 |
Latvian Prime Minister Valdis
Dombrovskis holds up a Euro
banknote for a media event |
With the addition of Croatia this past summer, the European Union grew to
twenty-eight member states composed of slightly over 500 million people. Indeed, there is power in numbers, and yet
with size comes complications and numerous conflicting interests. This New Year, Latvia officially adopted the
Euro as its national currency, in spite of reports that just over one half of
the Latvian population opposed the adoption. The economic integration of the European Union
offers many advantages, particularly to smaller nations with history of
political or economic instability. Perhaps most importantly, membership in the Union provides obvious
benefits in the form of capital, labor, and technological mobility in one of
the world’s largest, if not largest economic market. On
the other hand, domestic skeptics, most notably in the United Kingdom, worry
about the consequences of the loss of national sovereignty that is a direct
result of the further integration.
In
the case of Latvia, its economy shrank by over a fifth in the wake of the
financial crisis. However, significant support from the European Union and the IMF has propelled Latvia’s
economy by stabilizing growth. However, this economic growth has also resulted in inflation.
Estonia
adopted the Euro in January of 2011, and inflation increased that year by almost five percent.
Latvia’s historical ties to the Soviet Union may also be a factor
in the
population’s disapproval of the European Union. One
of the most obvious limitations of a currency union is the restraint it
places
on the monetary policy of domestic central banks. The currency zone
effectively distorts the
market equilibrium. For smaller,
undeveloped nations the Euro is over-valued relative to the countries’
previous
currencies. This puts a strain on
national exports. Conversely, Germany
benefits greatly from the Euro because struggling nations in the EU
lower the
value of the Euro on aggregate, which helps German exports. Many
economists assert that the Deutsche Mark
would be valued higher than the current Euro.
Germany is also the beneficiary of substantial foreign investment
relative to other Euro members because it is considered, and rightfully
so, to be low-risk. Typically high levels of foreign investment would
strengthen the national currency while hurting other domestic
industries. This has not occurred in Germany because weaker Union members
continue to drag down the value of the Euro. All of this contributes to
a modern currency battle, leaving
many national populations at odds with one another.
--
Chris Kenny
