Summary:
The influence on the national economics in Latvia already can be felt, even before entering the EU. Since negotiation of European contract in 1995, there has been an intensive integration process going on in Latvia - readjustments of legislation, increasing trade with the EU countries and big amount of investments has been received from foreign investors.
Entering EU will promote Latvia's welfare and development
The influence on the national economics in Latvia already can be felt, even before entering the EU. Since negotiation of European contract in 1995, there has been an intensive integration process going on in Latvia - readjustments of legislation, increasing trade with the EU countries and big amount of investments has been received from foreign investors.If there would not be a movement towards the EU or NATO, the economical developments in Latvia would take place in much slower manner because it would be much harder for Latvian politicians and society to find harmony and agreements about the way and type of as non-candidate countries has been slow and unmotivated enough.Even though, many advantages of joining EU are currently noticeable, all Latvia' s privileges and opportunities will become more realistic and available only after joining the European Union.
The most important changes
If Latvia will become an EU member state in May 2004, it will be faced with such positive changes:
The decrease of trade expenses with EU member countries
The elimination of tariffs barriers
The implementation of EU tariff system in accordance to countries which are not members of EU
Latvian agriculture would be included in the EU common agriculture politics
The receival of EU financial tools
The amelioration of investment restrictions
The adjustments to EU jurisdiction, standards and requirements
The gradual movement of labor force freedom
The coordination of economical politics with EU member states and involvement in EU economical politics implementation
Few years after joining EU, Latvia will join EU zone, implement euro currency and will implement a single monetary policy
Before we say "yes" or "no" to these changes it is worth considering the future of Latvia. Latvia is a small country, with quite restricted local market and resources, as well as developmental means, which are not enough. Therefore, Latvia's economical development and welfare is directly dependent on outside trade, investments, possibility to be competitive and create products and services with high value-added proportions. At the same time, it has to be considered that approximately 80% of Latvia's outside trade transactions have been taking place mainly with EU member states and candidate countries.Along with joining EU, there are many questions which need to be considered: will joining EU increase Latvia's the international trade, competitiveness and investments? Will joining EU improve and develop the trade with the most important export market for Latvia - the EU? How joining EU, Latvia will be able to be competitive among other "soon-to-be" member states, such as Estonia or Lithuania? Will infrastructures, education and regional development have more financial resources after joining EU? And how expensive it will be for Latvia not to join the European Union?When entering EU, Latvia will have to consider both advantages and disadvantages, however, in the case of joining EU, trade with other countries and foreign investments will increase, not decrease.
The best conditions for investment
The most important advantages for Latvia in EU will be better conditions for foreign investment attachment and risk premium decrease. Current integration processes in EU have shown that integration has very dominant part in member states' investments and trade. Being part of the EU will prove that investment environment in country is stable and safe and that is the most important factor of investment affection. Other motivations of investment increase in Latvia are joining the territory of EU, the decrease of trade expenses and low labour force expenses. At the same time it is extremely important that foreign investment would be focused not only on companies' developments but also on local resources of labour force and the use of infrastructures.The more investments will be received by Latvia after joining the EU, the best conditions there will be for the development of production. Depending on the type of investments it would be possible to have positive structural changes in Latvian exporting - the product density of value-added products could rise and natural resource export density would decrease.The increase of foreign countries and local investment will enlarge the capital resources of a country. At the same time, the increase of capital supplies will have a beneficial effect on productivity, the overall economical quantities and along that the level of income.
The ease of trade with the most important outside market - the EU
The outside Latvia's markets' change in the politics will have a positive effect on Latvian national economy because the trade restrictions will be eliminated and will become easier so will the expenses of the trade decrease. In addition, expenses with EU will be diminished since Latvian export will not be restricted by the inside trade protection (concerning tariffs and customs). Therefore, the real trade expenses with EU will be eased. The trade with EU countries will be increased by the common currency - euro - as well.Agricultural production will have the most effect because of the change of tariffs. The producers from Latvia will have an increased chance to realize their agricultural products in the market, especially those products that up till now had a high level of protection. However, the export to the EU could restrict quotas. On the other side, the "opening" of the Latvian agricultural product market will not harm much the producers, because some EU agricultural products and their import prices would increase in Latvia, because the export inside the EU is not subsidized. Therefore, the competitiveness of Latvian agricultural products could increase.When a common tariff system will be introduced in the countries that are not members of the EU, it may rise or diminish the prices of some products or their raw materials. Joining the EU common trade politics, Latvia will lose the possibility to create an independent trade politics with EU countries. However, at the same time it will be easier for Latvia to defend its own interests and market towards these countries which are not the member states of the EU. Specific examples, for instance country of Russia will become more predictable, because it will have to suit the same trade policy against Latvia as towards any other member state of the European Union.Thanks to the gross domestic products' increase, the first years after joining EU would increase import. However, its impact on payments would be decreased by EU transportations and foreign investment flow, plus the export which will again increase after some time.
