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Page 1: Presentation EB Latvia

Despite the current problems facing the Euro, Latvia is planning to adopt the single currency in 2014. Analyse the

reasons why some EU members states like Latvia are still keen to join the Euro

zone.

Diana Forson Prescilia HodebourgBertug Korucu

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Contents Introduction to the EU

The European Monetary Union

The Eurozone

Benefits and Drawbacks of the Euro

Latvia’s decision to join the Euro

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Introduction to the EU

The European Union is an economic and political union of 28 members states.

The EU has developed a Single Market through standardised system of laws that apply in all member states.

The single currency is a complement to the single market.

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EU Members Map

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The road of the European Monetary UnionPhase

1 •From the Treaty of Rome to the Werner Report, 1957 to 1970•The treaty of Rome has little to say about money.•Bretton woods System

Phase 2

• From the Werner Report to the European Monetary System, 1970 to 1979• “Snake in the tunnel”

Phase 3

• From the start of EMS to Maastricht, 1979 to 1991• Replacing the “Snake in the Tunnel” put in place by European Community• The Delors Report

Phase 4

• From Maastricht to the euro and the euro area, 1991 to 2002• Maastricht Treaty approved• The Three stages to EMU

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Criteria needed to join the Euro

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Eurozone

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Scenarios for Adoption of the Euro

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The Euro Area and the Global Economy

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Benefits of Adopting the Euro

Currency Stability◦ Gaining more strength

Reduced Threat of Exchange Rates Fluctuations◦ Tourism◦ Business Benefits

Lower Interest RatesSingle Market

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Costs of Adopting the Euro

Too Tight Money◦ 1 Monetary Policy; 17 Fiscal Policies

Too Tight Budgets◦ Increase debt; decrease growth

Too Little TradeToo Much Financial Inter-Connection

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LatviaPopulation: 2, 178, 443 Joined the European

Union: 1 May 2004Currency: Lats (LVL) until

31 December 2013, Euro as of 1 January 2014

Recovery from the Financial Crisis◦ 11.7% Unemployment◦ Public Debt 17% GDP

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Should Latvia adopt the Euro? YESGuarantee of Economic and Political stability

◦Signal to investors Eurozone is expanding◦Pro-austerity policy makers use Latvia as an

example of austerity and what it can achieveAccording to criteria of Optimal Currency Area

◦Trade already exists with other EU members◦Labour markets relatively flexible◦Exposure to external shocks relatively

symmetrical to Germany and other Nordic countries

Lat is already to pegged against EuroDivorce from Russia

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Should Latvia adopt the Euro?NO High levels of opposition amongst public (35% agree with

switch)◦ Fear of increases to prices when currency has changed

Risk of increasing inflation◦ Poorest member when joined in 2004 – convergence of incomes

(33%-53% per capita income (EU average) in 7yrs) currency will continue this convergence

Faster growth and faster inflation makes management of fiscal policy difficult◦ Pre crisis poor fiscal decisions lead to deeper impact of crisis on

country Difficult demographics

◦ Pressure on pensions and healthcare Whole of euro zone faces unresolved problems with banking

system

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ConclusionEC has set out certain criteria

which states need to comply with before being accepted to join the Euro

Latvia gains problems as well as benefits◦Already has fixed exchange rate◦Political and economic decision

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