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The Forum for Research on Eastern Europe and Emerging Economies (FREE) is a network of academic experts on economic

issues in Eastern Europe and the former Soviet Union at BEROC (Minsk), BICEPS (Riga), CEFIR (Moscow), CenEA

(Szczecin), KEI (Kiev) and SITE (Stockholm). The weekly FREE Policy Brief Series provides research-based analyses of

economic policy issues relevant to Eastern Europe and emerging markets.

FREE Policy Brief Series

And Then There Were Eighteen…

Will Latvia Join the Euro Zone in 2014?

Daunis Auers, University of Latvia

February, 2013

Latvia’s government is zealously preparing for accession to the Euro Zone. Prime Minister Valdis

Dombrovskis is expected to request the European Central Bank (ECB) and European Commission

(EC) prepare their respective convergence reports on Latvia’s readiness to enter Economic and

Monetary Union (EMU) within the next two months. The expectation is that Latvia will join on 1

January 2014. Indeed, the three-party coalition government has long been readying for the technical

changeover to the euro. The Cabinet of Ministers adopted a detailed national euro changeover plan in

September 2012 and appointed a high-level steering committee to manage the process. The

government has launched a controversial multi-million euro advertising blitz aimed at winning over

Latvia’s skeptical public. Parliament passed the law on euro adoption in a 52-40 vote on 31 January

2013.

What could possibly go wrong? Although unlikely, a referendum or the collapse of the Dombrovskis

coalition government could yet derail Latvia’s euro ambitions.

Latvia and Europe

All Latvian governments have steered a steady

pro-Western course in the two decades since

the fall of the Soviet Union.1 International

recognition was followed by membership of

the Council of Europe, World Bank and the

other minor and major international

organizations that make up the international

community. However, the big attractions were

the Western clubs – NATO and the European

Union. Membership of both was achieved in

the two ‘big bang’ enlargements of 2004. In all

the giddy excitement of finally joining the

Western world and seemingly slipping away

from Russia’s bear-hug, Latvia initially aimed

to quickly join the Euro Zone, setting a target

of 1 January 2008.

See the Latvia euro changeover site. Available at:

http://www.eiro.lv

However, the government proved half-hearted

in its efforts, preferring to enjoy the low-

hanging fruit of a cheap credit-driven booming

economy rather than balance the budget. Both

government and public entered a period of

rabid consumption and spending that

resembled nothing so much as sailors in a pub

after a year at sea. Unsurprisingly, Latvia

rapidly slipped far away from meeting the

Maastricht criteria on inflation. Accession to

the Euro Zone was quietly dropped from the

political discourse.

However, euro adoption returned as a frontline

government initiative after the dramatic

economic collapse of 2008, and the advent to

power of Valdis Dombrovskis, the Baltic

Angela Merkel. Dombrovskis will soon have

been in power for four years, a lifetime in

Latvian politics where, prior to Dombrovskis,

the average prime minister served for less than

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a year.2

He has overseen harsh austerity

measures of tax hikes and spending cuts, but

remains surprisingly popular (not least because

his party was in opposition during the post-

2004 economic bubble years). He has twice

been re-elected to office, proving once again

that Latvians favour monochrome technocrats

over colourful populists.

Despite a return to growth (in 2012 Latvia

recorded the highest GDP growth in the EU),

the government has maintained tight control

over spending. Indeed, it has even perhaps

been over-zealous, with both the IMF and EU

recently chipping in with criticism of the

social spending cuts that Latvia has made to its

2013 budget.3 Nevertheless, Latvia is now

applauded as a model of austerity and

frequently used as a positive contrast to

Greece.4

Moreover, Latvia is now on the cusp of

meeting the Maastricht criteria for accession to

the Euro Zone. A January 2013 IMF staff

report argued that Latvia meets the public debt

and budget deficit criteria, although inflation

and interest rates may be a hurdle depending

on the EU member states used for the

reference value calculation (will Greece be

treated as an outlier?).5 The informal political

signals from both the EC and ECB are clearly

positive. However, euro accession could still

be derailed by either a referendum or a change

of government.

