Latvia Joining Eurozone

LATVIA- TO BECOME EUROZONES

18TH MEMBER

Contents
Introduction............................................................................................................................2
The Eurozone and the Euro....................................................................................................2
History of the Euro.............................................................................................................2
The Eurozone.....................................................................................................................2
Introduction of Euro in Latvia................................................................................................4
History of introducing the Euro.........................................................................................4
The Euro implementation scenario....................................................................................4
Conversion.........................................................................................................................4
Stages of Euro introduction scenario.................................................................................5
Latvian Euro Coin Design......................................................................................................6
Positive effects of the Euro Changeover................................................................................7
Latvia and the Euro Zone...................................................................................................7
The Euro and the Latvias Credit Rating............................................................................8
The Euro and GDP.............................................................................................................8
Financial stability in the euro area.....................................................................................8
Negative effects of the Euro Changeover..............................................................................9
The Euro Changeover Costs...............................................................................................9
Prices..................................................................................................................................9
Societys Sentimentalism...................................................................................................9
Conclusions..........................................................................................................................10
References............................................................................................................................11
Bibliography.........................................................................................................................11

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Introduction
Latvian history of the 20th century has been difficult. Collapse of the Soviet Union in 1991 resulted of
command economy, the trade deficit and other forms of discontent. But the Independent Republic of
Latvia was established and country gradually began to develop.
In November 1, 1993 the European Union was formed and has resulted in the establishment of the euro
area and its single currency - Euro, which connects many European Union countries for trade, business
and banking operations as well as for everyday life.
In July, 2013 the European Union finance ministers officially approved Latvia as the 18th member of euro
zone as of January 1st, 2014.
The main purpose of this project is to explore the European Union, the euro area's history and its single
currency- Euro, as well as to discuss the positive and negative effects of the euro changeover in Latvia.
Renunciation from Latvias current currency - Lats will be historically important step for a country.
Therefore in this project I will also look at the reasons why Lat is more than just a medium of exchange
for its citizens.

The Eurozone and the Euro

The euro is the official currency of seventeen European Union countries that make up the European
Monetary Union (EMU) virtually joining all of Europe in the money market and promoting political
integration.
The euro as a national currency is used in Austria, Belgium, France, Greece, Estonia, Ireland, Italy,
Cyprus, Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia, Finland, Spain and Germany.

History of the Euro

In 1993 the Maastricht Treaty (formally the Treaty on European Union) entered into force- an agreement
that established the European Union.
When in the January, 1999 the euro was introduced, it became the new official currency of 12 Member
States which was a huge step towards European integration. In two stages the old national currencies such
as the German mark and the French franc were replaced. Firstly Euro was introduced as a virtual currency
for non-cash payments, while old currency remained in use for cash payments. The euro gained tangible
form in January, 2002 when euro banknotes and coins where released. Today some 330 million Europeans
use this currency and its associated benefits. However, the euro is not all EU Member States currency.
Two countries - Denmark and UK chose to use the Maastricht Treaty opt-out clause and decided not to
adopt the euro. The remaining countries (most of the new member states, and Sweden) have yet to
complete several rules to adopt the euro.
The Eurozone
The euro area (also known as the Eurozone) consists of those European Union countries which have
adopted the euro as their currency. The euro area was established in 1999 and it currently includes 17
member states.
The rest of EU countries will have to join the euro area after they meet the criteria set. The exception is
Denmark, UK and Sweden. The first two has agreement that allows for the option of joining the euro
zone, but Sweden does not fulfil needed requirements. However, the above-mentioned three countries
operate within European Central Bank's (ECB) framework.
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The ECB is responsible for the Eurozones monetary policy. One of its main responsibilities is to maintain
price stability in the euro area in order to avoid risks of inflation that could lead to a decline in purchasing
power of the euro. To accomplish this purpose the ECB controls the money supply and monitors price
trends.
Expression- Eurozone informally can be extended to those countries which have independently introduced the euro,
such as Montenegro. Three European microstates - Monaco, San Marino and Vatican City have entered into an
agreement with the European Union. The Euro in these countries has become the only method of payment. This
arrangement allows the countries to mint their own euro coins. However, the framework agreement does not mean
that the country is part of the Eurozone.

