Foto: Saulius Žiūra, F64
No choice for mismatch of currency – used and borrowed
Euro adoption in Estonia is less than two weeks into the future and much debate here has been discussed what Latvia?s response should be. If Estonia joining is perceived as providing more stability (currency devaluation no longer being an option) and more integration with the existing eurozone, it could increase investment into Estonia, but also divert investment to Estonia that had otherwise been planned for Latvia. If one believes this argument, Latvia?s response should be to aim for euro adoption as soon as possible.
But here is another argument of why Latvia has no choice but to join: continuing currency mismatch with respect to salaries (in LVL) and borrowing (in foreign currency). People borrowing in foreign currency are, knowingly or not, betting on a continuation of the fixed exchange rate. Should that bet be wrong, servicing an EUR debt with devalued LVL earnings could become impossible, leading to widespread defaults.