Aggravation of competitiveness
When joining the EU's monetary policy the competitiveness will increase, because the trade with EU will increase, and moreover, in the market of EU the competition takes place with much higher standards and requirements. To accomplish these some serious investments have to be made. For many companies it might be difficult to compete in such conditions since they may have to eliminate their expenses of work force, however, on the other side, more job opportunities would be created because of the EU funding.Furthermore, tougher competition will increase the restoration of economics and the increase of work effectiveness, plus it will increase the standards of living.If Latvia would not join the EU, it still had to take into account the standards of the EU in order to be able to transact with the member states of the EU. However, the restrictions in the EU market would not be so efficient for non -member countries in comparison with member states. Latvia would have to pay attention to higher requirements which it will have no effect on. Therefore, Latvian competitiveness in EU market would be extremely weak and inefficient compared to those countries that will and have joined the EU.
More support to the agriculture
The common policy's influence on Latvian agriculture will be dependent on how this policy will be reformed in the future. Joining the monetary policy of the agriculture, Latvia, from one side will loose the chance to realize exactly the necessary agricultural policy for those needs. The establishment of EU requirements in the environment of agriculture in Latvia will create additional expenses and with this the agricultural products and their import would significantly increase. However, at the same time, Latvian farmers will achieve more stable and predictable agricultural policy, such as stable and quite high purchasing prices, ease of connection with the EU market, higher competitiveness in this market compared to non-member countries, higher protection against third world countries, increased financial support and chance to create an effective agricultural region. After joining the EU, the total support for Latvia and its agriculture will be much higher than it is now. If Latvia would not join the EU, it would be much harder to compete with neighbour countries and their agricultural production.
EU funding - a chance to develop the country with a help of investments
Joining EU will have an important impact on Latvia's budget. From one side, the expenses of a country will increase (payments into EU budget, establishment of necessary organizations, additional management institutions, etc.), but from the other side, EU financing is expected in connection with before-entrance programs and in payments for the agricultural funds. Keeping on mind the relatively low level of GNP in Latvia, it could claim to maximal structural funds amount (till 4% from the GDP).The funding from EU will promote important investments into the development of a country (in infrastructure, in education, in road-repairs, etc.). The further development of Latvia is very depending from how this funding will be used and invested. The previous experience of EU enlargement emphasizes that structural funds have a positive effect on countries economical development. However, mainly this funding is expected after a longer period of time.Few years after Latvia will have joined the EU, and when implementing the Economical and Monetary policies qualification requirements, Latvia will join these policies and introduce euro currency, and therefore it will attain the highest integration level of the EU.
Profit and loss balance
Intensive trade, flow of investments, EU funding, economical restructure and the increase of productivity will stimulate the economical development of Latvia. These will also increase income and purchasing power possibilities. At the very beginning of years in EU, Latvia might have hard times and relatively high expenses and the beneficial and advantageous side would only be seen after a longer period of time. However, Latvia as one of the poorest countries from all member states in comparison with more wealthy EU countries will have its gain in much meaningful manner. The maximum benefits from joining EU, Latvia will receive only in that case if stable macro economical policy will be successfully implemented and many investments will flow into education and the quality of the work force.
The many steps of introducing Euro in Latvia
First of all, Latvia would have to convince that it is economically ready to take part as Euro zone's member state.
Even though only before few years it seemed to be impossible that Latvia could reach such level of development, which could let this country to join such developed states as the ones in the EU. Now Latvia has a chance to join these countries and participate in single monetary policy's creation, participate in making decisions towards itself and towards other EU countries and also a chance to join the single currency market.Joining EU does not mean that Latvia will automatically be considered as a part of euro zone and as a country which will implement this currency. After joining EU, Latvia will have to prove that it is economically ready to participate in EU as a full-time member. Being ready for Economical and Monetary policy means that, first of all, a country has reached a specific level of development and it also means that a country has converged with national economics of other European countries. Secondly, macro economical policy of a country has been implemented on the same principles and objectives as those of Economical and Monetary policy.
Maastricht convergence criteria
The country's readiness towards European Monetary policy has been criticized by five criterions of Maastricht convergence.
The level of inflation cannot reach more than 1,5 % of three other EU member countries which have the smallest amount inflation.
The rates of 10 year governmental securities can not overcome other three EU member countries with the smallest amount of inflation of average security rate no more than by 2 %.
