Why Latvia's Decision to Join the Euro Makes Sense

Last week’s convergence report from the European Commission gave Latvia the green light to become the eighteenth member of the eurozone as of next January. “The eurozone is again a club with a queue–not at the exit but at the entrance,” crowed Herman Van Rompuy, president of the European Council. “Joining the eurozone will foster Latvia’s economic growth, for sure,” Latvian Prime Minister Valdis Dombrovskis said in Riga. Yet Latvians on the street are less certain. Public opinion polls show that only about 35 percent of respondents favor the switch, and opposition parties that oppose the euro have done well in recent local elections.

Who is right? Is it really a good idea for Latvia to sign on for membership in Europe’s troubled currency union? Let’s look at some of the factors that would make the answer “yes” or “no.”

Criteria for an optimal currency area

We can begin by setting Latvia and the euro to one side to look at the broader question of which countries or regions might benefit from common currencies. Imagine that we sit down with a blank outline map of the world and try to fill it in so that countries and regions that are better off sharing currencies are assigned the same color. We ask questions like these: Should Maryland and Virginia both use the dollar? If yes, color them both green. Should Russia and Ukraine both use the ruble? If yes, color them both red, and so on. When our map is finished, the regions with the same color—whether they are sovereign nations, groups of nations, or regions that overlap national borders—are what economists call optimal currency areas.>>>Read More