Latvia adopts euro – Let’s revisit eurozone divergence and convergence

January 6, 2014 in Euro Zone, Historical and Research

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Eurozone flagLatvia became the 18th country to enter the euro-zone and that brings  one more country with negative inflation under the umbrella of the single currency i.e. the euro. On the other hand this new addition takes the leadership position as far as the real GDP growth is considered. With the expected GDP growth of 4%, Latvia comes at the number 1 position in the euro zone. Euro has always attracted it’s fair, and many times unfair, share of criticism. The main arguments have always been same even if the words might have been different that those have been about  the economic diversity of the member states, or countries in this regard.

Criticism about the euro project

The main argument against the euro project has been whether or not the member countries meet the requirements to make this as an Optimum Currency Area (OCA) or Optimum Currency Region (OCR). The main requirements for an  Optimum Currency Area is flexibility to adopt to the changes in the economic situations and the convergence of the economic models and approaches.

Optimum Currency Area

  • Smooth flow of labor (labour) and capital with the changes in demand and supply situation.
  • Efficient fiscal flow mechanism with the openness for the government revenues to flow from stronger economic areas to the weaker ones in the times of crisis.
  • Not too much diversity and barriers which prevent the adoption to strategic, proactive and uniform monetary policies.

With Latvia’s inclusion, it’s time to revisit the divergence and convergence in the euro-zone, especially after a period of severe crisis situation in the euro-zone when the serious question were being raised about the survival of the euro. The following table highlights some of the economic factors like gross domestic product (GDP), GDP per capita, GDP growth rate, inflation rate, unemployment rate, minimum wages, and governments’ debt to GDP ratio. Please note that the minimum wages are not applicable in some of the countries. Germany is supposed to declare minimum wage of euro 8.50 per hour from the year 2015. It is estimated that 17% of the workforce in Germany earns less than this amount.

Key economic data of Euro zone member countries

Country Member since GDP in billion euro -
2012
Population in millions
Latest data during the years 2012 and 2013
GDP per capita
(Prices- Year 2012)
Real GDP growth – expected in 2013 Inflation (Yearly basis)
Year – end of 2013
Average Inflation (Yearly basis)
Year 2000
Unemployment
(harmonized) end of the year 2013
Minimum wages applying Purchasing Prices Parity Debt to GDP – end of 2012
Austria 1-Jan-1999 € 323.28 8.44 € 36,400 0.40% 1.40% 2.34% 4.80% N.A. 74.00%
Belgium 1-Jan-1999 € 391.31 11.14 € 34,000 0.10% 0.97% 2.54% 9.00% €1501.82 99.80%
Cyprus 1-Jan-2008 € 18.59 1.13 € 20,000 -8.70% -2.13% 4.86% 17.00% N.A. 86.60%
Estonia 1-Jan-2012 € 17.68 1.34 € 12,700 1.30% 1.50% 4.01% 8.80% €320 9.80%
Finland 1-Jan-1999 € 202.25 5.41 € 35,600 -0.60% 1.40% 3.04% 8.40% N.A. 53.60%
France 1-Jan-1999 € 2,113.92 65.7 € 31,100 0.20% 0.70% 1.69% 10.90% €1430.22 90.20%
Germany 1-Jan-1999 € 2,750.60 81.89 € 32,299 0.50% 1.34% 1.44% 5.20% N.A. 81.00%
Greece 1-Jan-2001 € 201.52 11.28 € 17,200 -4.00% -2.90% 3.15% 27.40% €683.76 156.90%
Ireland 1-Jan-1999 € 170.13 4.59 € 35,700 0.30% 0.30% 5.55% 12.60% €1461.85 117.40%
Italy 1-Jan-1999 € 2,488.26 60.92 € 25,700 -1.80% 0.66% 2.54% 12.50% N.A. 127.00%
Latvia 1-Jan-2014 € 22.95 2.03 € 10,900 4.00% -0.40% 2.64% 11.90% €284.74 70.00%
Luxembourg 1-Jan-1999 € 46.21 0.53 € 83,600 1.90% 1.20% 3.15% 5.90% €1874.19 21.70%
Malta 1-Jan-2008 € 7.06 0.418 € 15,300 1.80% 0.30% 3.04% 6.40% €697.42 71.30%
Netherlands 1-Jan-1999 € 624.71 16.77 € 35,800 -1.00% 1.47% 2.31% 6.90% €1477.8 71.30%
Portugal 1-Jan-1999 € 171.91 10.53 € 15,600 -1.80% -0.20% 2.85% 15.70% €565.83 124.10%
Slovakia 1-Jan-2009 € 74.12 5.41 € 13,200 0.90% 0.50% 12.17% 13.90% €337.7 52.40%
Slovenia 1-Jan-2007 € 36.79 2.06 € 13,200 -2.70% 0.70% 8.87% 10.10% €783.66 54.40%
Spain 1-Jan-1999 € 1,091.34 47.27 € 22,700 -1.30% 0.20% 3.43% 26.70% €752.85 86.00%