(Table 1)

(European Central Bank, 2013)

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Introduction of Euro in Latvia

History of introducing the Euro
Latvian euro coins will be released into circulation after country joins Eurozone in January 1st, 2014. On
the referendum in September, 2003 Latvian nation voted for Latvias accession to the EU at the same time
supporting euro adoption in the country. The Treaty of Accession for Latvia adopting the euro, along with
other new EU countries, has been complied with economic conditions (Maastricht Treaty criteria).
As Latvia is a member of the EU and the EU Economic and Monetary Union since May, 2004, Latvia was
supposed to switch to the European single currency by the January, 2008 but due to the economic crisis in
2008/2009 and the poor economic situation in Latvia, the changeover was delayed.
January, 2005 Latvian Bank attracted the Lats to the euro at the rate of EUR 1 = 0,702804 LVL.

The Euro implementation scenario

Latvian Euro changeover scenario involves simultaneous cash and non-cash money implementation. This
means that on the euro changeover day not only non-cash transactions and non-cash reserves in bank
accounts will be automatically converted to euro, but at the same time the euro currency will be put into
circulation. Such a scenario is known as the Big Bang scenario and this is how the euro is introduced in
the new EU Member States. In comparison - initially when the euro currency was introduced in several
old EU member states, a process was organised gradually starting with the establishment of non-cash
payments in euro and then issuing cash notes during the next three years (also known as the Madrid
scenario).
Conversion
The euro changeover process in the EU countries is regulated by the EU legislation. Therefore, this
regulation applies to all countries that are preparing to adopt the euro. It has been established that the
exchange rate shall be adopted as one euro expressed in each participating countrys currency. The
exchange rate will not be rounded or shortened when making conversions. Monetary amounts to be paid
or accounted for will be rounded up or down to the nearest cent. If the application of the exchange rate
gives a result which is exactly half-way, the sum will be rounded up.

The euro changeover will take place at the current exchange rate of the Bank of Latvia: 1 EUR =
0.702804 LVL.
Money on bank account will be automatically exchanged on the night of January 1, 2014 at the
official exchange rate and free of charge.
Exchange of cash Lats to the Euro will be available at banks free of charge from January 01 until
June 30, 2013 in unlimited amounts.
The Bank of Latvia will exchange lats for euros at the official exchange rate free of charge for an
unlimited period of time.
(TKB, 2013)

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(Table 2)

Stages of Euro introduction scenario

A dual circulation period of the lats and the euro - To ensure convenient cash circulation
following the euro changeover is it planned to introduce a two-weeks dual circulation period
of both currencies - lats and euro.
During this period citizens will be able to spend their cash reserves in lats for goods and
services without exchanging to the euro, which means that traders will be obligated to accept
both the lats and euro coins and banknotes. The lats banknotes and coins will be gradually
withdrawn from circulation and replaced with the euro banknotes and coins. Two weeks after
the euro changeover day euro-cash will become the only legal tender.
The lats cash exchange to the euro - it will be possible to exchange cash reserves to the euro
6 months following the euro changeover day in any bank and in the Bank of Latvia for
unlimited period of time following the euro changeover.
Period of dual price display - the requirement to display all prices in the lats and euro will be
mandatory for all traders and service providers for a three-month period before and 6 months
after the euro changeover day so that citizens could follow prices and get used to the new
currency.
Prices in the euro will be set according to the official exchange rate of the euro against the
lats and based on strictly mathematical principles. This dual price display requirement is
planned to ensure consumer rights protection and to reduce an unsubstantiated price hike due
to the rounding of prices.
(TKB, 2013)