The governmental deficit in budget cannot overcome 3% of GDP.
The total debt of a government cannot overcome 60 % of a country's GDP.
The country has to be stable in currency rates against euro, and include itself in Currency rate mechanism II. This means that fluctuations of a national currency cannot overcome +/- 15% in comparison to euro fluctuations for two years.
According to the jurisdiction of EU, Latvia, as other member states of the EU has no choice - to join or not to join the European Monetary policy. At that time when Latvia will be part of EU and accomplished all joining requirements, it, as all other member states of EU, will have to join the European Monetary Policy.
The implementation of Euro will happen slowly
The movement of Latvia towards the implementation of euro will take place in several steps. First of all, as inhabitants of Latvia voted for EU, in 1st May, 2004, Latvia will join the EU. After entering EU, the preparation for participation in EU zone will take place. At this time Latvia will have to prove its capability of criteria of Maastricht convergence. To make sure that a country is ready to implement single currency, it has to participate in Currency rate mechanism II, at least for two years. This mechanism means that Latvia in cooperation with European Central Bank and other EU institutions will argue about a specific currency rate for euro and Latvian Ls. The most important part in this period will be that the devaluation of a national currency is inadmissible. The agreement about Currency mechanism II will take place only then, when Latvia will enter EU. Therefore, keeping in mind the timetable and schedule for entering EU, Latvia might join Currency System in 1st of January, 2005. In this system Latvia will have to spend almost two years - till 1st January, 2007. After 2007 March, when information about last two years will be available, the institutions of EU would be able to evaluate Latvia's adequacy towards European Monetary policy criterions. Approximately after half a year, EU institutions will prepare the statement of convergence, which will evaluate the readiness of Latvia in European Monetary system. In case of a positive valuation, Latvia will join the European Monetary system and will introduce the currency of euro.
The time table for implementing Euro in Latvia
1st May, 2004 - Latvia joins EU1st January, 2005 - Latvia joins the Currency rate mechanism II; Latvian Ls is attached to euro.2005 - 2006 - Latvia proves its capability and readiness to join European Monetary system.2007 - The evaluation of European monetary system takes place and in case of positive valuation, Latvia prepares to introduce euro and join European Monetary system.1st January, 2008 - Latvia introduces euro.
Latvia and the execution of Maastricht convergence criterions
2000200120022003 (I-VI)
Inflation2.6 2.51.91.8*
The execution of consolidate budget
(% from GDP) -2.8-1.8-2.50.0 *
Governmental debt (% from GDP) 13.115.014.514.6
*
Governmental 5 year (2003. - 10 years) bond profitability (%)8.938.065.53 4.95
Maastricht convergence criterion has been accomplished
2002. June -2003. June
*
Forecast
Source: The Bank of Latvia; LR Central Statistics Bureau.
The current development of Latvia's economics proves that Latvia can successfully accomplish all criterions supplied by the convergence. Latvia has relatively long experience in accomplishment of stable currency rate, even now, the inflation has been decreased till the European Monetary system's level, and fiscal rates also include themselves in this level, therefore Latvia successfully keeps on accomplishing these criterions. Keeping in mind these successful steps, in 1st January, 2008, Latvia has an extremely real possibility to join the euro zone and to introduce euro in Latvia. Some period of time, after introducing euro, Latvia, as all other member states, will have both currencies - euro and Latvian LS, however, the change in ATM's and shops will be distributed in euro. The time period, till which Latvian LS will be changed against euro in banks, will be set. All deposits and loans in Latvian banks would be converted into euros.Introducing euro in Latvia will be a logistic and technical job; however Latvia in this situation has not so old and successful experience - before ten years, in circulation emerged Latvian LS and Latvian roubles disappeared. After introducing euro, Latvian inhabitants will have a chance for daily use of one, so extremely important currencies, which has been used over twenty other European countries and no doubt Latvian euros will be some kind of national symbols.
Sources
Baldwin, R. E., Francois, J. F., Portes, R. The Costs and Benefits of Eastern Enlargement: The Impact on the EU and Central Europe, 1997.
Bucker, T. and Boeri, H. The Impact of Eastern Enlargement on Employment and Wages in the EU Member States. European Integration Consortium, 2000. Working Document No. 2 on the Financial Implications of EU Enlargement. European Parliament, March 13, 2002.
Common Financial Framework. Accession Negotiations, 2004-2006. Commission of the European Communities, January 30, 2002.
European Union Accession. Practical implications for Business in Central Europe. EIU, 2002.
Vanags, A. The economical impact of EU accession for Latvia: a computable general equilibrium approach. BICEPS, 2000.
This is the complete article, containing 2,848 words
(approx. 9 pages at 300 words per page).
