Euro Adoption and its Impact on Latvian Economy

Document Type:Research Paper

Subject Area:Business

Document 1

Immediate effects of this adoption were felt in the Latvian economy. This paper draws the conclusion that adoption of the euro has serious implications on a country’s economy. This is because, by virtue of joining a union that subscribes to a set currency, the impact will be felt in the exchange rates, especially with regard to international trade. The paper goes ahead to explore the options that Latvia would have in view of these implications; inclusive of wage adjustments, efforts geared towards financial stability and voluntary private debt and its restructuring. However, research has shown that despite such efforts, further reforms are still needed in restructuring the economy of Latvia. The real GDP of Latvia declined in the financial crisis of 2008-2009 to an approximate 20% with a high inflation rate of 15%.

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Latvia joined the Euro zone on the 1st of January 2014, and it dropped all previous monetary denominations (all salaries, loans, financial instruments, pensions, bank balances) changing over from lats into euros. The changing rate was an approximate 1. 42 euros per lat (Égert, Halpern & MacDonald, 2006). It is imperative that the changing rate adopted is not overvalued as this would reduce the economic competitiveness of Latvia within the monetary union. Euro adoption is also a political move as it allows general progress in the integration into EU (Égert, Halpern & MacDonald, 2006). The negative implications cited in Latvia resulting from adoption of the euro can be rectified. This can be through ensuring perfect mobility of the factors of production. The economy can also alienate traditional adjustment methods and adopt flexible labor markets and the enforcement of relative fiscal policies (Fidrmuc & Korhonen, 2006).

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Prior to joining the euro zone, the relative prices between Latvia and France differed greatly to an estimation of 15-20%. The economic policies in play were thus not shifted significantly. It is also clear that nominal volatility was not a major cause of these changes as the Latvian economy shifted from employing the floating exchange rate to adopting the fixed exchange rate. The economic models that were in use in Latvia imply a key lack of consideration in the pricing policies that were employed, as compared to the considerations of currency unions. Entry into the euro zone implies that a country has experienced economic growth, development and progression in reference to attaining a level of economic congruence in reference to the economic states of member countries (Cavallo, Neiman & Rigobon, 2015).

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