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Interview: Valdis Dombrovskis

Apr. 12, 2013

People looking at the Eurozone are concerned about the stability and future of the single currency. Italy, Spain, Greece, and Cyprus. Headlines from these countries don't seem to stop. Even so, some want in. Latvia is a coastal country of 2 million on the Baltic Sea. The country is a member of the European Union and is located in the north. Scandinavia is on the west, Russia on the east. It was formerly part of the Soviet Union. Prime Minister Valdis Dombrovskis was in Tokyo. He told NHK WORLD's Ai Uchida why he's trading in his Lats for Euros.

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Valdis Dombrovskis

Prime Minister of Latvia

Latvia is set to join the Eurozone next year, can you tell us about that?

Yes, we are sticking with our plan to join the Eurozone as of January 1st next year, we have already filed an application requesting a convergence report from European commission and ACB, and we expect a positive report, findings that Latvia fulfills all of necessary criteria which are necessary to join the Eurozone. It's a decision which will facilitate economic growth in Latvia, it will help in attracting foreign investment, it will eliminate currency conversion costs since we do around 70% of our trade, foreign trade in Euros, and it will also help reducing interest rates, since our currency, Lats, is pegged to the Euro, and whatever exchange rate leaks there might be calculated by markets will be eliminated.

Why now?

Well, that's a question we are hearing quite often. So it's a Eurozone crisis, so why join? Or why join now? But it's important to understand the nature of the crisis. Because it's not Euro as a currency crisis. If you look at the Euro as a currency, it's stable. If anything, anyone is worrying about Euro, it's that that Euro is too strong. With quantitative easing in US, with Abenomics in Japan, each major economy is watching each other, what's happening, and what's happening with exchange rates. So from that perspective, Euro is stable, Euro's share as a global reserve currency is stable, around quarter of global reserves are being held in Euros, and our currency, Lats, is anyway pegged to Euro, so whatever happens to Euro, anyway happens to Lats. So what we are seeing in Eurozone right now it's financial and economical crisis in certain Eurozone countries, which were not following sound macro economical and fiscal policies. And that's how they run into trouble. And that's a problem which needs to be addressed, and it's being addressed, by strengthening macro economic governance and fiscal discipline in Eurozone, and also there is mechanisms created to deal with the current crisis, like European financial stability fund, European stability mechanism, ECB program of bond purchasing of the countries in trouble based on certain conditionality, so there is both long-term response to prevent that crisis from repeating itself, and short-term response to deal with the countries currently in trouble.

Aren't you afraid of being exposed to some of these nations that are having so much fiscal trouble?

Of course, we factor in also our contributions to ESM. Which are then to support countries in difficulty, and even if we factor in those contributions, the balance for Latvia is still positive.

And what is the reaction of your people?

Well, of course, if for last 3 years, what people have heard about Eurozone is crisis crisis and agin crisis, people asking this question, so why join, and it's a government task to explain the nature of the crisis, to explain why do we believe it's still a good idea for Latvia to join, and already for several months, we have launched an information and communication campaign, and we see public support gradually improving.

Are there political goals for joining the Eurozone?

Well, joining the Eurozone, of course, is mainly about economics. But certainly, there are some geopolitical considerations as well. Because what we are seeing right now in Europe is some kind of 2-speed Europe emerging. With a core Europe being centered at Eurozone, and remaining countries which could be said periphery or so. We see that there are separate Eurozone summits taking place, there are Eurozone meetings of finance ministers, there are ever more things Eurozone countries start to do together, and then the countries outside Eurozone help to take those decisions, those that want to belong to this core Europe, or stay out in the periphery and in this case, for Latvia, the logical answer would be to move to the core Europe.

And what about countries outside the European Union, for example, Russia?

Well, as regards Russia, I would say Russia has relatively little to do with the Eurozone, it's still mainly EU internal decision. But I would say that ever since Latvia regained independence from Soviet occupation, we were working towards integration in the West, we were working towards integration in European Union and NATO, which we both joined in 2004, and joining Eurozone would be the logical next step.

So integrating into the Eurozone, could not be seen as distancing yourself from Russia?

No, probably it even would facilitate trade and tourism, because I may imagine that for Russian tourists, it's easier to come with Euros instead of coming with whichever currency and changing it to Lats, for example.

Many countries in the Eurozone are struggling to balance their austerity measures with growth. Latvia emerged from a double digit contraction in a relatively short time to what was actually the highest GDP growth in the European Union. How did you manage this?

Well, I think one of the reasons was that we did bulk of our adjustment during the crisis. Because what some countries in Southern Europe are doing, they are trying to kind of delay the adjustment and this strategy doesn't really work, because without doing the necessary adjustment, those countries are not able to return to financial stability. Without financial stability, they are not able to return to the economic growth, they are just getting deeper into recession, making this adjustment ever more difficult. So in our case, we front-loaded our adjustment, we did bulk of the adjustment already in 2009 during the crisis. It helped us to quickly restore economic, financial stability and with financial stability we were able to return to economic growth.

Can your neighbors who are still experiencing trouble, learn from that model?

Well, of course there are no ready-made solutions, and each country has to look for its own problems, because also the underlying problems in different countries are different. Our problems were coming mainly from macro economic unbalances. So that's why we had to do so many structural reforms to regain competitiveness. Problems for example in Ireland or Cyprus came mainly from the banking sectors, so it's needs also different adjustment measures. So but in any case we are ready to share our experience, if there is anything countries in crisis right now can use from Latvia's experience, we are more than willing to share it.

You're here with a business delegation. What kind of opportunities are you seeing between Latvia and Asia?

Some of the main emphasis points we were putting, one was providing this opportunity of our transit corridor, our major ports and railway links with Russia and CIS, our distribution possibilities to Scandinavia, of course we are interested to attract more tourists from Japan and Asia in general, and we also provided additional information on business climate in Latvia, the fact that doing business index Latvia is number 5th country in the number 25 in the world, our IT infrastructure, in terms of internet speeds, Latvia is number 4 country in the world, Japan is number 2. So, we have one of the lowest tax burdens in EU 27, several free economic zones, with some additional tax benefits especially for manufacturing and assembly activities, and a number of other advantages.


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