The Great Debate UK

Latvia needs more help to preserve euro peg


paul-taylorLatvia needs more support from the European Union if it is to preserve its currency peg to the euro and avert a chain reaction of devaluations and bankruptcies around the Baltic and beyond.

The Latvian government and central bank are taking extreme measures to maintain a currency board linking the lat with the single European currency, hoping to steer the former Soviet republic into the safe haven of the euro zone in 2012.

But the price in wage and pension cuts for ordinary Latvians has risen to normally intolerable levels, and the prospect of entering the promised land of monetary stability looks ever more remote as the EU sticks to its strict rules on euro entry.

Furthermore, Latvia’s prospects of economic recovery after a staggering 20 percent forecast contraction of output this year look poor with an overvalued currency. The boom years of consumer spending based on cheap euro credit are well and truly over.