Latvia'a accession to the eurozone during its sovereign debt crisis
2013
Ancans, S., Latvia Univ. of Agriculture, Jelgava (Latvia). Faculty of Economics
The sovereign debt crisis has not stabilised, and it continues worsening in several euro area states. Latvia prepares to join the euro area in 2014, replacing the national currency lat with the single European currency euro. Therefore, the aim of the research is to analyse the main gains and losses from Latvia's accession to the euro area during its sovereign debt crisis. Several gains to Latvia's national economy are expected after the accession to the euro area, the main and most realistic of which is an improved financial system and, along with it, a higher credit rating for the country, which means lower borrowing rates for the country at international financial markets. It is important, given the fact that Latvia's government debt is quite high, approximately 40% of GDP, and its interest cost is essential. However, several additional expenses are expected with the introduction of the euro. The key expense relates to contributions to the European Stability Mechanism, part of which will have to be possibly written off or lost in case of crisis, incurring part of the debt of the economically weakest euro area countries having excessive government debt. For this purpose, scenarios for the eurozone debt crisis are developed and potential losses from Latvia's membership in the euro area are estimated in the present research. Under negative debt crisis scenarios, Latvia's losses from the membership in the euro area exceed its gains. Therefore, it is advised to join the euro area after the eurozone sovereign debt crisis is over.
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