Sources: EuroStat (European commission), TradingEconomics and IndexMundi and world Bank.

There were 11 countries which joined the hands when the Euro came into the existence on January 1, 1999. The physical currency came into the existence much later in the year 2002. The virtual euro existed by pegging the exchange rates of the currencies of the member nations within a margin during 1st January 1999 to 2002 when the physical euro banknotes and coins were launched. The zone expanded to it’s current status of 18 countries under the umbrella.

The above data shows that out of 18 member countries, 8 countries are having negative growth of GDP i.e. the economies are shrinking, 4 are having negative inflation rate, 4 countries have a government debt to GDP ratio well over 100% with Spain expected to join that club soon and 10 countries have an unemployment level of over 10% with Spain and Greece well over 25%. GDP per capita has a wide range with Latvia at the bottom with euro 10,900 to Luxembourg at the top with euro 83,600. Latvia is also at the bottom as far as the minimum wages are concerned with a monthly minimum wage of 284.74 euro while Luxembourg again tops in this category with a minimum wage of 1874.19 euro per month. Belgium follows with 1501.82 euro per month with Ireland and France close behind with respectively euros 1461.85 and 1430.22 per month respectively.

Diversities are always there even in any single country but the easy flow of workforce and capital are much simpler in case of a single government and no issues about geographical barriers etc. The fiscal transfers or governmental aid to geographies in need are also simpler and efficient when there is one single country and single central government. Another major factor which comes as another strong barrier is lack of single language which again prevents easy flow of labor even if other hurdles are taken care of. Considering all these an economic zone with a group of nations would always have  challenges in becoming an efficient “Optimum Currency Area”.

While we are talking about the individual countries, let’s also check into some the comparison of euro-zone as a whole and the United States.

Euro zone and the U.S. Key Economic Data Comparison

Economic region GDP in billion euro -
2012
Population in millions
Latest data during the years 2012 and 2013
GDP per capita
(Prices- Year 2012)
Real GDP growth – expected in 2013 Inflation (Yearly basis)
Year – end of 2013
Average Inflation (Yearly basis)
Year 2000
Unemployment
(harmonized) end of the year 2013
Debt to GDP – end of 2012
US 15,680 314 49966 1.60% 1.20% 3.38% 7.00% 101.60%
EU 12195 337 31949 -0.40% 0.90% 2.03% 12.10% 90.60%

Please note that there may be some minor differences in the data because of rounding off to a whole number at some places where it does not matter much e.g. population etc and also some minor differences because of compilation of historical data from various sources even when the sources are authentic.

Author Info

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Himanshu, by qualification a mechanical engineer with diversified experience of working in Europe and Asia Pacific, has been trading in Forex market for close to a decade. Himanshu also runs one of the fastest growing Forex portal ForexAbode.com which provides free Forex trading analysis, forecast & strategies, free trading tools, education, Forex Blogs and Forex Forum and contributes the analysis to financial and Forex websites like SeekingAlpha.com, MarketOracle.co.uk, ForexStreet.net, CountingPips.com, International Business Times and some more. Contact details: You may please leave your suggestions, comments or complaints using the comment form or write to us using the Contact Us page. You may also connect the author on Google at +Himanshu Jain

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