Pride and trepidation in Latvia as it swaps to euros

Latvia became the eurozone's newest member on Jan. 1, its latest step into the European sphere. But it is also the poorest euro-using country, and still dependent on Russia.

Ints Kalnins/Reuters
A cashier inspects an euro banknote at a supermarket in Riga on New Year's Day 2014. Latvia entered the eurozone with the start of the year, in a move that has stirred both pride in the country's place in Europe and concerns about the future of its still poor economy.

Baiba Šmite of Riga's culture department holds the small coin as if it were gold. Look, she says, pointing to the figures on it. The fish; the water lily; that's our countryside. And on our bank notes, folk symbols thousand of years old.

“It was a big moment when we had lats [Latvia's post-Soviet currency] in our hands,” Ms. Šmite says, remembering the time after 1991, when Latvia, along with Estonia and Lithuania, its Baltic neighbors, freed itself from more than 50 years of Soviet occupation.

“The lat was symbolic of our independence, our history – we're proud of our country,” she says. “But with the euro, we're together with the Western world more than with the Eastern world.

As emotionally hard as it was for many Latvians to abandon their currency, entering the eurozone this month marked another symbolic milestone, the latest step in a long, painful journey by this former Soviet republic, still dependent on Russia for energy, to align with the West. And one which many hope will boost the embattled idea of a united Europe.

“Look at Ukraine: some people are willing to go to the barricades for the idea,” says Andris Sprūds, director of the Latvian Institute of International Affairs in Riga. Latvia is the fourth ex-Soviet state to adopt the euro after Slovakia, Slovenia and, three years ago, Estonia. Lithuania aims to join next year.

“Maybe people are going to realize that Europe is not such a bad community after all.”

A long road

Born 15 years ago to more closely bind the continent's economy, the euro has been hit hard in recent years. Greece, Ireland, Portugal, and Cyprus have required bailouts; anti-euro parties have appeared across Europe; and Britain continues to debate exiting the European Union altogether.

But for Latvia, adoption of the euro is critical to the country's future, says Andrejs Pildegovičs, Latvia's Foreign Ministry state secretary. “The currency union as such has a future,” he says. “We are not jumping on a sinking boat, but on a boat of responsible, competitive, forward-looking nations. We have confidence in this project.”

The tiny Baltic nation has sought to anchor itself in the West since the day it regained its independence, and it has not been an easy ride. Although Latvia benefited from a credit boom when it joined the EU in 2004, the ensuing global financial crisis plunged the country into its worst ever recession. Latvia's leading bank collapsed, forcing the country to accept a €7.5 billion ($10 billion) bailout from the European Commission and the International Monetary Fund.

But in the aftermath, Latvia's economy grew at the fastest pace in the EU when the government, adhering to a harsh austerity plan, slashed spending and wages. Now, amidst thorny discussions on the future of struggling economies in Greece, Spain, and elsewhere, EU officials hope that Latvia will be another voice for austerity and fiscal prudence.

"Thanks to these efforts ... Latvia will enter the euro area stronger than ever, sending an encouraging message to other countries undergoing a difficult economic adjustment,” European Commission President Jose Manuel Barroso said.

Public concerns

But even as Latvia's economy grew, so too did poverty and income disparity – unlike countries like Spain, Greece, and France, there are no laws protecting job security and wage levels here. Although people didn't strike in response, tens of thousands of qualified workers emigrated, further sapping the eurozone's poorest member – inside the EU, only Bulgaria, Croatia, and Hungary are poorer.

Now, many Latvians are worried that adopting the euro will mean more of the same. Recent polls show half the population opposes the new currency.

“I'm lucky to have a job, but my friends can't live on their salaries anymore” says Valērija Bērziņa, a teacher in Riga who, like many, fear that the euro will raise  prices.

Latvian officials hope that that will change as Latvia's economic health, and thus its welfare, improves. Experts say that the euro will cut transaction and borrowing costs and, perhaps more importantly, wipe out fears about the stability of investing in Latvia. 

“It is a stamp of quality for foreign investors,” says Andrejs Jākobsons of the Baltic International Centre for Economic Policy Studies in Riga.

More integration, less isolation

Just as important, officials say, is the feeling of added security from being in the EU. Latvia, which was occupied for much of its modern existence, shares 180 miles of its border with Russia and Belarus. “More European integration is less isolation for our region,” Defense Minister Artis Pabriks says. "It means more security."

Concerns about Russia arise not just from Vladimir Putin's efforts to increase the Kremlin's influence in former Soviet territory. Latvia is home to the largest Russian-speaking community of all the Baltic states, and it wields significant clout. Nils Ušakovs, Riga's mayor, is of Russian origin. His pro-Russian party, Harmony Center, won the majority in municipal elections this summer and rallied euroskepticism.

Russians also hold a significant stake in Riga's banks, which are a major crossroads of commerce between the EU, Russia, and Central Asia. Half the money in Latvian banks comes from non-residents, mostly from Russia, Belarus, Uzbekistan, and other ex-Soviet republics. Russians feel it's safer to put their money in Latvian banks than at home, and the staff speaks Russian and understands them, says Mr. Jākobsons, the economist.

Some EU officials fear that the adoption of the euro could make Latvian banks even more attractive to Russian money – and money laundering – and turn Latvia into another Cyprus.

“Overall, the appeal of money laundering through Latvia will increase,” says Agnia Grigas, author of The Politics of Energy and Memory between the Baltic States and Russia. But Ms. Grigas adds that with the increased pressure and monitoring involved with being a member of being part of the European common-currency club, “the Latvian government will be better equipped and more motivated to combat these risks.”

'Long enough'

Despite the risks, there's a feeling that having the euro is the only viable option for Latvia.

"We wanted to join the European Union, be a member of NATO, and now we have the euro,“ says Gatis Mūrnieks, one of the country's leading entrepreneurs and founder of the advertising firm McCann World Group in Riga. “The times have been hard long enough.”

“Now we stand at the threshold of a new era, we want to show the world how strong we are.”

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