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Answer one question from this section.
1. Study the extract below and answer the questions that follow.
Latvia to join the eurozone monetary union
Latvia will become the 18th country to adopt the euro after being approved for membership
by the European Commission. The country has met the criteria for eurozone membership,
including low ination, low long-term interest rates, a stable exchange rate, low public debt
and low budget decits.
Latvia joined the European Union (EU) customs union in 2004. This resulted in a large
increase in the availability of credit and strong economic growth in Latvia. However, the
2008 global nancial crisis resulted in the collapse of one of its leading banks and massive
economic instability. Economic output fell by about 20 % and Latvia had to accept a bailout
(loans) from the International Monetary Fund (IMF) and the EU.
Latvia kept the lat (the Latvian currency) pegged to the euro throughout the crisis. At the
time, some economists argued that devaluation would have been a better way to improve the
economy. However, Latvia followed the path of other countries such as Greece and Ireland,
and chose to improve competitiveness through austerity measures. This involved increasing
direct taxes and cutting government spending and public sector wages.
By late 2010, the economy was growing again and Latvia had repaid the loans to the IMF
and the EU. In 2012, the economy expanded by 5.6 %, the fastest of any country in the
EU, although output was still 12 % below its pre-crisis peak. In addition unemployment was
falling, but it remained high at 12.4 %.
For Latvia, which shares a border with Russia, the attraction of the euro is about economics
and security. Entering the eurozone in January 2014 is part of a process of shifting away
from the influence of Russia, and following its northern neighbour Estonia which joined the
eurozone in 2011. Lithuania hopes to join the eurozone in 2015.
Public support for joining the eurozone has been low. Evidence from one survey suggests
that a small majority of Latvia’s population opposes membership, fearing that prices will rise
and Latvians will be drawn into the problems facing Europe’s struggling economies.
Nonetheless, there are signs that support is growing. The Latvian prime minister said that
“switching to the euro will help economic growth and bring increased foreign investment.
Unlike countries that can afford to ignore the euro and additional integration, Latvia cannot
easily stand on its own. This is good news, not only for Latvia, but also for the eurozone.
It shows that there is still condence in the single currency”.
[Source: adapted from www.reuters.com, 5 June 2013; http://online.wsj.com, 9 July 2013 and
www.theguardian.com, 16 July 2013]
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