Finland Times

 

A woman pays for her shopping in a supermarket in Rūjiena, Latvia, near the border with Estonia on January 2, 2014. Latvia joined the Eurozone on January 1, 2014. Photo AFP - Lehtikuva

The adoption of the euro by Latvia will bring positive effect on its economy, yet the Baltic country will also face test, analysts believe.

     

Latvia officially entered the euro zone and became its eighteenth member on Wednesday.

   

After the outbreak of the global financial crisis in 2008, Latvia used an external loan of 7.5 billion euros (10 billion U.S. dollars) to reduce its budget deficit by almost 17 percent by cutting public sector wages and social security funds, leashing massive layoffs and sharply raising indirect taxation.

     

Latvia became one of the fastest growing economies in the European Union (EU). The country's economy increased 4.5 percent year-on-year in the third quarter of 2013, and unemployment rate was 9.1 percent in October 2013.

     

As the eurozone economic recovery is still fragile, Latvia's joining will undoubtedly boost the confidence of the market for the euro and the eurozone economy.

     

The determination of Latvia to join the euro zone is another evidence that it is wrong to predict the collapse of the single currency club, said Olli Rehn, European Commission vice president and commissioner for economic and financial affairs.

     

European Central Bank President Mario Draghi noted that the great efforts Latvia made for the euro membership will enhance the influence of the country in the EU. As the euro is strong and stable, adopting the single currency is an attractive option for other EU members.

     

As Latvia's national currency had been pegged to the euro since 2005, staying out did not help Latvia fend off the debt crisis in the euro zone, analysts believe. Adopting the euro can reduce the costs and risks of the currency exchange, promote trade between Latvia and the euro zone, bring more orders to Latvian enterprises, and enhance the confidence for the country's capital market, they believe.

     

However, analysts consider that after joining the euro zone, Latvia will lose its independence of monetary policy and will be restrained in response to economic turmoils.

     

Whether Latvia can deal with the negative effects of joining the euro zone, such as rising inflation and unemployment, shrinking wages, depends on the country's healthy development, they believe.

     

Caretaker Prime Minister Valdis Dombrovskis admitted that adopting the euro did not mean Latvia has a guarantee of healthy economic growth, and that the country cannot relax its existing fiscal policy.

     

According to the forecast of the Latvian Central Bank, joining the euro zone will raise inflation to two percent in 2014. Finance Minister Andris Vilks said that tax cuts will be introduced in 2014, including personal income tax cuts, to enhance people's living standards and boost employment. The international rating agency Standard and Poor's raised the outlook of Latvia from stable to positive in December 2013.