January 1, 2014, will mark one year since Latvia replaced its national currency, the lats, with the euro. Looking back at this important event, one can conclude that hopes of the euro kickstarting a rapid increase of inflow of investments in Latvia and membership in the euro zone making Latvia more attractive have not come to pass.
© E.Kniežausko nuotr.

Inflow of foreign and local investments, millions in savings on currency conversion, economic stability and cheaper loans – all of these benefits were promised by officials last year. Now, nearly one year since the adoption of the euro in Latvia, one has to conclude that the majority of those promises have failed to come to pass. According to information from the Bank of Latvia, direct foreign investments in Latvia have grown by only EUR 166 million in the first nine months of 2014. Compared to the moment of euro adoption, direct foreign investments have grown by only 1.4 percent, as reported by lsm.lv.

Head of the Monetary Office of the Bank of Latvia Daina Paule does not deny the fact that growth of foreign investments is, in fact, insignificant. However, she adds, the situation could have been worse.

"We see that investments continued to flow into Estonia, our neighbour and euro zone member state, in the first half of the year. In spite of soon becoming a member of the euro zone, Lithuania has experienced a decline in direct foreign investment," she explains.

Economist Gatis Kokins, who has been sceptical about Latvia joining the euro zone, is not surprised by the dearth of investment: "We still live in a very low GDP growth environment. We still have certain geopolitical risks, and we’ve yet to learn how to make our economy healthier and more attractive to investors," said the economist.

Latvia's one year in the euro zone: no upsurge of investment

Kokins believes the adoption of the euro has not done much to solve Latvia’s most pressing problem – depopulation. "The fact that we continue to live in a very slow economic development environment only serves to increase the risk of depopulation. Latvians continue to leave the country. This is something the economy is unable to tackle at the moment. We see that market growth is the main factor for retail trade and services. While there are some positive changes noted for medium wages, the positive side of things is ruined by depopulation," adds the economist.

The euro adoption did not have a positive impact on loan services in Latvia. Data compiled by the Finance and Capital Market Commission and the Latvian Commercial Banks Association suggest that the total loan portfolio of all banks working in Latvia has declined by nearly EUR 1 billion in the first nine months of 2014.

Meanwhile price monitoring carried out by the Latvian Economy Ministry shows that concerns that the euro adoption would make consumer prices grow have come to pass.

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