1st of January - Eurozone joined Latvia!

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Joining the Euro Area and Benefits for Latvia

Alongside NATO and European Union (EU) integration, euro implementation in Latvia is one more step for our country to permanently become an integral part of the European political and economic system. In joining the euro area Latvia further solidifies its integration in the Euro Atlantic community, as well as cooperation with EU countries and the USA. This means not only economic, but also political and military security for Latvia.

As of 1 January 2014, Latvia will become the 18th country to participate in decision making on joint operation of the euro area together with other Economic and Monetary Union (EMU) member states. Latvia will actively participate in determining the EMU’s future development in the interests of its people and businesses.

At this moment when every Latvian resident is asking the question, how will the euro affect my life in the short term and in the longer perspective?  The government of Latvia is making an effort to ensure that the transition to the euro is understandable, comfortable, simple, and safe.

Minister of Finance Andris Vilks: "The medium and long-term benefits from joining the euro area will become apparent with time. Only then will each one of us reap the benefits, which this step will bring Latvia. Still, calculations indicate that the yield will be good, and that it will be experienced not only in the state budget, but also by every business person and resident.”

Many hearts among the Latvian people are still clinging to the national currency, the lat, yet it is clear that people's daily lives will not change depending on what currency we use. Therefore it is essential to explain why joining the euro area is important and advantageous for the Latvian state, people, and businesses.

Benefits for the country

The transition from the lat to the euro is primarily an economic project, and the invitation for Latvia to join is a confirmation of a healthy and strong economy. The euro is the second most important currency in the world: 40% of global trade transactions are conducted in euro and 25% of the world's foreign currency reserves are stored in this currency. Likewise, Latvian people and businesses have trusted the euro for years – almost half of deposits are in euro, more than 80% of loans are taken in euro, and 60% of external payments for products and services is made using the euro. The transition to the euro will cut the cost of servicing the national debt. Interest cost on servicing the national debt during the next ten years will average 90 million euro per year. This is almost a billion euro over ten years!

Benefits for business

Latvian businesses have to assess the cost-benefit of the transition to the euro, which, according to the Euro Transition Law, have been assigned to all economic entities, with everybody being responsible for the costs and everybody reaping the benefits. Still, many remain sceptical about the project because of the short-term business adjustment costs.  Meanwhile, the government asks Latvian businesses to see the medium and long-term benefits of euro implementation.

Minister of Economic Daniels Pavļuts emphasises: "Stability and predictability are precisely the values that are important to financial markets and investors, therefore it can be predicted that along with euro transition, Latvia's credit ratings will continue to improve as well, and, with increased financial market integration, access to financing from foreign sources will improve for businesses. This means that private sector borrowing costs will be lower and opportunities to attract investment will improve. The experience of our neighbouring country Estonia proves that euro transition is a significant stimulus for increase in foreign direct investment.”

In short: joining the euro area will bring very practical and tangible gains for most businesses, both for those working in export markets, and for domestic market participants.

Payments to other euro area countries will cost less, because there will no longer be any need for currency exchange, which until now has imposed substantial expenditure for businesses. For example, the annual currency conversion costs for the country averaged 71 million euro over the past few years. In 2009, exchange costs reached 220 million euro. This means that businesses will have more money to spend on development or employee compensation. Various benefits will outweigh the contribution to the European Stability Mechanism. The currency and exchange bureaus of Latvian commercial banks earned around 600 million euro from currency exchange services over the past five years.

Latvia's credit ratings will improve based on the economic growth and prudent economic policies resulting from euro area membership. For businesses and people, this means reduced costs in existing loan payments and access to new financing and favourable loan conditions. Experience of other countries shows that as soon as a country joins the euro area, its credit rating and the credit ratings of its leading banks increase by one or two grades. In Estonia, it took only a year for credit ratings around the euro implementation period to increase by as much as three grades.

With its euro changeover, Latvia also gains improved access and reduced costs for capital to increase investment, produce efficiently and export. Euro adoption will boost economic development. The effect of euro implementation on Latvian GDP from 2014 to 2020 is estimated at an additional 8 billion euros.

During times of economic instability, interest rates on loans in lats tended to become volatile. With the euro, these interest rates will not only be lower, but also more predictable, allowing for better planning of business finances and development. With the decrease of currency lender premiums associated with currency risk, business, economic growth, and overall prosperity will be advanced, because with the reduction of sovereign credit risk, Latvian entrepreneurs and private individuals will borrow money at reduced costs.

Based on experiences of Estonia and other countries, the euro should bring more investor and counterpart confidence facilitating investment. After joining the euro area in 2011, foreign direct investment in Estonia doubled from 420 to 857 million euro (excluding the financial sector).

Benefits for society

Every Latvian resident will benefit from the transition to the euro, because business activity and more rapid economic development will promote a gradual increase in wages, as well as new and better jobs in both the private and public sectors.

With the decrease in state budget interest expense and increase in revenue due to GDP growth, the amount of funds that the state can allocate to health care, education, pensions, and other social needs will increase. People will have the opportunity to compare product or service prices in various countries, facilitating competition and increasing consumer value.

After the euro changeover, international payments in euro to and from Latvia will cost as much as domestic lat payments cost currently, which is substantially less. Likewise, currency conversion costs will disappear – this is important for those who, for example, receive money transfers from family members in other European countries or purchase products and services within the euro area, for example, shopping on the internet.

Latvian bank clients took out 86% of their loans in euro. Currently, while earning money in lats, each euro loan repayment is made more expensive because of currency conversion costs. These costs will go away as of January 1.

The euro changeover will also promote tourism - both Latvian tourists travelling around many European countries and tourists coming to Latvia from the euro area will no longer have to convert currency. Likewise, easy to understand and compare prices will promote the volume of sales.

The Ministry of Finance calculations show that in Latvia non-recurring direct costs for euro transition in the private sector will be up to 219 million euro, whereas in the state sector they will amount to 12 million euro. By 2018, Latvia will have to pay 199 million euro into ESM funds. However, calculating costs and benefits expressed solely in financial terms, the country's balance is positive. In addition, the ESM payment is an investment on which the state earns interest.

At the moment, a concrete, practical and very important period is ahead for Latvia - the transition period to the euro. Successful management of the transition depends on everyone involved in this process – the state and municipalities will play their role and businesses and inhabitants will play theirs.

"We must all understand that the euro is not a magic wand that on January 1 will bring about all our economic wishes. However, we can see that among the countries that have adopted the euro there are both those experiencing economic hardship and those developing successfully. This proves that reasons can be found elsewhere – in the ability to plan and manage their money, no matter whether it is the government, a business, or a household. Latvia has met the main prerequisites, so that the impact of the euro on the Latvian economy and public welfare will be positive,” stresses Minister of Finance Andris Vilks.

Currently Latvian residents have an equivocal attitude towards euro implementation. The new currency has staunch supporters, but also confirmed critics. One of the most frequently asked questions is who will pay for the expenses associated with euro implementation. The answer to this is simple – calculations show that the benefits and savings from euro implementation will cover the costs already in the first year. Looking at the euro implementation process as a whole and in the long-term, sceptical inhabitants and business people will soon come to positive conclusions regarding the European common currency.