2

Pettai, Auers and Ramonaite (2011), ‘Political

Development’ In Marju Lauristin (ed.), Estonian Human

Development Report 2010/2011: Baltic Way(s) of Human

Development: Twenty Years On. Tallinn: Eesti Koostoo

Kogu. 144-163.

3 Aaron Eglitis (2013), ‘EU joins IMF in criticizing

Latvian cuts to tax, social spending’. Bloomberg news.

4 Anders Aslund, an ardent cheerleader of Latvia’s

austerity programme, puts the country’s success down to

‘front loading’ reforms, particularly fiscal adjustment .

See Anders Aslund (2013) ‘Why austerity works and

stimulus doesn’t’.

5 IMF Staff Report No. 13/28 (January 2013). Also see

Swedbank Analysis (1 August 2012). ‘Fulfilling the

Maastricht Criteria – mission possible for Latvia and

Lithuania?’

Let the People Decide?

The biggest potential hurdle remains the threat

of a public referendum. The EC and ECB will

not contemplate Latvia’s accession to the euro

zone with the Damocles Sword of a

referendum hanging over the process.

Moreover, public support for the euro remains

low, with just 8% of the public wanting the

euro introduced quickly and 41% being

absolutely opposed to the currency.6 A vote

would be a real throw of the dice.

A citizen’s initiative aiming to delay euro

adoption, by demanding a vote on the timing

of accession, was submitted to Latvia’s

electoral authority (by the awkwardly named

Latvia’s Social Democratic Movement for an

Independent Latvia, a fringe party that has

never been elected to parliament) in late 2012.

The Central Election Commission must make

a final decision on whether to allow the

initiative to go ahead by February 3. However,

the legal opinions provided by scholars, the

Latvian ombudsman’s office and the Latvian

parliament’s legal advisors indicate that the

initiative is likely to be rejected because:

• Latvians effectively voted to join the

euro when voting on accession in

2003;

• The Council of Ministers is the only

institution authorized to choose the

date of accession to the euro zone,

thus any initiative specifying a date (or

conditions that need to be met) is not

legal;

• The text of the initiative conflicts with

the constitution.7

While the ruling could be challenged in

Latvia’s Constitutional Court or a reworded

initiative submitted to the Central Election

Commission, the weight of the legal opinions

6 Although another 42% had a positive attitude towards

the euro, but did not want to see it hurriedly introduced.

See DNB Banka (November 2012), ‘Latvijas Barometrs:

Eiro ieviešana Latvijā’.

7 The legal opinions can be found on the Central Election

Commission’s homepage.

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already delivered indicates that these efforts

would be unlikely to succeed. At worst, the

uncertainty could delay euro adoption past

January 1, 2014 (and the Latvian legal system

can certainly be ponderous at times). The same

is true of any parliamentary attempt to initiate

a referendum by having a one-third minority

of deputies force the president to sit on the

euro adoption law while citizens sign an

initiative.8 Indeed, legal opinions cited by the

President state that because euro introduction

is a treaty obligation, a majority of

parliamentarians (51 of 100) would need to

sign any initiative attempting to call a

referendum. The opposition will not be able to

rustle up a majority of parliamentary deputies

(although the legal haggling could delay the

date of euro adoption).

Coalition Collapse?

The other risk is a collapse of the government

coalition. While the Reform Party and the

prime minister’s Unity Alliance are firm

supporters of euro adoption, the third coalition

member – the radical right populist National

Alliance is more torn. Its rank and file

membership is largely against the euro,

primarily for nationalist reasons (they see the

Latvian Lat as a symbol of sovereignty and

national identity). One NA parliamentarian

even broke coalition ranks and voted against

euro adoption. A motley conglomeration of far

right radical groups and nationalist

intellectuals has begun speaking out against

the ‘commercialization’ and ‘westernization’

of Latvia, and sees the euro adoption battle as

the opportunity to draw a final line in the sand.

