© 2024 KRWG
News that Matters.
Play Live Radio
Next Up:
0:00
0:00
0:00 0:00
Available On Air Stations

Baltic States Embrace Eurozone

DAVID GREENE, HOST:

This is MORNING EDITION, from NPR News. Good morning. I'm David Greene.

RENEE MONTAGNE, HOST:

And I'm Renee Montagne.

Here a couple of the more alarming warnings coming out of the eurozone this week. Greece says it could go broke by July. Spain says it probably can't raise money from investors because they're demanding interest rates that are too high.

Despite all these troubles, one country is still eager to join the eurozone: Latvia. In fact, all three Baltic States remain supportive of the euro.

To find out why, we called Anton LaGuardia. He writes for The Economist magazine, and he's in Latvia's capital Riga this week.

Thank you for joining us.

ANTON LAGUARDIA: Hi. Good morning.

MONTAGNE: Why don't we begin with all of this bad news? It would seem to be a painful illustration of why not to join the eurozone. Latvia is still hoping to do that in 2014. How do you explain that?

LAGUARDIA: Firstly, because it's a small country. Secondly, because it has long had a fixed exchange rate which is pegged to the euro. And therefore, if you're going to be pegged to the euro, you might as well be inside it, where you might have a greater influence. And they say that this will reduce their borrowing costs. The question on everyone's mind, of course, is whether by the time the Latvians qualify to join, whether there will be any euro left to speak of.

MONTAGNE: Even pegging its currency to the euro, it was able to revive an economy by going through some of the very things that are being asked of Greece, Ireland and other countries with debt problems in the eurozone.

LAGUARDIA: Well, yes. Latvia and its Baltic neighbors, Estonia and Lithuania, have kind of become poster child for the idea that you can do a thing called internal devaluation. Let me try and explain that. When you have your own exchange rate, you know, if you're in trouble, you can devalue it, which means your exports are cheaper. If you're inside the currency zone - which is what the euro is - you don't have that flexibility, and therefore you have to reduce your wages and your prices so that you become more competitive, compared to other countries.

Now, that is much harder to do, and usually, you can only do that through huge recession and unemployment, which is exactly what the Baltic States have undergone. Basically, the Latvians have shown that if you have the political determination to do it, and if several other stars are aligned in just the right way, it is possible to do it. They have returned to robust growth. They're all growing quite fast now. Latvia is growing at about five-and-a-half percent a year. And if I'm not mistaken, Greece is shrinking at the same rate.

MONTAGNE: Which brings us to the question: Why could Greece not do what Latvia has done?

LAGUARDIA: Well, all Baltic States have very low debt, so they had the space to make the adjustment. The point being that as soon as Greeks started to get into trouble, people started wondering whether it will default on its debt, would have to leave the euro. The same kind of questions were not as acute in the case of the Baltic States, because their debt burden was much lower. So the lesson is low debt is good for you.

Another lesson is that most of the banks in the Baltic States were owned by foreigners - by Sweden, particularly - and they stayed in. So the argument that you can draw from the Baltic States is that you need an external actor to help you with the banking system.

MONTAGNE: Let's go back to the rest of Europe. You suggested it's possible that the euro or the eurozone won't be there or for Latvia to join. What are we seeing now, in terms of efforts to preserve the euro?

LAGUARDIA: There are two - well, there are three prongs of attack. One is to try and keep getting countries to bring down their deficits and their debt. The second is to say, look, it's not just a problem of individual countries, but the system as a whole that doesn't work. And therefore, there are attempts to create a more integrated system by sort of two shorthand labels: one is a banking union, where the E.U. as a whole will try and deal with the banking problem of individual countries.

And the second is a fiscal union where you create the equivalent of treasury bonds, you create Eurobonds were the countries of the eurozone share in issuing debt. And that would create a safe asset for banks to hold so they don't go down when their governments start getting into trouble.

MONTAGNE: Thank you very much for joining us.

LAGUARDIA: Thank you.

MONTAGNE: Anton LaGuardia writes the Charlemagne column on European affairs for The Economist magazine. He spoke to us from the Latvian capital of Riga. Transcript provided by NPR, Copyright NPR.