It’s 2014 and the euro is still in one piece. In fact, there’s a line outside to get into Club Euro. Latvia is the latest to cross the velvet rope, on January 1. Meanwhile, economists who predicted the currency’s collapse are baffled why everyone hasn’t left, and more importantly, why more are joining.
The gamut of predictions-from Greece’s “inevitable” ejection to Germany’s voluntary exit-were all based on purely economic calculations. But European integration has always been a political goal, centered on the creation of a unified Europe. Latvia’s accession is the latest example of that ethos at work.
Latvia, along with its Baltic neighbors, has eagerly sought to join Europe and the West since the fall of Soviet Communism. This transition has not been easy, given Latvia’s close proximity to Russia, heavy reliance on Russia for energy, and large ethnic Russian population-largely transplanted there during Soviet occupation and of which only a fraction speaks Latvian.
Successive governments have implemented legislative changes to move the country out of Russia’s sphere of influence, but for Latvia, the most important geopolitical changes have taken place at the international level-it joined the European Union (EU) and North Atlantic Treaty Organization (NATO) in 2004, and entered the Euro Zone this year.
Using the EU and NATO as gateways to the West is not a new strategy for states in political transition, and it isn’t new for the EU either. The single market and the euro have been the closest the EU has ever come to achieving a common foreign policy. While member states can’t seem to cooperate on traditional hard military power, they have used the soft power of market integration as an instrument of European foreign policy since the start of the Cold War. In fact, that’s how Greece got into the EU.
The case for a Greek exit from the euro centers on arguments of the country’s economic incompatibility with the rest of the monetary union. But Greece hitched itself up to the European project in 1981 for geopolitical, rather than economic, reasons. The U.S. and its European allies were worried that Greece, with a strong domestic Communist party, would succumb to Soviet influence, and thus threaten freedom of navigation in the Mediterranean. The solution was to snatch Athens out of the Soviets’ sights. The incumbent Greek government, also worried about the Communist party’s rising power, decided to throw its lot in with Europe and the West by joining the EU.
To the euro’s architects, economic incompatibilities were irrelevant then, and are irrelevant now. That means that Euro Zone members are determined to bear the economic costs to preserve the European project as long as they need to. They consider the EU and the euro as instrumental in forging political cooperation across formerly feuding European states-a perception reinforced by the EU winning the Nobel Peace Prize last year. Greece, or any other member state, cannot leave without putting that unity at risk.
The catch-22 is that there isn’t much hope for Greece enacting the kind of structural reform it desperately needs as long as it’s locked into the euro project and EU welfare.
But back to Latvia. It has completed its austerity program, repaid its rescue loan from the International Monetary Fund, and is one of the fastest growing countries in the EU. It won’t benefit from the EU’s new bailout facility, save for the small boost it provides in making credit rating agencies feel better about the country’s sovereign debt. It will, however, shell out cash to sustain fiscally troubled Euro Zone members.
Currency transaction costs are already minimal, as Latvia maintains a fixed exchange rate with the euro and 80 percent of its loans are denominated in euros, as the Financial Times reported last April.
For Latvia, joining the common currency is an economically negligible move, and at worst, risks further embroiling Latvia in the euro crisis. But economics doesn’t matter. Both Latvia’s finance and foreign ministers have explicitly stated that joining the euro is a “geopolitical” choice.
EU motives are no different.
Bringing in Latvia comes with considerable risk, as its accession opens the euro’s doors to dirty money, which members of Russia’s wealthy elite have parked in Latvia’s banks. And there aren’t quantifiable benefits to compensate, as Brussels won’t be getting much money for its troubled euro members out of one of the EU’s smallest economies.
The euro’s goal is purely political-European political unity-and economic integration is merely the means to get there. Arguments about the attainability of this goal aside, the biggest misperception about the common currency is that it is an instrument of economic, rather than, foreign policy.
Matthew Melchiorre is an adjunct fellow at the Competitive Enterprise Institute.