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(Table 3)

(Table 4)
Key changeover dates at a glance
Date
Frontloading of coins starts on

1 November 2013

Sub-frontloading of coins starts on

10 December 2013

Frontloading of banknotes starts on

1 November 2013

Sub-frontloading of banknotes starts on

10 December 2013

Starter kits of coins for the public become available on

10 December 2013

Conversion of accounts into euro

1 January 2014

End of the dual circulation period of the lats and the euro

14 January 2014

Euro becomes sole legal tender on

15 January 2014

Lats can be exchanged at post offices until

31 March 2014

Lats can be exchanged at banks until

30 June 2014

Lats banknotes and coins can be exchanged at Latvias Banka.

No deadline

(ECB, 2013)

Latvian Euro Coin Design

In July, 2006 the Latvian Bank was holding an exhibition "The Euro Coin Design, presenting the
approved samples of designed Latvian euro coins.
Banknotes and the front design of euro coins are exactly the same in all Eurozone, however reverse design
of the coins each country chooses itself. This makes the creation of the coins more complex, but is more
appealing for currency users.
Latvias euro coins are minted according to the Latvian National Euro Changeover Plan and after joining
the Eurozone in January, 2014 coins characterizing state symbols will be launched into circulation. (See
Table 5)

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 0.01

0.02

0.05

0.10

0.20

0.50

1.00

2.00

2 (side engraving)

(Table 5)
(Ministry of Finance of the Republic of Latvia, 2013)

Positive effects of the Euro Changeover

Latvia and the Euro Zone
Although Latvia will introduce the euro only in January 1st, 2014 country is closely linked to the
Eurozone, as a Euro is already the mainly used currency for import and export markets. Since 2005 the
Lat is attached to the euro, so the exchange rates are less risky and transaction costs - lower. Latvias main
trade partners are countries within Eurozone and those with their national currency attached to Euro, for
example, Lithuania and Denmark. Therefore Latvias economy has already being affected by on-going
processes in these countries, including the consequences of debt crisis in Eurozone. Yet, joining Eurozone
will include benefits such as: participation in decision making within Eurozone, the higher credit rating,
the lower interest rates on savings, new investment and employment possibilities and better economic
growth opportunities.
Euro changeover will also have positive impact on Latvian business industry and facilitate business
development and trade business with its partners across Europe.
Money transfers to other countries will get cheaper as they will be charged the same rate as domestic
payments.
It is expected that after implementing the euro the interest rates on loans will become cheaper.
In addition the business opportunities to raise money for capital will increase as businesses will be able to
use financing opportunities through equity and bond markets.
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Not only businesses will benefit from Euro changeover but also society as a whole. During the economic
crisis Latvia lost a lot of its capital. One of the reasons was the public and trade companies concerns about
the possible losses that would arise in case of devaluation of Lat. Therefore money that could have been
invested in Latvian economy- was invested elsewhere.
After joining Eurozone concerns about currency devaluation will disappear, thus improving the
investment environment in Latvia.

The Euro and the Latvias Credit Rating

It is estimated that introduction of the euro will save around 900 million euros in the Latvian state budget
within next 10 years, due to lower interest payments. These funds will be devoted to health care,
education, infrastructure and other important areas of Latvian population. Why is this so? Accession to the
euro zone, urges the world rating agencies to raise public credit rating, for example, after the introduction
of the euro in Estonia, two rating agencies upgraded its credit rating by three notches.
The Euro and GDP
The introduction of the euro in Latvia will improve countrys export and investment opportunities. This
means improvements to existing and newly started businesses that will create employment. Latvian Bank
economists estimated that the introduction of the euro will result in increase of about 33000 new jobs,
which will reduce the high levels of unemployment.
Increased production levels will be followed by economic growth. It is estimated that during the yr. 20142020 additional goods and services of estimated value of 8 billion will be produced. This will generate
additional revenues for businesses and employees alike.
Growth in Gross domestic product will bring additional revenue to the state budget. This will help
increase the pensions and salaries within educational, health and other public sector workers.
(Bank of Latvia, 2013)