They are likely to put the National Alliance’s

ministers and parliamentary deputies under

severe pressure.

Indeed, the National Alliance already played

the ‘euro card’ in November 2012,

successfully extracting budgetary concessions

for pet projects from Prime Minister

Dombrovskis. They may well play it again, as

8 See Article 1, paragraph 3 in the law on referendums

and initiatives.

they seek a greater number of ministerial

portfolios. However, as Dombrovskis pointed

out, opening up of the coalition agreement

could well lead to the collapse of a

government already creaking at the edges.

Conclusion: After Dombrovskis

There is strong political resolve to lever Latvia

into the Euro Zone. Moreover, the unusual

confidence emanating from both government

officials and the Bank of Latvia indicates that

certain reassurances have been made in

Brussels and Frankfurt. Indeed, Latvia’s

glowing current reputation as the poster child

of austerity gives it a once-in-a-decade

political momentum. Latvia’s entry into the

euro on schedule on January 1, 2014 is more

likely than not.

However, looking to the future, one pertinent

question needs to be addressed. Which Latvia

will we see in the Euro Zone? The grey,

serious, disciplined almost Teutonic Latvia of

Valdis Dombrovskis? Or the reckless drunken

sailor, that has marked much of Latvia’s post-

communist era?

Naturally, Dombrovskis holds the key to this

question. He is expected to leave domestic

politics after the October 2014 parliamentary

election, probably to cash in his international

political capital with a well remunerated

European post (the timing is right for a 2014-

2019 European Commissioner portfolio). At

best, if re-elected, he might be persuaded to

stay on to oversee Latvia’s presidency of the

European Union in 2015. In any case, while

Latvia has been reborn as a paragon of

economic virtue under his watch, these assets

have not been institutionalized. Dombrovskis

will leave behind the same old fractured, frail

and quarrelsome parties, politicians and

oligarchs that he inherited. Recent

international criticism of disequilibrium in

government welfare and tax policies hints that

political backsliding has already begun.

Latvia is at its strongest when its political,

economic and administrative elite units in

pursuit of some concrete target. Independence

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from the Soviet Union, then NATO and EU

accession, followed by harsh austerity

measures and now even Euro Zone accession

were achieved far quicker than many observers

had believed possible. International

conditionality has made up for the absence of

ideology and ideas as moral and political

compasses in Latvian politics. However, when

left to their own devices, Latvian politicians

have tended to run amok. After Latvia enters

the Euro Zone it will be left without an all-

encompassing political plan. Quite frankly,

that is rather worrying.

▪

References

Aslund, Anders (2013) ‘Why austerity works and

stimulus doesn’t’.

DNB Banka (2012), ‘Latvijas Barometrs: Eiro ieviešana

Latvijā’.

Eglitis, Aaron (2013), ‘EU joins IMF in criticizing

Latvian cuts to tax, social spending’. Bloomberg news.

IMF Staff Report No. 13/28 (2013). Available at:

http://www.imf.org/external/np/sec/pn/2013/pn1311.htm

Pettai, Auers and Ramonaite (2011), ‘Political

Development’ In Marju Lauristin (ed.), Estonian Human

Development Report 2010/2011: Baltic Way(s) of

Human Development: Twenty Years On. Tallinn: Eesti

Koostoo Kogu. 144-163.

Swedbank (2012). ‘Fulfilling the Maastricht Criteria –

mission possible for Latvia and Lithuania?’.

Daunis Auers

University of Latvia

Auers@lu.lv

Personal Homepage

Daunis Auers (PhD London) is Associate

Professor of Comparative Politics at the

University of Latvia and a Visiting Lecturer on

the EMBA programme at the Stockholm

School of Economics in Riga.