Britain’s busy debating its place in Europe, but instead of leaving the European Union it might be the perfect time to actually adopt the euro instead.
While the focus in the UK is on ditching our EU membership, one country has just decided now is the time to step up integration instead.
Latvia, the Baltic state, this week agreed to ditch its Lats in favour of the euro. It will become the 18th member of the currency bloc on January 1st 2014.
While there will be a huge amount of debate about why Latvia is stupid to join the euro at this stage – and the country’s population is far from convinced - we thought we’d look at whether or not the UK should follow Latvia’s lead and jump aboard the eurozone ship.
Latvia, the Baltic state, this week agreed to ditch its Lats in favour of the euro. It will become the 18th member of the currency bloc on January 1st 2014.
While there will be a huge amount of debate about why Latvia is stupid to join the euro at this stage – and the country’s population is far from convinced - we thought we’d look at whether or not the UK should follow Latvia’s lead and jump aboard the eurozone ship.
Why would anyone want to join the euro now?
The chief reason for Latvia’s decision is economic, according the country’s prime minister. And it’s not what you might think: Latvia is not looking for hand outs or easy access to Merkel’s bailout fund, quite the opposite.
After a torrid financial crisis where GDP contracted more than 17%, Latvia has climbed back to growth and managed to cut its debts and deficits at a pace even Germany would struggle with. In three years its fiscal adjustment was more than 15% of GDP.
But although the recovery has been successful, the hard times were exacerbated by Latvia being outside the eurozone. When its crisis was in full swing its currency came under speculative attack, much like the attacks on Europe’s peripheral bond markets during the sovereign crisis.
So rather than concentrate on boosting growth, the Latvian government had to spend precious foreign currency reserves to defend itself instead. When currencies come under attack the results can be disastrous, including a rapid rise in inflation eroding living standards and corporate profitability.
By joining the eurozone Latvia gets rid of this problem. If it comes up against hard times in the future it does not need to worry about a speculative currency attack.
Latvia’s euro membership could be positive for Germany too. Austerity has worked for Latvia and the prime minister has been a big supporter of it, even going so far as to criticise Nobel-prize winning economist and austerity-fan Paul Krugman. Germany might just have found its next poster child for austerity.
Could Britain reap the same benefits?
Of course, if the UK joined the eurozone; it would not be the poster child of anything. Firstly, our austerity efforts so far have been meagre at best. Public spending is still unsustainable and our economy is still too reliant on the financial service sector.
The export market revolution has yet to happen, which is hampering our economic turnaround. Perhaps this is where the UK could take a lesson from Latvia.
We know that one of the reasons Latvia wants to join the eurozone is to eliminate currency risk. Since 2009 the pound is more than 12% stronger than the euro, which has hit the competitiveness of exports to our largest trading partner.
Ok, maybe our currency hasn’t come under speculative attack like the Lats, but the UK is no stranger to currency crises (think back to September 1992 and Black Wednesday when the UK crashed out of the ERM), so we can’t rule one out in the future.
The pound has seen its standing in global foreign currency reserves slip in the past decade as currencies like the Aussie dollar and the Norwegian krone have been favoured by rich emerging market countries. Likewise, we’ve already lost our triple-A credit rating. While this has gone mostly unnoticed so far, it has weakened our long-term defences against an attack on the UK Gilt market or the pound.
While there are many reasons not to join the eurozone – including the sovereign debt crisis and the fact it is a bit like a giant gravy train for MEPs paid for by taxpayers – Latvia’s decision poses an interesting question.
The prime minister has addressed the eurozone crisis in recent weeks; however he sticks to his view that the sovereign crisis is not a crisis of the euro, but rather a crisis for the countries involved. The Latvian government is joining the currency bloc purely for the currency, and, at this stage, it is not worried about the lack of fiscal union.
If they’d have us, that is...
Of course, while Latvia – with its stable budget and impressive economic turnaround – was given a resounding vote of approval from the EU executive, it’s not exactly clear that the UK would receive the same warm welcome.
So, for now, the sensible thing to do might be to get our own house in order before we decide to either embrace or divorce ourselves from the world’s largest economy.
The chief reason for Latvia’s decision is economic, according the country’s prime minister. And it’s not what you might think: Latvia is not looking for hand outs or easy access to Merkel’s bailout fund, quite the opposite.
After a torrid financial crisis where GDP contracted more than 17%, Latvia has climbed back to growth and managed to cut its debts and deficits at a pace even Germany would struggle with. In three years its fiscal adjustment was more than 15% of GDP.
But although the recovery has been successful, the hard times were exacerbated by Latvia being outside the eurozone. When its crisis was in full swing its currency came under speculative attack, much like the attacks on Europe’s peripheral bond markets during the sovereign crisis.
So rather than concentrate on boosting growth, the Latvian government had to spend precious foreign currency reserves to defend itself instead. When currencies come under attack the results can be disastrous, including a rapid rise in inflation eroding living standards and corporate profitability.
By joining the eurozone Latvia gets rid of this problem. If it comes up against hard times in the future it does not need to worry about a speculative currency attack.
Latvia’s euro membership could be positive for Germany too. Austerity has worked for Latvia and the prime minister has been a big supporter of it, even going so far as to criticise Nobel-prize winning economist and austerity-fan Paul Krugman. Germany might just have found its next poster child for austerity.
Could Britain reap the same benefits?
Of course, if the UK joined the eurozone; it would not be the poster child of anything. Firstly, our austerity efforts so far have been meagre at best. Public spending is still unsustainable and our economy is still too reliant on the financial service sector.
The export market revolution has yet to happen, which is hampering our economic turnaround. Perhaps this is where the UK could take a lesson from Latvia.
We know that one of the reasons Latvia wants to join the eurozone is to eliminate currency risk. Since 2009 the pound is more than 12% stronger than the euro, which has hit the competitiveness of exports to our largest trading partner.
Ok, maybe our currency hasn’t come under speculative attack like the Lats, but the UK is no stranger to currency crises (think back to September 1992 and Black Wednesday when the UK crashed out of the ERM), so we can’t rule one out in the future.
The pound has seen its standing in global foreign currency reserves slip in the past decade as currencies like the Aussie dollar and the Norwegian krone have been favoured by rich emerging market countries. Likewise, we’ve already lost our triple-A credit rating. While this has gone mostly unnoticed so far, it has weakened our long-term defences against an attack on the UK Gilt market or the pound.
While there are many reasons not to join the eurozone – including the sovereign debt crisis and the fact it is a bit like a giant gravy train for MEPs paid for by taxpayers – Latvia’s decision poses an interesting question.
The prime minister has addressed the eurozone crisis in recent weeks; however he sticks to his view that the sovereign crisis is not a crisis of the euro, but rather a crisis for the countries involved. The Latvian government is joining the currency bloc purely for the currency, and, at this stage, it is not worried about the lack of fiscal union.
If they’d have us, that is...
Of course, while Latvia – with its stable budget and impressive economic turnaround – was given a resounding vote of approval from the EU executive, it’s not exactly clear that the UK would receive the same warm welcome.
So, for now, the sensible thing to do might be to get our own house in order before we decide to either embrace or divorce ourselves from the world’s largest economy.