Financial stability in the euro area

In recent years, the economic crisis has shown that the existing mechanisms for countries suffering from
economic downturn are not effective enough. Therefore was created the so-called European Stability
Mechanism. By nature it is a fund in which countries contribute shares according to how big the country
is. This financial instrument can be compared to an insurance policy that gives a security. Member states
contribute to the capital and in situation of financial crisis receive the financial assistance. The contribution
amount depends on the countrys population and economic size. Contributions for small States' are
modest. After joining the Eurozone Latvia also will become a member of this fund. Latvian contributions
over 5 years time are rounded to approximately 199 million euros.

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Negative effects of the Euro Changeover

The Euro Changeover Costs
The euro changeover does include costs. Studies have shown that direct costs in the euro area are from
0.3% to 0.8 % of GDP. The Latvian Ministry of Finance estimated that the introduction of the euro in the
public sector for Latvia will cost 8.7 million. Latvian Bank estimates that euro changeover for the private
sector will cost between 77 to 153 million. The cost will relate mainly to the modification of information
systems, pricing replacements and customer information. However the calculations also show that already
in the first year the financial benefits will be equal to or even slightly above the euro changeover costs.
Along with the introduction of the Euro in Latvia the ECB's monetary policy will be implemented,
therefore rather than considering the development of each individual Member States, the entire Euro Area
will be looked at. Thus, if the Latvian economic structure differs significantly from the average structure
of a Eurozone, there is a theoretical risk that the ECB monetary policy may not meet the needs of the
Latvian economy and lead to macroeconomic instability, which is also known as asymmetric shock.
Prices
There are concerns that introduction of the euro will increase prices, which will impact on the national
economy, as traders and service providers may round up the numbers.
After January, 2002 when 12 European Union countries introduced the cash euros, the prices for certain
products actually increased, including some everyday goods and services such as a cup of coffee, bread or
hairdressing. At the same time, prices for many goods remained unchanged or have been rounded down.
The euro impact on inflation in latest Eurozone Member States is quite low, such as in Estonia with
inflation of just 0.3%, in Slovakia by 0.25% and in Malta by 0.2% points. It is very likely that after Latvia
joins Eurozone price increase will be comparable to the current monthly inflation.
Societys Sentimentalism
In 1919 Latvia introduced the Latvian rubble, which already in 1922 was changed to Latvian lats, and
remained so until 1940, when the Soviet Union invaded and Latvian Lat was replaced by the Soviet ruble.
After the collapse of the Soviet Union in 1991 The Latvian ruble came back and already in 1993 Latvian
lats became the countrys national currency. Since the Lat already existed in the 20th century, the society
now is prevailing sentimentalism as Lat is being associated with free and independent Latvia and the
USSR collapse.
After the changeover, all income and expenses will be covered by the euro and lats will be removed from
circulation.

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Conclusions
The establishment of European Union has created cooperation and solidarity between European
countries, new infrastructure and employment.
EU resulted with the establishment of the EEC, which is providing economic stability across the

euro area.
To join the euro area, certain criteria has to be met, which also includes the Maastricht Treaty.
Euro zone is affected by the stability of the euro, which is supervised by the ECB.
When Latvia joined EU it was also supporting euro adoption.
Euro changeover process in Latvia is overlooked by the Euro Project Steering Committee.
Implementation of the Europes single currency cannot be assessed unambiguously. It has both its
advantages and disadvantages; however Latvias Euro Changeover has more positive than negative

effects.
One of the issues introducing the euro in Latvia is societys sentimental feelings about Lats.

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ECB. (2013). Latvia (as of 1 January 2014). Available from:
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TKB. (2013). Euro Introduction in Latvia. Available from:
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