins: Latvian euro coin minting and delivery, as well as delivery of banknotes to The Bank of Latvia must be organized and then banks` have to be provided with cash. The total costs will come to about 12 million lats.