Despite the current problems facing the Euro, Latvia is planning to adopt the single currency in 2014.

Analyse the reasons why some EU members states like Latvia are still keen to join the Euro zone.

Diana Forson Prescilia Hodebourg Bertug Korucu

Contents

Introduction to the EU
The European Monetary Union The Eurozone

Benefits and Drawbacks of the Euro

Latvias decision to join the Euro

Introduction to the EU
The European Union is an economic and political union of 28 members states. The EU has developed a Single Market through standardised system of laws that apply in all member states. The single currency is a complement to the single market.

EU Members Map

The road of the European Monetary Union

Phase 1
From the Treaty of Rome to the Werner Report, 1957 to 1970 The treaty of Rome has little to say about money. Bretton woods System

Phase 2

From the Werner Report to the European Monetary System, 1970 to 1979 Snake in the tunnel

Phase 3

From the start of EMS to Maastricht, 1979 to 1991 Replacing the Snake in the Tunnel put in place by European Community The Delors Report

Phase 4

From Maastricht to the euro and the euro area, 1991 to 2002 Maastricht Treaty approved The Three stages to EMU

Criteria needed to join the Euro

Eurozone

Scenarios for Adoption of the Euro

The Euro Area and the Global Economy

Benefits of Adopting the Euro

Currency Stability
Gaining more strength

Reduced Threat of Exchange Rates Fluctuations

Tourism Business Benefits

Lower Interest Rates Single Market

Costs of Adopting the Euro

Too Tight Money

1 Monetary Policy; 17 Fiscal Policies

Too Tight Budgets

Increase debt; decrease growth

Too Little Trade Too Much Financial Inter-Connection

Latvia

Population: 2, 178, 443 Joined the European Union: 1 May 2004 Currency: Lats (LVL) until 31 December 2013, Euro as of 1 January 2014 Recovery from the Financial Crisis
11.7% Unemployment Public Debt 17% GDP

Should Latvia adopt the Euro?

YES

Guarantee of Economic and Political stability Signal to investors Eurozone is expanding Pro-austerity policy makers use Latvia as an example of austerity and what it can achieve According to criteria of Optimal Currency Area Trade already exists with other EU members Labour markets relatively flexible Exposure to external shocks relatively symmetrical to Germany and other Nordic countries Lat is already to pegged against Euro Divorce from Russia

Should Latvia adopt the Euro?

NO

High levels of opposition amongst public (35% agree with switch)

Fear of increases to prices when currency has changed

Risk of increasing inflation

Poorest member when joined in 2004 convergence of incomes (33%-53% per capita income (EU average) in 7yrs) currency will continue this convergence

Faster growth and faster inflation makes management of fiscal policy difficult
Pre crisis poor fiscal decisions lead to deeper impact of crisis on country

Difficult demographics
Pressure on pensions and healthcare

Whole of euro zone faces unresolved problems with banking system

Conclusion

EC has set out certain criteria which states need to comply with before being accepted to join the Euro Latvia gains problems as well as benefits
Already has fixed exchange rate Political and economic decision

Reference List

A. Evans-Pritchard. (2013). Mad Latvia defies its own people to join the Euro. Available: http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100025122/. Last accessed November 2013. BBC News. (1998). Special Report EMU: The Advantages. Available: http://news.bbc.co.uk/1/hi/special_report/single_currency/66473.stm. Last accessed November 2013. Ecb.europa.eu.(2013). ECB: The euro. [online] Available at: http://www.ecb.europa.eu/euro/html/index.en.html [Accessed: 17 Nov 2013]. Economonitor. (2013). Why Latvia's decision to join the Euro makes sense. Available: http://www.economonitor.com/dolanecon/2013/06/10/why-latvias-decision-to-join-the-euro-makes-sense/. Last accessed November 2013. Eumatters.ie.(2013). Why was the EU founded?. [online] Available at: http://www.eumatters.ie/why-wasthe-eu-founded-.html [Accessed: 17 Nov 2013]. Europa.eu. (2013). EUROPA - How the EU works. [online] Available at: http://europa.eu/abouteu/index_en.htm [Accessed: 17 Nov 2013]. European Commission. (2013). Adopting the Euro. Available: http://ec.europa.eu/economy_finance/euro/adoption/index_en.htm. Last accessed November 2013. European Commission. (2013). Latvia and the Euro. Available: http://ec.europa.eu/economy_finance/euro/countries/latvia_en.htm. Last accessed November 2013. S. S. Nello. (2012). The Eurozone: Structure, Performance and Outlook. In: The European Union: Economics, Policies & History. 3rd ed. Maidenhead: McGraw-Hill Education. p232-260. S. S. Nello. (2012). The Theory of Economic and Monetary Union. In: The European Union: Economics, Policies & History. 3rd ed. Maidenhead: McGraw-Hill Education. p195-215. T. Paterson. (2013). Latvia's Reward for Austerity? Membership of the Euro 2014. Available: http://www.independent.co.uk/news/world/europe/latvias-reward-for-austerity-membership-of-the-euro-in2014-8646364.html. Last accessed November 2013.