Surprised? I´m not


latviaSurprised that Latvia is seriously thinking of joining the euro?
Don´t be.
It makes perfect sense.

Being inside the eurozone, in itself, doesn´t seem to hurt your economy one bit. Look at Germany, Finland and the Netherlands.
Obviously, there is a risk that your country will have to put up money for the rescue of debt laden euro partners.
But then again – that doesn´t seem to be too painful. The eurozone central banks came away with a profit of 14 Bn EUR in 2012, in interest from the bonds that the ECB bought to support five debt ridden euro countries (Portugal, Italy, Ireland, Greece and Spain).

And also there´s the fact that being outside of the eurozone doesn´t appear to protect you against recession or bad times. Look at the United Kingdom, Iceland, and… yes, look at Latvia, a few years ago.

Remember? Latvia crashed savagely in the beginning of the international financial turbulence, in 2008 and 2009. Latvia’s GDP fell by 17.7 percent in 2009, the sharpest economic contraction in the EU.
It is a familiar story, about banks lending generously to anyone who came even near a bank, building up a bubble, overheating the economy. In this particular case, it happened to have been Swedish banks, since they dominated the Latvian banking market.
At one point, Swedish banks had 50 Bn EUR of loans outstanding to the 2 Million inhabitants of  Latvia.
Had to crash, right?

When it did, the Swedish banks belatedly froze all credit giving. The EU and the IMF came to the country´s rescue but Latvia had to pay a high price. Public sector salaries were cut by 40%, pensions were slashed, hospitals closed and unemployment went up to 24 % (youth unemployment 43 %). The young fled in droves. During the last decade, 13% of the Latvian population has emigrated.

Being a non euro country, Latvia, unlike Greece, was of course free to go for the less painful option, to devaluate the currency, thus slashing the debt radically.
That would have really hurt the Swedish banks.

Well, it turned out right for the banks (Swedish finance minister Anders Borg doing some intense lobbying just to make sure). Latvia chose austerity, repaid its loans and the four big Swedish banks have since 2008 clocked a handsome profit of 20 Bn EUR.

Now, if Latvia joins the euro, it will be part of the European Banking Union so supervision of the banking market will fall under the ultimate responsibility of the ECB.
Or they could take their chances outside the eurozone. The Swedish banks are back in Latvia big time, happy to do business, controlling half the market already.

Sweden of course, has no intention so far of joining the European Banking Union seen as the Swedish national surveillance of banks is excellent, according to the Swedish finance minister Borg.

Personally, I´m not surprised that the Latvian government wants to join the euro.