Latvia plans to be ready to introduce the European common currency in 2014. The big question is, should it be done at all? The turmoil caused by the debt crisis in the euro area has given rise to a number of questions and doubts. Yet the answer remains unchanged: yes, of course. Why? In the global crisis, the small EU member states that already use the euro - Slovenia, Slovakia, Cyprus, Malta, and also Estonia – have successfully used the euro as a shield and their economies have shrunk less as a result. Euro introduction does not automatically guarantee growing economy, yet investors, depositors, banks, businesses and the general population tend to have more confidence in a big currency – just as a big ship is more reliable in the sea than a small boat.
Some key points:
1. greater investment creates new businesses and jobs;
2. lower interest rates also promote economic growth;
3. sense of security about deposits creates accruals that the banks can invest in the economy;
4. big currency creates greater security and lesser costs during crisis.
The euro also means much lower interest rates – and for exactly that reason, in the absence of euro, Latvia will overpay about a billion lats for its external debt in the next ten years! In the next few years, the state will have to repay the debt of 2.3 billion lats it accumulated during the crisis years. It will have to be refinanced in 2014 and 2015. It is very important at what interest rate this can be done: 2-2.5% or 5.5-6%. The difference in ten years time is the aforementioned one billion lats or an equivalent to an annual health care or education budget payed out in interest every year. The euro is no alternative for structural reform and in any case – with or without a plan to introduce the euro – educational, health and government systems are to be rebuilt so that there is more return in terms of the invested time, people hours and money. Estonia that introduced the euro in 2010 is a good example: in terms of security, Estonia outpaces us by seven steps if we apply the credit rating yardstick; it has also benefited form substantially larger foreign direct investment and its unemployment is lower but salaries higher than in Latvia, because higher productivity translates into higher earnings.